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Why footballers are worth every penny

Posted by Jon Norris on Apr 24th, 2014 | Tax

Why footballers are worth every penny - Two people playing football - Crunch

It’s a generally accepted fact that football players – top flight players in particular – are stupendously overpaid. The highest-paid footballer in the UK is currently Wayne Rooney, on a contract worth £15.5 million per year at Manchester United. To put that in context, the UK’s Prime Minister takes home £142,500 every year – less than 1% of Rooney’s salary.

With the aftershocks of the financial crisis still being felt around the country and widespread animosity towards excessive pay packages, it’s understandable that many people feel footballers’ pay levels are overblown. The word “gratuitous” is even thrown around regularly. The situation isn’t helped by the fact that many footballers are young, not particularly well behaved, and appear to have little to offer wider society save their ability to kick a ball.

Talk of controlling the spiralling wages of footballers has been ongoing for some time. A survey back in 2009 showed that 80% of fans believed player wages should either be cut or capped, and some players have even voiced their support for controls on salaries.

High wages for top stars don’t just alienate the general public – they hurt clubs and fans alike. Across all Premier League clubs, an average of 72% of revenue is spent on wages, a figure which creeps above 90% for some clubs. These huge bills are passed on to fans in the form of higher ticket prices and more expensive merchandise.

Note: For the purpose of this piece I’ll be using financial data from the 2011/12 Premier League, kindly provided by the Guardian here.

Here’s how wage bills stack up for the 2011 Premier League clubs, as a percentage of their total revenues.

Wages vs revenue

Wage bills are now so extortionate that they drive most football clubs into the red year after year. For 2011/12 only 8 of the 20 Premier League clubs turned a profit and the worst financial performer, Manchester City, lost £99 million.

There should be pressure from all quarters to clamp down on wages. Fans would benefit from reduced gate and merchandise prices, while team owners and shareholders would see a much healthier bottom line. The only party interested in maintaining sky-high wages should be the players themselves, and possibly their Estate Agents.

But which side of the fence would the Treasury fall on? Although the economy is on the up austerity is still very much a reality in the public sector, and the government is forecast to run a hefty deficit for the next few years. The most beneficial situation for the government – and therefore the general public – is the one that results in the largest amount of tax revenue. If player salaries were artificially reduced, how would that impact the public coffers?

One cap that no footballer wants

If a salary cap was introduced for footballers, it wouldn’t be the first time. In 1901 the Football League introduced a maximum weekly wage for players of £4 (about £417 today), which was based on the average national wage at the time. This wage cap stayed in place until 1961, when it was abolished under threat of strike action from the Professional Footballers’ Association.

What would be the impact if a cap in line with average national wages was re-introduced? In 2011/12 the average annual wage in the UK was £26,200 – around one six hundredth of Wayne Rooney’s yearly salary. Adjusting the salary of all professional footballers in the country to that level would have several interesting – and quite surprising – side effects.

The most immediate impact would be that, paying their players an average wage, all Premier League football clubs would suddenly become wildly profitable businesses. Manchester City, with their wage bill of £202 million slashed to £786,000, would suddenly find themselves the fourth most profitable club in the Premiership. Here’s how the change in profitability would look between current salary levels (pink) and average salary levels (green).

Premier League Profitability

It may surprise many to learn that, despite their astronomical levels of pay, footballers are in fact paid as vanilla employees of their clubs. Some particularly successful players have established limited companies to manage their image rights – a practice which is currently subject to an HMRC investigation.

One of the only ways footballers can reduce their tax bill is, much like Amazon and Google, to move their earning to countries with lower tax rates – and for a football player that means transferring to a different club. A tax law introduced in Spain in 2005, known as “The Beckham Law“, allowed wealthy foreigners who would otherwise be classified as tax resident in Spain to use non-resident tax rates for six years, meaning income is taxed at 24.75%, instead of Spain’s top rate of 43%. Some have seen these tax laws as instrumental in Beckham’s (and subsequently Cristiano Ronaldo’s) move to Real Madrid.

These straightforward tax affairs mean that – although footballers are subject to the same taxpayer confidentiality as all employees – it is relatively straightforward to estimate their contribution to UK tax revenues.

Impact on tax revenues

A reduction in wages would mean a more profitable Premier League, and a corresponding increase in Corporation Tax. In 2011/12 £21.3 million was received in Corporation Tax from the Premier League – if average wages were put in place the increased profit levels would cause this tax revenue to leap up to £365 million.

However, the tax received from the players themselves would crater.

Wayne Rooney’s £15.5 million pay packet means he would have paid £313,381.04 in National Insurance contributions per year  in 2011/12, and a whopping £7.7 million in Income Tax. Reduce this level of salary down to the national average and he would pay £2,276.64 in National Insurance and £3,745 in Income Tax.

Across all the players in the Premier League, tax receipts would drop from £834.5 million to just £3.6 million. The changes can be seen below (again, current salary levels in pink, and with national average salaries in green) –

Tax changes

The composition of the tax paid by Premier League football clubs and their players would change drastically, but the overall effect would be a reduction in tax revenue for the Treasury of some £487 million – over 57%!

All this means that if salary caps were introduced for professional footballers at the national average wage, HMRC’s tax receipts would drop by 1% – enough to pay for school meals for every pupil in the country for a month, 16,651 midwives, or 20,292 police officers.

So, while many may disagree with the disproportionately hefty salaries enjoyed by many football players, it’s important to take into account that a large percentage of that income goes right back into public hands, and pays for a huge amount of public services.

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