Farage's Use of Company for Earnings Highlights Legal UK Tax Strategy

Nigel Farage, leader of Reform UK, has drawn renewed attention to the common practice among company directors of receiving earnings through a personal service company, a method that can significantly reduce an individual's tax liability. Recent reports indicate Farage funnels his income from sources like GB News appearances into his company, Thorn in the Side Ltd, allowing him to pay corporation tax on profits rather than higher rates of personal income tax. This strategy, while legal and widely used, has sparked public debate and criticism.

The practice involves a company paying corporation tax on its profits, currently around 25%, before distributing the remaining funds to its director-shareholders as dividends. In contrast, direct employment income is subject to income tax and National Insurance contributions, which can reach up to 40% or more for higher earners. "If Farage has payments going into his company the money belongs to the company. If Farage pays himself he pays income tax. If he pays himself a dividend he pays tax on dividends," stated James Clark on social media, emphasizing the distinct tax treatments.

This approach is considered a legitimate tax planning method within UK law. Directors often opt for a low salary, typically set to meet National Insurance contribution thresholds, and then supplement their income with dividends. This structure avoids National Insurance payments on the dividend portion and benefits from lower dividend tax rates compared to income tax rates. Clark further noted, "Hundreds of thousands do this because it is perfectly legal."

Despite its legality, the use of personal service companies by prominent public figures like Farage has frequently attracted scrutiny. Critics often highlight the perceived unfairness of such arrangements compared to the tax burdens faced by conventionally employed individuals. This discussion has gained traction, particularly in light of recent controversies surrounding other political figures' tax affairs, such as Angela Rayner's stamp duty issues.

Farage's spokesperson has maintained that Thorn in the Side Ltd has operated for 15 years, has "a variety of interests," and is a "properly functioning company." While the method is not illegal, it underscores a broader conversation about tax efficiency for company owners and the public's understanding of complex tax regulations. The debate often centers on whether these legal tax-saving strategies align with public expectations of fairness and contribution.