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The Premier League and the UK income tax rate…

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Cristiano Ronaldo’s well publicized move from Manchester United to Real Madrid in the summer understandably received a lot of publicity. A world record football transfer fee of £80m is bound to catch the attention.

Ronaldo’s first year remuneration from Real Madrid is reported to be in the region of £11m. Students sitting the 2009 exams should be well aware that the 40% tax rate for the 2008/09 tax years applies to taxable income above £34,800. An individual in the UK with annual earnings of £11m would exceed the 40% threshold in just 2 days!

There were no doubt many factors that persuaded Ronaldo to move to Spain to play for Real Madrid. From a tax point of view though, Spain has favorable tax legislation that enables foreign players to pay tax in the region of 23%. When you compare this figure with the 40% top rate in the UK (and the upcoming 50% tax rate which is not examinable in the December exams) and apply the difference to the amounts of remuneration that Ronaldo is earning then the tax bill  would be significantly lower in Spain than in the UK. Approximate figures show a difference in tax next year when the 50% rate is in place of nearly £3m per year. This adds up to a significant amount when looked at over his contract period of 6 years.

Of course the football purists amongst us would argue that it’s the football team and supporters that are important rather than the tax bill but then again I can’t be sure about this until somebody offers me £11m a year to live in the sun in Spain!

Is 40% average?

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Students should be well aware that the maximum personal UK income tax rate is 40% but how does this compare to the rest of the EU?

The EU have released the 2009 edition of their report on the “Taxation Trends in the European Union”. There are some interesting findings.

The top personal income tax rates in the EU range from a high of 59% in Denmark to a low of 10% in Bulgaria. The 40% top rate of income tax is also present in Greece, Hungary and Poland.

The arithmetic average of the 27 member states is 37.8% so the UK rate is slightly higher than the average for the EU. What is interesting is that the newer member states such as the Czech Republic, Romania and Slovakia all have relatively low income tax rates (15%, 16% and 19% respectively). When compared with the older EU member states the UK rate is relatively low.

This is all very interesting but the key thing to remember for the exams is that the top rate of income tax in the UK is 40%. In fact, ask anyone that has qualified since 1988 what the highest income tax rate is and they should say 40%. The top rate has been 40% since 1988!

Of course it should be the 6th April!?

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There appears to be a bit of a love/hate relationship between students and the UK tax papers. Students tend to either love them or hate them. There’s seldom any half way position.

It’s also one of those subjects where generally either you know it or you don’t know it. There’s not a lot of scope for guessing or trying to “waffle” to get the correct answer.

One of the most frequently asked questions by students is “Why does the UK tax year start on 6 April instead of say 1 January?” Note that this will not be asked in the actual exam so the answer is for personal use only or to impress your friends!

HM Revenue & Customs are a very helpful lot and explained the reason why the tax year starts on 6 April as follows:

The reason for the tax year running from 6 April to 5 April is primarily historical and has its origin in the switch from the Julian to the Gregorian calendar in 1752.

It had been calculated in the 16th Century that the Julian calendar had lost 9 days since its introduction in 46 BC. Most of Europe changed to the new, more accurate, Gregorian calendar in 1582, but the UK continued with the old one until September 1752 by which time the error had increased to 11 days.

These 11 days were ‘caught up’ by being removed from the calendar altogether – 2 September was followed by 14 September. In order not to lose 11 days’ tax revenue in that tax year, though, the authorities decided to tack the missing days on at the end, which meant moving the beginning of the tax year from the 25 March, Lady Day, (which since the Middle Ages has been regarded as the beginning of the legal year) to 6 April.

The dates were adopted for income tax on its re-imposition in 1842 and have not changed since.

So now you know!