Tax secrets the wealthy don’t want you to know, like how to get richer by buying a yacht!

Why the tax system is so confusing

Tax could be so simple that everyone understood it, but then 100,000 accountants would have nothing to do, so instead we have a bewildering array of different taxes and thresholds and exemptions and tens of thousands of pages of legislation to get lost in. You should ask in whose interest is it to have such a complex system. Because it’s certainly not in your interest. The complexity allows the government to raise your taxes while giving tax cuts to millionaires without you noticing. Which is exactly what they’ve done. 

Do I pay more tax than the richest man in the world? 

One of the crazy things about tax planning is that once you get to a certain level of wealth you no longer need any income at all, so you no longer need to pay income tax. Elon Musk’s only salary from Tesla is minimum wage. When he needs cash he can borrow it, using his Tesla shares as collateral. Jeff Bezos was reported to have paid a billion dollars in tax (which in fairness is more than I’ve paid), but it was on an income of $4bn. So he paid a 25 per cent rate. The average Brit (or American) will be paying a significantly higher rate than that. 

How you can get richer by buying a yacht 

Oh, this is easy, providing you have a vast amount of offshore income. Let’s assume you do. In which case the problem you’ll have is that this foreign income will be taxable in the UK if you are “tax resident” in the UK. In brief, you’re tax resident if you live here for most of the year. So to avoid tax on your offshore income you simply need to spend some decent time outside the UK. But the catch is that if you stay in one place for too long then that country will tax your offshore income. So you need to keep moving. You could just rent a whole load of villas, but having your own yacht makes the country-hopping a lot easier. You can get some pretty decent yachts for around £25 million. 

Other tricks rich people use to stay rich that you could try

One of the main reasons that wealth inequalities persist is that the two most significant things that the mega-rich own – businesses and land – are exempt from inheritance tax, meaning vast wealth can be passed down the generations tax free. If you can’t quite stretch to buying a few thousand acres of Scottish Highlands or your own business empire, there’s a simple loophole you could use to dodge inheritance tax just like the super-rich do: If you buy shares in companies that are listed on something called the Alternative Investment Market your investment will be exempt from inheritance tax. 

• These millionaires want to be taxed more. Here’s why
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• Tax fraud 23 times less likely to be prosecuted than benefits crime

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You pay much more than the official income tax rate

There’s a notorious con at the heart of our system: national insurance contributions. Many people think that NICs pay for pensions or hospitals, but they don’t. They’re just another form of income tax. To work out how much tax you’re really paying you need to include NICs. This is where things get shocking: If your boss had £100 available to pay you a bonus, they usually have to pay just over £12 of it as NICs, so you actually only get an £88 bonus. Then on that £88 you pay 20 per cent income tax and another 12 per cent of NIC. That means you’re left with under £60 out of that original £100. 

In other words, most people are paying double the rate of tax they think they are, and that’s before student loan repayments, compulsory pension charges, universal credit tapers or child benefit reductions. I say ‘most people’; landlords, investors and pensioners don’t pay NICs, meaning tenants often pay more tax than their landlords, employees pay more tax than shareholders and the young pay more tax than the old. 

But at least I’m paying for schools and hospitals and other local services, right? 

This is the real kick in the teeth: We may think that we’re helping to pay for everything we need, but it’s not that simple. Your salary is someone else’s expense. If your boss pays you that £100 bonus, your boss will now be £100 poorer. That means that your boss will pay less tax. If they earn substantially more than you do then the tax saving they make will be more than the tax you pay. In other words, you might have suffered more than £40 of tax on that £100 bonus, but your boss will have saved more than £40 by paying the bonus to you. So you’re not contributing to the hospitals and schools, you’re only subsidising a tax break for your boss. If you want to help pay for hospitals you’d be better off asking for a pay cut, as it will force your boss to pay more tax. 

Don’t ask for a wage, get paid in capital

This is one of the most unfair things in our taxation system (though there’s a lot of competition for that title). If you get paid a regular wage you’ll pay income taxes and NICs that could easily take away half your income. But the really rich don’t get paid a wage. Their wealth comes from ‘capital’ – that is, the stuff they own, like properties and investments. When those capital items increase in value, they can sell them to realise a capital gain. And the maximum rate of tax on that gain is usually 20 per cent, and sometimes 10 per cent. So our tax system is actually designed to allow the very rich to pay between a half and a fifth the tax rates the rest of us are paying. 

You think that sounds bad…?

It’s literally BAD! Some wag at the civil service named the relief that allows the rich to pay a 10 per cent tax rate on their gains “Business Asset Disposal Relief”, or BAD relief. It’s an outrageous rule, not least because it’s specifically designed to give you no benefit if you earn less than £50,000 a year. 

The statistics on tax evasion prosecution are depressing

You are 23 times more likely to be prosecuted for over-claiming benefits than you are for tax dodging (despite the latter costing the country far more). Some 160,000 parents have been fined for not paying a ‘Child Benefit Tax Charge’ that usually they didn’t know they had to pay. And around 200,000 people per year are fined £100 for not submitting a return despite not having any tax to pay. Meanwhile only eight accountants and lawyers were prosecuted over the last two years for enabling tax evasion. 

What would Taxtopia look like?

That’s much cheerier! I think everyone hopes the future will be a more utopian place, it just happens that the world I know best is the world of tax.  In a Taxtopia we’d have a system that worked for everybody: that was pro-business and supported the poor, that helped save the environment and redistributed wealth and couldn’t be avoided by paying an accountant to rearrange your finances. It wouldn’t be hard to do, though it would mean I’d be out of a job. 

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Taxtopia: How I Discovered the Injustices, Scams and Secrets of the Tax Evasion Game by The Rebel Accountant is out now (Monoray, £20).

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