UK Tax – Ensuring You Don’t Overpay When Relocating
Benjamin Franklin once said “In this world nothing can be said to be certain, except death and taxes.”
This is true – the burden of tax is unavoidable but the amount you have to pay can be minimised if you’re clever about it. Here are five key pointers to ensure you don’t pay any more than you have to when relocating to the UK:
The UK government may take up to 47% from your income and up to 40% of your capital so it is worth spending some time considering this in advance before you even come to the UK. Tax is always very specific to different countries so if you are coming to the UK it is sensible to understand some background points / planning possibilities about the UK tax regime.
1. Tax authorities in the UK – HM Revenue & Customs
The tax regime in the UK is administered by HM Revenue and Customs (HMRC) – www.hmrc.gov.uk You might hear it referred to under its former name before a merger of Inland Revenue or even HM Inspector of Taxes. Like the legal system it is respected for being firm but on balance usually fair.
The tax year in the UK starts on 6 April and ends on 5 April the next year. This is based on the English mediaeval calendar! Individuals have until 31 January following the tax year end, to file and pay their taxes.
The tax code in the UK is long and complex and the second largest in the world after India. This is largely driven by the complexity of modern international business and the wish for politicians to impress their voters.
2. Am I a UK tax resident or not and how much will I pay?
Until recently the residency rules for UK tax used to be quite simple but uncertain in application based on very old cases decided in the courts. The new statutory residence test from 6 April 2013 offers certainty but is quite complicated and difficult to explain quickly based on many gateway tests.
Normally however you will be considered as tax resident in the UK automatically if you have a permanent UK home available to you, come here permanently for employment or self-employment and/or spend more than 183 days in the UK.
The UK does allow one to split the tax year between the non-UK part year and the UK resident element. Depending on the tax regime in your home country you may wish to consider taking action to trigger income or capital gains before you came to the UK. This might be appropriate if you come from a country with lower taxes than UK or with more beneficial treatment on certain types of assets than in this country.
There is a tax free personal allowance of £10,600 for the 2015/16 tax year. This is withdrawn for those whose taxable income exceeds £100,000.
For those whose gross income exceeds £31,785 for 2015/16 the marginal rate of income tax is 40% increasing to 45% over £150,000. For those who are self-employed or employed there will also be Social Security (known as National Insurance in the UK) on the margin at 2%. Like many countries the social security rates are quite high and a form of disguised taxation. However perhaps this is not quite as high as many countries especially Western European nations.
Perhaps in a bid to attract international business, UK company tax rates are low by international standards at 20% and this is reducing to 18% over successive years.
3. Saving tax on overseas income
If you regard your permanent home as outside the UK you may be regarded as what is known as “non-domiciled” in the UK. This refers to where you regard yourself as from, rather than where you happen to temporarily have a permanent house. UK resident but non-domiciled individuals are taxable on foreign income and foreign source capital gains only to the extent they are remitted or brought to the UK. This is known as the remittance basis.
A resident but non-domiciled individual is therefore not taxable on say for example bank interest arising on a foreign bank account not remitted to the UK. By contrast a UK resident and UK domiciled individual pays tax on their worldwide income but with credit for any tax they pay on income or gains overseas.
This means that it is legally possible to be UK tax resident but shelter your overseas income from worldwide taxation. You do of course need to consider the taxation on the income or gain, in the country where it arises but this may be a country where there are no such withholding taxes.
This non-dom regime operated very quietly until recent years when it has become politically controversial. There are now rules that mean if you have been a UK tax resident for more than seven or nine years you have to pay lump sum currently £30,000 or £50,000 to access the benefit of this remittance basis. There are also complex anti-avoidance provisions which determine how remittances are deemed to occur in certain circumstances.
4. Relief for work overseas
For non-domiciled individuals for the first three years there is a valuable relief which enables you to shelter part of your employment income free of tax. Essentially the proportion of your salary that relates to workdays overseas is not subject to UK tax if it is NOT brought to the UK.
If say an individual spends 100 working days out of a working year of 265 days outside the UK on business then this proportion of their salary could escape UK tax. It is worth stressing that this relief only applies to employment income not remitted to the UK. The relief is thus only helpful for those who do not need or want to bring all the salary to the UK to live on.
The UK has relatively generous reliefs for relocation expenses for non-domiciled individuals eg travel costs for family, removal costs, legal costs re house sale and purchase that are not paid by your employer.
5. Plan for Capital taxes
Even if your present idea is only to stay in the UK temporarily it is worth spending time thinking about capital taxes. Inheritance tax is a tax in the UK on death or transfer of assets in certain circumstances. It is payable at 40% above a nil rate band of £325,000. If you are purchasing UK property and or own substantial overseas assets it may be worth taking action now to mitigate taxes that might otherwise payable sometime later.
I hope you have found this article useful – of course it is for general guidance and not a substitute for detailed advice. It is recommended that readers seek help from a suitably qualified professional. Tax law changes often so seek advice regularly.
This article was written by Andrew Cazalet, a London based international tax adviser from Lido Tax Consulting. For further details, contact him at , at www.lidotax.co.uk or on 020 8819 8673