Blessed are the rich

29 January 2006 By Simon Nixon

Some of the City s highest paid foreign professionals use a loophole in UK law to pay a fraction of the tax that British nationals must pay. That is grossly unfair. Abolishing the loophole could be combined with a switch to a lower flat rate tax for everybody.

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Highly paid foreign bankers working in the City of London are avoiding large amounts of UK tax by using dual contracts. The employee has one contract for the time he spends working in the UK and a second contract for time spent overseas.

Under the UK's nondomicile rules, foreign residents only pay tax on their UK earnings and not on their overseas income. Salary and bonuses paid under an overseas contract are paid into an offshore account and are tax free until repatriated to the UK.

Dual contracts tend to be used by people earning more than £1m a year. Typically, the UK contract will account for 70% of an employee's time and the overseas contract for the other 30%. For somebody earning £1m a year, that would lead to a tax saving of 12%, giving an average tax rate of 28%. The UK top rate of tax is 40%.

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