The rising cost of living, an increase in interest rates to control inflation, intervention from government and backlash. What is happening in the UK economy and the mini-budget? And how is it impacting football?
Football may not be front of mind for government leaders when trying to tackle one of the greatest economic challenges in decades, but at Football Finance Professionals, we use football as a medium to engage you, the reader, about finance topics. From our experience, football fans and those passionate about the game will use it as a vehicle to escape the normality of life. Whether playing, watching or now learning through sport we hope your passion for it will benefit you. And we are here to help you along the way.
So what changes have been proposed by Kwasi Kwarteng in the September 2022 mini-budget? Primarily made up of tax cuts, to counteract the rising cost of living and the reduction of disposal income for the taxpayer, the theory behind the proposals is to stimulate a struggling economy. Which will have the biggest impact on football?
The basic rate of income tax will be cut from 20% to 19% from April 2023. This will impact all tax payers including football players playing in the UK. Is this change significant? Not in the world of football, since the effective rate of tax paid by Premier League football players is almost 45% due to the magnitude of their earnings. It will, of course, assist the fans when it comes to having slightly more disposable income to spend on what they choose. Will ticket sales suffer? Surely fans will protect their season tickets for as long as possible, but they may choose not to renew in the next season if money is tight.
Abolition of the additional rate of tax
The most significant change that was proposed in the mini-budget, was the abolition of the 45% income tax rate. This would drop the effective tax rate of Premier League players down to 40%. Due to their annual earnings being way in excess of £150,000, the 45% tax threshold. Having announced the changes on 23 September, by 3 October the proposal for scrapping the 45% tax rate was scrapped. Why announce the change then reverse the decision just over one week later? The backlash! From the financial markets and from backbenchers and opposition. “Tax cuts for the rich” was the headline. The pound value plummeted, in particular against the US dollar and the Bank of England threatened to step in to increase interest rates once again.
Football has always been an odd industry to understand. Below, we explain the impact that the 45% tax rate cut would have had on the UK Treasury.
The Premier League
Players, who in the Premier League, earn on average over £3 million pounds in salary would have seen significant net (after tax) pay rises. This would have been great for player recruitment and could have seen even more talent attracted to the UK. Each Premier League player would have received a net pay rise of £2,700 per week. £144,000 annually. This is based on the average salary. This net pay rise would have been greater than 3.5 times the average UK salary BEFORE tax is deducted.
The tax cuts in the Premier League alone would have cost the UK Treasury in excess of £72 million. This figures only considers first team players, ignoring academy and women’s player salaries.
Cristiano Ronaldo, with a reported salary in excess of £26 million, would have received a pay rise of £1.3 million.
This may go some way to illustrate why the decision was reversed. Football players already have a reputation in some circles of being “overpaid”. Their salaries are arguably a reward for their years of dedication, hard work and skill. Obviously this is in demand and rare at the highest level which is why they can command such high salaries.
Alongside the proposed income tax changes, the government announced other amendments, such as the cancellation of the proposed corporation tax rise. This may have a limited impact on football clubs, since they have traditionally made taxable losses. With a drive towards profitability and restrictions on brought forward losses, clubs may become corporation tax payers in future. Increases in the cost of servicing players may mean clubs defer their tax paying status for a while longer.
One welcome change from the clubs’ perspective will be the cancellation of the National Insurance rise of 1.25%. This will take effect from 6 November. Providing clubs with relief of £1 million annually this will help from a cash and financial fair play perspective. This is based on the average pay bill. Clubs with larger pay bills, such as Manchester United and Manchester City shall benefit by savings of circa £4 million.
The reduction in National Insurance will benefit employers (clubs) and employees (players and non-playing staff). Albeit, the benefit to players will not be as significant as the previously proposed 45% tax rate being abolished.
The state of the economy
The UK economy is currently in a fragile state, experiencing inflation, and with the pound being weak. What impact will this have on clubs and players?
Foreign players will be interested in the value of the pound, the currency in which they will likely be paid. A weak pound means a reduction in its value in a currency that a foreign player may prefer. This could cause recruitment issues or drive up the cost of player salaries in the UK.
The weak pound will mean an increase in the value of receivables in other currencies. For those Premier League clubs competing in European competitions, receiving EURO as prize money, will be better off that expected. UEFA losses calculated in EURO will be greater when translated into sterling. This would provide a competitive financial reporting advantage to Premier League clubs. Those clubs that will be trading player registrations with overseas clubs will have foreign exchange exposure on their balance sheet. This all depends on the level of deferred consideration and the contractual currency. Some may be naturally hedged and some may have timing issues when comparing receivable amounts against payable due dates.
US investors already have significant interests in the Premier League, including Manchester United (Glazers), City Football Group (Silver Lake), Arsenal (Kroenke) and Chelsea (Todd Boehly/Clearlake Capital). This list is not exhaustive. With a weakening pound, we are may see further US investment into the Premier League. Everton FC is the latest club to attract interest from US investors.
Riding the storm
Football is well-known for spending vast sums of money on players. But the industry is reliant on fan income, either via broadcasting or on a match day. The state of the economy is going to continually impact fans and commercial sponsors in the decisions to engage. Football needs to be wary of this and clubs need to ensure they can offer value for money to fans. This would be locally and globally. We are all facing challenging times and football will not be immune to the challenges ahead.
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