Tax Guide for Individuals Moving to the UK
Tax administration and allowances
The UK taxing authority is known as Her Majesty’s Revenue and Customs (or HMRC for short) and the tax year runs from 6 April to the following 5 April. There is no system of joint filing and married couples must submit separate tax returns.
For tax resident individuals, a personal allowance of tax free income is available (this is £9,440 for tax year ending on 5 April 2014). Non residents who are UK citizens or EEA nationals can also claim a personal allowance.
The personal allowance reduces for individuals with annual earnings of more than £100,000, (reducing to nil at £118,880 for 2013/14). In addition, certain “non-domiciled” individuals may be required to give up the personal allowance (more information on this is provided below).
For 2013/14, the first £32,010 of earnings above the personal allowance (where available) is taxed at 20%, the next £117,990 is taxed at 40% and any balance above that is taxed at 45% (different tax rates apply for capital gains, dividends and certain savings income). There are also social security taxes, known as National Insurance Contributions, in addition to income tax. The employee rates for 2013/14 are 12% on earnings between £7,755 and £41,450 and 2% on earnings above £41,450.
The UK does not have “itemised deductions” or similar. The main tax reliefs are limited to contributions to pension schemes or gifts to UK registered charities.
Certain tax qualifying investments are available, including Individual Savings Accounts (ISAs). It is worth noting that investments that are qualifying in the UK are unlikely to have similar status outside of the UK and the tax advantages may be lost if you are still required to file a tax return as a resident or citizen of your home country.
How is tax collected?
Employees working in the UK are subject to Pay As You Earn (PAYE) tax withholding on cash payments and certain benefits. This applies even where an individual continues to be paid from outside of the UK.
If you are an employee moving to the UK, your employer will submit a “Starter Declaration” to the tax authorities as part of the monthly online payroll reporting, which will provide certain personal information details, including your start date, address, date of birth and number of hours per week that you expect to work.
Following receipt of the Starter Declaration, HMRC will issue a tax code to you and a copy to your employer which will then be used to determine the total amount of tax to withhold each pay period. The code can include taxable benefits, pension relief, underpaid tax for prior years etc and will differ significantly from one individual to another. The “standard” tax code for 2013/14 is 944L (which would mean that a full tax free allowance of £9,444 is being applied against income).
At the end of each tax year, your employer will provide a Form P60 (details of pay received through payroll and tax withheld for the year) and may also provide Form P11D (details of non cash benefits provided, such as company car, private medical insurance etc). You will then be able to use these forms to prepare your tax return, if one is required (see below).
If you are “self employed” or in a “partnership”, you will declare income through the filing of a tax return form and generally make tax payments twice a year, by 31 January and 31 July respectively.
The first thing to note is that not everyone in the UK is required to file an annual tax return. The typical taxpayers that generally must file are (this is not an exhaustive list):
- Anyone earning more than £100,000 in a tax year
- All self employed taxpayers
- Taxpayers claiming non resident, or non domicile status
- Anyone that has been issued with a tax return by HMRC
- Any individual that has not had full tax withholding at source (note that if a taxpayer is aware that they will owe tax for a particular year they are required to request a tax return if one has not been issued – failure to request a return can result in a penalty charge!).
If you fall into any of the above categories, or are able to take advantage of any tax relief claims for which a filing is required, you will need to complete and submit Form SA1 to HMRC in order to register and receive a tax filing number (known as Self Assessment number or Unique Tax Reference).
If you want HMRC to calculate your tax or you are completing a “paper return”, you must submit your tax return by 31 October following the tax year end. In other cases, the return must be filed electronically by 31 January following the tax year end (this is the date that tax agents will typically work towards). There are no requirements for or ability to file extensions and an automatic penalty of £100 will apply if you are late, rising to £10 per day after three months up to a maximum 90 days.
Following the submission of a return, HMRC has one year from the filing deadline to open an “enquiry”. This may consist of a few questions or they may request a full breakdown of information and additional personal details. If HMRC suspects that a taxpayer has been fraudulent, they have up to 20 years to raise assessments of underpaid tax.
The full amount of any tax due must also be settled by 31 January following the tax year end, if interest and potential surcharges are to be avoided. In addition, if you have significant income not taxed at source, you may need to make payments on account. If this is the case, the first instalment will also be due by 31 January with the second payment due by the following 31 July.
Payments on account are only generally required for those that are self employed, or where a taxpayer has a significant underpayment on their return and expects to owe a similar amount for the following year. It is possible to reduce or cancel a payment on account, however if a taxpayer does reduce too far, an interest penalty will be charged from the original due dates when the return is filed.
Tax Residence status
The basis on which an individual is taxed in the UK is dependent upon their residence status. This is a particularly complex area of taxation, but in general the following rules will apply
You will be automatically resident if:
- You spend at least 183 days in the UK; or
- You have your only home in the UK for more than 90 days, and that home is occupied for at least 30 days
- You are in full-time work in the UK for a continuous 12-month period
Ties to the UK
If the above tests are not conclusive, then it will be necessary to determine the number of “ties” to the UK, based on the following (we would recommend seeking further advice in this instance)
- Family tie: a spouse, civil partner or minor child is living in the UK (excluding children only in the UK due to boarding school arrangements who spend less than 21 days in the UK outside of term time)
- Accommodation tie: available accommodation for a continuous period of at least 91 days, ignoring gaps of less than 16 days.
- Work tie: at least 40 days are spent working in the UK (defined as 3 hours or more per day)
- 90 day tie: more than 90 days spent in the UK in at least one of the two prior tax years
- Country tie: applicable to leavers where more days are spent in the UK than any other single country
An individual can also claim non domicile status if this is beneficial. Domicile is less governed by the length of an assignment, and individuals who move to the UK but do not intend to remain on a permanent basis are likely to be able to claim non domicile status. If you are considered non domiciled in the UK, you will usually only pay UK tax on overseas investment income and gains to the extent that the income or proceeds are remitted to the UK, so this can be a very useful tax break.
For the first seven years of tax residence, a non domiciled taxpayer has two options:
- Declare worldwide personal income and gains; or
- Only declare overseas personal income and gains if remitted to the UK, but give up the UK personal tax free allowance and capital gains tax allowance
By concession a taxpayer that is in the first seven years of residency can elect option 2 without giving up the UK personal (and capital gains) tax allowances if their total overseas income and/or gains are less than £2,000 during the tax year.
Once a taxpayer has been resident in the UK for more than seven tax years, option 2 remains available, however the taxpayer must then make an annual payment of £30,000 to HMRC to maintain this privilege. After 12 years, this increases to £50,000 per annum.
There are a number of tax planning strategies that may be available to individuals moving to the UK which can significantly reduce the liability to UK tax. Many of these opportunities will require the correct structuring of a taxpayer’s financial affairs at the time of moving, and advice should therefore be sought at an early stage to maximise any applicable tax savings.
In general, tax savings can be made for individuals who:
- Are assigned to the UK by an overseas employer for a period of up to 2 years (see “A” below)
- Are non domiciled and will have business travel outside of the UK (see “B” below)
- Are in receipt of non UK investment income or gains on the sale of non UK assets (see “C” below)
A: Detached duty relief
HMRC will allow relief from income tax for travel and subsistence payments if they are incurred in the performance of the duties of the employment. This relief is commonly referred to as Detached Duty or Temporary Workplace relief.
To qualify for relief an individual must be working away from their normal work location for a period of no longer than 24 months. This would typically apply to individuals that are “seconded” to the UK by an overseas employer for a fixed term assignment and not to individuals that move to the UK to take up a new UK employment (as to back up the temporary nature of the workplace, an existing relationship with a home country employer must remain). Where an individual qualifies for relief, the following expenses may be claimed:
- The cost of travelling from home (or indeed anywhere) to the temporary workplace;
- The reasonable cost of accommodation near the temporary workplace (including utilities);
- Daily subsistence costs (to cover the cost of meals).
It should be noted that these expenses relate to the employee only and not their family.
The rules are complex, but can provide a significant tax planning benefit. It is recommended that advice is sought at an early stage as it will be necessary to retain receipts and/or proof of payment in order to substantiate any claims.
B: UK tax exemption for non UK working days
An individual who is non domiciled and moves to the UK can claim UK tax exemption on the proportion of their employment income relating to days spent working outside of the UK. This applies to the year of transfer and subsequent two tax years.
However, a condition of claiming this relief is that at least the amount being claimed as a deduction must have been paid and retained outside of the UK. If any amount of this claim is remitted to the UK, the tax relief available will be reduced accordingly.
To take advantage of this tax relief, you should ensure that your net pay is delivered to a qualifying non UK bank account. If you are being paid by a UK employer, this can be achieved by using an offshore account with one of the major banks based in the Channel Islands or Isle of Man (whilst such branches remain part of the UK banking system, the jurisdictions are considered to be outside of the UK for taxation purposes). It is also important to note that the account should be in the sole name of the employee (although a joint account is acceptable provided that the spouse does not receive income directly to that account).
C: Non domicile claims
If you are considered non domiciled in the UK, you will not be required to declare or pay UK tax on any non-UK investment income or gains on the sale of non UK assets, provided any such income or gains are kept outside of the UK.
Leaving the UK
On leaving the UK, you will be automatically non resident if:
- You spend less than 16 days in the UK; or
- You spend less than 46 days in the UK and were not resident in the prior three tax years; or
You leave the UK under a full time contract of employment abroad (defined as an average 35 hour or more working week) and spend no more than:
- 90 days in the UK per tax year
- 30 working days (defined as 3 hours or more) in the UK per tax year
As an example, if you leave the UK under a full time employment contract, you will generally become non resident if you expect to be absent from the UK either for at least a complete UK tax year (for example, a if you leave on 1 September 2013, you would need be absent until at least 6 April 2015 so that the tax year outside of the UK is then 2014/15).
If you are leaving for another purpose, and do not meet the “automatically non resident test” then you will need to try and limit days spent in the UK based on the “Ties to the UK” rules outlined above.
On leaving the UK, it is also necessary to submit a completed Form P85 to HMRC on departure. This form is generally used to claim non resident status in the UK, from which point only UK source income remains taxable.
The typical income that a non-resident taxpayer will need to report to the UK authorities will be:
- UK investment income (bank interest / dividends)
- Gains on sale of UK assets owned at departure (unless taxpayer is absent for at least five full tax years)
- Stock / share option income where the grant was made prior to leaving the UK (taxed on workdays from grant to vest/exercise depending on treaty)
- UK rental income
- Earnings relating to UK workdays (in certain cases)
In addition, a non resident taxpayer must report details of days spent back in the UK, including the number of those that are spent working and number of separate trips made (if they continue to have a UK filing requirement).
National Insurance Contributions (NIC)
The requirement to pay UK NIC will depend upon which country you have moved from, who your legal employer is and how long you expect to remain in the UK. If you are liable and an employee, you will be required to pay Class 1 Contributions.
If you are seconded to the UK by an overseas employer within the European Economic Area (EEA), you will generally be required to continue to pay in your home country (and gain exemption from UK NIC) where the secondment is expected to last no longer than 24 months. For longer assignments, depending on the agreement between the member states in question, you may be able to pay only in the home country for up to five years. To make the claim your home country employer will be required to complete form A1 in order to obtain a “Certificate of Coverage”.
If you are seconded to the UK by an overseas employer based outside of the EEA, but in a country which has a reciprocal social security agreement with the UK, you may also be able to remain in the home country scheme for two to five years. If you expects your assignment to last longer than the specified period, you will normally cease payments in the home country and commence payments in the UK.
If you are seconded to the UK from a country other than the above (and remain employed by your home country employer), you will normally be required to pay UK Class 1 contributions from 52 weeks after your arrival.
If you have moved to the UK as a local hire (i.e. to take up a UK employment contract), you will generally be required to pay into the UK system from day one.
In certain cases, it is possible to continue to participate in an overseas pension plan and gain the same tax advantages as a UK plan. This would mean that contributions would be tax deductible (subject to a maximum) and employer's contributions would be tax free. Each country will have a different agreement with the UK but as an example, a U.S. 401k pension plan, where contributions continue as part of UK service, would be specifically allowable under the UK/US treaty provided that the individual making the claim was a member of the plan prior to arrival in the UK.
Use of tax treaties
The UK has the largest network of Double Tax Treaties covering over 100 countries and used effectively, these can avoid a situation where a taxpayer becomes liable to both UK and overseas tax on the same item of income.
A tax treaty will dictate which country has the right to tax which item of income, whether this is employment, capital gains, dividends, pension income etc.
Treaties can often be used to provide exemption from tax on employment income, where an individual is seconded to the UK by an overseas employer for a limited period. The exact requirement will depend on the particular “home” country, however in general an individual that is seconded to the UK for a period of less than 183 days may be able to claim tax exemption in the UK. However in most cases this will only work if the salary costs are not recharged to the UK entity, so keeping below 183 days is not always sufficient!
The above guidance is intended to be general in nature and as everyone’s position will be different, advice should be sought before relying on this. In addition, tax legislation is constantly changing and it is always good practice to review your tax situation on a regular basis.
Tax Guide for Individuals Moving to the UK | Submitted by: Richard Watts-Joyce of Global Tax Network