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Fatcat fund managers are using a £700million-a-year loophole to pay a lower income tax rate than teachers and nurses, a report warns today.

The “Mayfair” loophole lets private equity bosses cut tax bills to just 10% by treating their multi-million pound wages as capital gains instead.

This means they avoid the 45% top income tax rate, the 38 Degrees campaign group said.

The loophole was enshrined in a decade-old deal with HM Revenue and Customs.

Group director David Babbs called the legal loophole “Government-sponsored tax avoidance on a breathtaking scale”.

(Image: PA)

He added: "The rest of us pay in our fair share to keep the country going - why should millionaire financiers be treated differently?”

In most cases, fund managers use it to cut their tax rate to 28%.

Some exploit Entrepreneurs’ Allowance, slashing the rate to just 10% – less than the basic income tax rate of 20%.

A deal on how the private equity industry pays tax was agreed with the last Labour government.

Mr Babbs urged Chancellor George Osborne to side with “hardworking families on average incomes” by closing the loophole in his March 18 Budget.

But many private equity bosses bankroll the Conservative Party.

A Treasury aide said: “The treatment was agreed by the previous Labour government,” adding the Tory Government “has increased tax on private equity” from 18% to 28%".