Contractor accountants and other UK workers spent an extra 3 days paying their tax bill this year, according to the Adam Smith Institute.

Tax Freedom Day this year was Monday the 27th of May. That means British workers spent the first 149 days of 2011 working for the state. The additional 3 days were mostly caused by the VAT increase at the beginning of the year.

It takes 39 days for the average British worker to earn enough to pay their annual income tax bill, a further 26 days to settle National Insurance liabilities and 29 days to pay VAT. Council tax takes up seven days of income and you need to complete a 5 day working week to pay the duty on alcohol and tobacco.

Sam Bowman, the think tank’s head of research, said it was no wonder that economic growth was so slow when we are slaves to the state for five months of the year.

Meanwhile, freelancers entering higher tax brackets could be tempted to increase the amount they pay into their pension fund.

The number of people paying higher rate 40% tax is expected to increase to 3.7 million this year, whilst 275,000 people will fall into the 50% bracket.

Bill Mackay, the marketing director of AJ Bell, pointed out that making pension contributions was one of the best ways to benefit from tax relief. His company witnessed a 179% year on year increase in the number of single contributions to two of its accounts in April.

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Image: by tommy

The impending 50% tax rate is likely to prompt some high-earners to leave the UK and take up residency in a country with better tax laws. But will that let them off the hook with HMRC?

Last week’s High Court ruling in the Robert Gaines-Cooper case seems to suggest that it’s not necessarily as simple as some people would like to believe.

Mr. Gaines-Cooper is a 72 year old tycoon who moved to the Seychelles in 1976. He adhered to Britain’s residency rules but the court decided that the “centre of gravity of his life and interests” was still England. He has a house in Henley-on-Thames, for example, where his second wife lives. Lord Justice Moses declared that this meant he had not cut pre-existing ties with Britain. The ruling means that Gaines-Cooper is now facing a tax bill of £30m dating back to 1993.

Non-residents only need to pay tax on income earned in Britain which can lead to significant savings. They are also only allowed to stay in the UK for a maximum of 90 days in any one tax year.

This case brings into question how much of a break is necessary in order to be classed as a non-resident. City law firm Withers advises its clients “to leave and sever as many links as possible”.

The Sunday Times clarified this further by saying that after you sell up you should not return to Britain within the first year. The opinion of many contractor accountants is clear – to avoid UK income tax you need to live abroad for 3 years, and to avoid capital gains tax, 5 years. Any directorships should be resigned, all bank accounts closed and mobile phone contracts should be terminated. Family members such as a spouse or children should not remain in the UK and the electoral register should be updated with your overseas details.

We know that HMRC is trying to recoup as much tax as it can in a bid to cut the public expenditure deficit. The taxman raked in £373 million in 2008-09, an increase of 360% on the year 2004-05 from their investigations into wealthy taxpayers. And there are likely to be more similar cases to come.

© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: lunchtime escaping by Sam Judson