02: How tax was saved

Normally if you work on terms that amount to employment, the ‘employer’ must deduct tax and national insurance from your pay under PAYE (see Overview – PAYE). Only if you are genuinely self-employed can the ‘employer’ pay you gross.

To get round this, a worker would set up an intermediary company that would contract with the client to provide services. The client could pay the company gross and the company paid the individual mainly in dividends, which do not carry national insurance.

Further tax savings were possible because:

• Companies have greater scope for deducting expenses than employees.
• You could leave money in the company, so avoiding income tax altogether.
• You could share dividends with a spouse.