How different forms of income are taxed for athletes.
Professional athletes in the UK generate income from various sources, which may all be taxed in different ways.
Income might come from:
-
Winning Income
-
Sponsorship Income
-
Image rights
-
Endorsements
-
Signing bonuses
-
Career income
Taxation of income for athletes
It is essential to understand the taxation of income for athletes and payment methods associated with these income streams to effectively manage their finances.
This article aims to discuss the taxation of winning income and sponsorship earnings for professional athletes in the UK, along with an overview of how image rights and endorsements are paid. Additionally, we will explore the impact of taxes on signing bonuses and other forms of income throughout athletes’ careers.
Taxation of winning income for athletes
Winning income refers to the prize money earned by professional athletes for their performance in competitions. In the UK, sports like football, cricket, rugby, and athletics offer substantial prize money for top-tier events. For instance, footballers in the English Premier League receive bonuses for winning matches and league titles. Athletes who achieve success in major international competitions, such as the Olympics or Paralympics, also earn significant winnings.
Winning income, such as prize money from competitions or tournaments, is generally subject to income tax in the UK. Athletes are required to report their winnings as part of their taxable income and pay tax on the amount received.
The taxation of income for athletes depends on the rate applied. To winning income, this will generally depend on the individual’s overall income and tax bracket. However, the amount of tax payable on winning income can vary depending on other factors such as the athlete’s tax residency status and any applicable tax exemptions or deductions.
For 2023/24 these three rates are 20%, 40% and 45% respectively.
| Between PA and PA + £37,700 (basic rate) For most, over £12,570 to £50,270 |
20% |
| Between PA + £37,701 and £125,140 (higher rate) For most, over £50,271 to £125,140 |
40% |
| Over £125,140 (additional rate) | 45% |
Tax Exemptions for Some Sports
In certain cases, winnings from specific sports competitions may be exempt from income tax.
For example, certain events recognized by the Sports Minister as “listed events” can qualify for income tax exemption on prize money.
This exemption applies to events like the Olympic Games, Paralympic Games, certain World Championships, and events with similar international significance.
Taxation of Sponsorship Income
Sponsorship income constitutes a vital part of an athlete’s earnings. Sponsors pay athletes to endorse their products or associate with their brands, leveraging the athlete’s popularity and image to enhance their brand.
Sponsorship income is another significant source of income for professional athletes in the UK. Athletes can earn sponsorship income through endorsement deals, brand partnerships, and other forms of commercial agreements. The taxation of sponsorship income depends on how it is structured and received.
Payments to Image Rights Companies (IRC)
Athletes often establish image rights companies to manage and exploit their image rights.
Payments made by sponsors or employers to these image rights companies are subject to UK Corporation Tax.
Athletes often establish image rights companies as a separate legal entity to handle the exploitation of their image and related commercial activities. The taxation of income for athletes will then change from income tax as noted earlier, to a potentially lower corporation tax rate.
2023/2024
Upper limit = 25%
(Profits >£250,000)
Marginal rate = 26.5%
(£50,000 – £250,000)
Lower limit = 19%
(≤£50,000)
These companies can enter into contracts with sponsors or employers for the use of the athlete’s image rights in return for image rights payments.
If the athlete is a director or shareholder of the company, they may receive financial rewards like salaries or dividends, which are taxed as per normal income tax rules.
Many athletes in the UK establish image rights companies (IRC) to manage and receive their sponsorship income. The IRC acts as an intermediary between the athlete and the sponsor, and the sponsorship income is paid to the IRC.
The IRC then pays the athlete a salary or licensing fee for the use of their image rights. This arrangement allows athletes to potentially reduce their tax liabilities by managing their income through the IRC.
It is important for athletes to comply with the relevant tax regulations and ensure that the structure and operation of their IRC are legitimate and transparent.
Self-Employment Tax for Sponsorship Income
If athletes receive sponsorship income directly, without the involvement of an image rights company, it is considered self-employment income.
In such cases, athletes are responsible for invoicing sponsors and ensuring proper payment arrangements are in place. Athletes are responsible for reporting this income on their Self-Assessment tax return and paying income tax and National Insurance contributions accordingly.
Impact of Taxes on Signing Bonuses and Career Income
Signing Bonuses
Signing bonuses received by professional athletes, whether as part of a new contract or transfer, are subject to income tax.
Athletes should be aware of the tax implications and consult with tax professionals to understand the potential tax liabilities associated with signing bonuses.
Income Throughout Career
Athletes’ income throughout their careers, including salaries, endorsements, and other forms of remuneration, is subject to income tax and should be reported accordingly.
It is crucial for athletes to maintain accurate records, consult with tax advisors, and stay updated on tax laws to ensure compliance and effective tax planning.
Tax Planning and Professional Advice
Navigating the tax implications of winning and sponsorship income can be complex for professional athletes in the UK. It is recommended that athletes seek professional advice from tax advisors who specialize in sports taxation.
These experts can help athletes understand their tax obligations, maximize tax efficiencies, and ensure compliance with the relevant tax laws.
It’s important for athletes to stay informed about changes in tax regulations and to maintain accurate records of their income and expenses to support their tax filings. By proactively managing their tax affairs and seeking professional guidance, athletes can optimize their financial situation and ensure compliance with the UK tax system.
Conclusion
Professional athletes in the UK earn income through winning prizes and sponsorship deals, among other sources. Understanding the taxation of income for athletes and different payment methods associated with these income streams is crucial for athletes to effectively manage their finances.
Winning income is generally subject to income tax, with potential exemptions for certain listed events.
Sponsorship income can be received through image rights companies or as self-employment income, both subject to taxation.
Athletes should also consider the impact of taxes on signing bonuses and maintain awareness of tax liabilities throughout their careers.
Seeking professional advice and staying informed about tax regulations are key to navigating the complex landscape of taxation for professional athletes in the UK.
Book in a free consultation.
