Who Is Liable For Income Taxes In The United Kingdom
The taxation of individuals in the United Kingdom is determined by residency and domicile. Tax residents are liable to U.K. tax on their worldwide income. However, some short term residents and individuals who are regarded as not domiciled in the United Kingdom may be subject to U.K. tax on offshore income and capital gains only if the funds are remitted to the United Kingdom (this is known as the “remittance basis”). Before 6 April 2008, the remittance basis was automatic for those who qualified. Effective from 6 April 2008, individuals wanting to be taxed on the remittance basis must make an election each year unless their total unremitted offshore income and gains from all sources for that year is less than £2,000. Individuals who have unremitted offshore income and gains of at least £2,000 do not need to make a claim if their only U.K. income is taxed income of no more than £100. Individuals who elect the remittance basis lose their tax-free personal allowance for the year and also surrender their annual capital gains tax exemption. In addition, any individual who has been resident in any part of seven of the preceding nine tax years must effectively pay additional “tax” of £30,000 for each year for which they elect the application of the remittance basis. The budget announced on 23 March 2011 indicated that this charge will increase to £50,000, effective from 6 April 2012, for individuals resident in the United Kingdom for 12 years. However this measure is currently under consultation. For further details regarding the remittance basis, see Remittance basis.
Nonresidents are subject to tax on compensation attributable to U.K. workdays and certain U.K.-source investment income.
Domicile. Under English law, an individual’s domicile is the country considered to be his or her permanent home, even though he or she may be currently resident in another country. It may be a domicile of origin or of choice. Under English law, every person is born with a domicile of origin, which is normally that of the father. A domicile of origin has great tenacity. Therefore, individuals who were never domiciled within the United Kingdom and who work there for limited periods normally have no difficulty proving that they are domiciled in another country.
Resident. Whether a person is a U.K. resident remains a question of fact. Individuals who are resident in the United Kingdom are deemed to be resident and ordinarily resident (R/OR) or resident but not ordinarily resident (R/NOR). Before 6 April 2009, an individual’s U.K.-residence status was generally determined under the following mostly non-statutory rules:
- If an individual came to the United Kingdom for a period of less than two years, he or she was regarded as resident for the whole of any tax year in which he or she spent 183 days or more in the country and was not resident for the whole of any tax year in which he or she spent less than 183 days.
- If an individual’s stay in the United Kingdom was likely to last for a period of two years or more, the individual was regarded as resident from the date of arrival until the date of final departure.
In the absence of a clear intention to remain in the United Kingdom for three years or more, the type of residence status was based on the previous periods of residence or presence in the United Kingdom.
Ordinarily resident. Someone who intended to remain in the United Kingdom for three years or more was regarded as ordinarily resident from the date of arrival. The purchase of accommodation or a lease of three years or more was considered a strong indication of an intention to remain for three years or more. An individual who had been present in the United Kingdom for an average of more than 90 days over 4 consecutive tax years was regarded as R/OR from the beginning of the fifth year. If a clear intention was established to visit the United Kingdom for more than 90 days a year on average before the fifth year, the individual was regarded as R/OR from the beginning of the tax year in which the intention was established.
Not ordinarily resident. If employees came to the United Kingdom with no definite intentions concerning the length of their stay and if they occupied only temporary accommodation, they were normally considered as R/NOR until the beginning of the tax year following the third anniversary of their arrival and R/OR thereafter.
Individuals who came to the United Kingdom with no intention to remain in the United Kingdom for at least three years and who then purchased permanent accommodation or otherwise changed their intention such that they intended to remain in the United Kingdom for at least three years were regarded as R/OR from the beginning of the tax year in which their intention changed.
However, individuals whose intention was to remain long term and who then changed that intention and left the United Kingdom within three years were regarded as R/NOR from the beginning of the tax year in which they could prove that their intention clearly changed.
Recent changes. Effective from 6 April 2009, some of the principles outlined above have changed. In general, whether an individual is regarded as resident or not resident in the United Kingdom is determined under similar rules to those outlined above. However, the basis on which an individual’s ordinary residence status is determined is changed in certain important respects.
Following a court decision published in March 2009, HM Revenue and Customs withdrew all of its previous guidance on residence and issued draft replacement guidance. A further decision was published in February 2010. Under this decision, no minimum period must elapse before an individual becomes ordinarily resident in the United Kingdom. The decision suggests that ordinary residence in the United Kingdom is based on whether the individual’s residence in the United Kingdom has been voluntarily adopted and is for a settled purpose such as employment. The decision concluded that an individual can have a settled purpose even if this is for a finite period.
In December 2010, HM Revenue and Customs published further guidance. Under this guidance, an individual’s personal intention is no longer relevant in determining his or her ordinary residence position. An individual is considered ordinarily resident in the United Kingdom if it is determined that an individual has a settled purpose in the United Kingdom. Individuals who can clearly demonstrate that they are in the United Kingdom for a temporary limited purpose may be able to demonstrate that they do not have a settled purpose in the United Kingdom and accordingly are not ordinarily resident in the United Kingdom. Individuals who are in the United Kingdom for a temporary purpose for three years or more are not able to claim that they are not ordinarily resident in the United Kingdom. It is now more difficult for individuals to prove that their stay in the United Kingdom is for a temporary purpose and accordingly more difficult to be considered not ordinarily resident.
On 23 March 2011, an announcement was made to confirm that a statutory residence test will be introduced. A consultation on this test is taking place in June 2011, with the intention of implementing the test by April 2012. Because the determination of an individual’s residence status is crucial in determining the individual’s liability to U.K. tax and because the current guidance is not entirely clear, individuals should seek professional advice at the earliest opportunity.
Days present in the United Kingdom. Until 5 April 2008, days of arrival and departure were regarded as days spent wholly outside the United Kingdom. Effective from 6 April 2008, any day in which the individual is present in the United Kingdom at midnight is considered a full day of presence in the United Kingdom for residence purposes.
Remittance basis. R/NOR individuals may be taxed on a remittance basis on employment income earned offshore that is not remitted to the United Kingdom. They are also subject to remittance basis taxation on investment income held offshore. However, unless they are domiciled outside the United Kingdom, they are liable to capital gains tax on the disposal of worldwide assets.
Individuals who are not domiciled in the United Kingdom may be subject to remittance basis taxation on all offshore investment income and all offshore capital gains. Remittance basis taxation may also apply if individuals satisfy both of the following conditions:
- They are R/OR in the United Kingdom.
- They have a non-U.K. employer and none of the duties of such employment are performed in the United Kingdom.
Effective from 6 April 2008, the default position is that all residents are subject to U.K. tax on worldwide income and gains on an arising basis. Individuals who qualify must elect to be taxed on the remittance basis unless either of the following circumstances exists:
- Their total unremitted offshore income and gains is less than £2,000.
- They have not made any remittances to the United Kingdom and their only U.K.-source income is taxed income of no more than £100.
This election comes at a cost. Individuals who elect the remittance basis may not claim personal tax allowances and the annual capital gains tax exemption. In addition, individuals who have been resident in any seven of the preceding nine tax years must pay additional “tax” of £30,000 for each year for which an election is made. This “tax” charge is met by nominating a minimum of £1 of offshore income and/or gains for the year to be taxed as if the arising basis applied in order to generate an additional U.K. tax liability of £30,000. If the amount of income and/or gains actually nominated is insufficient to generate £30,000 of additional tax, the balance payable is treated as income tax, albeit income tax that has not been paid on any specific non-U.K.-source income or gains. The law further provides that this nominated income is deemed to be the last to be remitted to the United Kingdom behind all other offshore income and gains for that year. The arrangement is an attempt to turn the remittance basis charge into a “tax,” but the government offers no guarantee that other tax authorities will agree to grant a credit for such “tax.” The budget announced on 23 March 2011 indicated that the £30,000 charge will increase to £50,000, effective from 6 April 2012 for individuals resident in the United Kingdom for 12 years. However, this measure is currently under consultation. Each family member must make an election if they wish to benefit from the remittance basis unless his or her total unremitted offshore income and gains is less than £2,000 or his or her only U.K.-source income is taxed income of no more than £100.
Family members who are 18 years or older at any time during the U.K. tax year are also subject to the £30,000 charge if they wish to claim the remittance basis. In considering whether the remittance basis should be claimed, individuals should review the provisions of any relevant double tax treaties and note that many of the treaties the United Kingdom has entered into with other countries contain what is known as a “remittance clause.” Under this clause, non-U.K.-source income is exempt from tax in the source country only if it is remitted to the United Kingdom.
Organizing bank accounts. If the remittance basis applies, special rules identify the source of funds remitted to the United Kingdom from a so-called “mixed fund.” A “mixed fund” is a fund that contains monies from different sources such as employment income, investment income, capital gains and “clean capital.” The special rules specify eight categories of income and gains. If monies remitted to the United Kingdom are remitted from a mixed fund, income is regarded as being remitted in a specific order which, in general terms, is the following:
- Employment income for the current year
- Investment income and gains for the current year yielding the highest net amount of U.K. tax
- Investment income and gains for the current year yielding lower U.K. tax
The above ordering applies to the income and gains for each tax year separately beginning with the most recent tax year and working backwards. If possible, it is important to organize off-shore accounts containing separate monies from different sources in order to clearly identify the source and minimize the net U.K. tax on remittances
As a result of the complexities of the remittance basis and the mixed fund rules, it is suggested that specific advice be sought.
Income subject to tax. The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. An employee is taxed on all remuneration and benefits from employment received during a tax year (ending on 5 April). Consequently, an employee is taxable not only on basic salary but also on most perquisites or benefits in kind, including company cars, meals, permanent housing, tuition for dependent children, medical insurance premiums and imputed interest on loans below market rates. Employer-paid moving expenses in excess of £8,000 are also taxable. However, travel expenses for international moves are not taxable and are not included in the £8,000 tax-free allowance. Employer-paid education expenses for employees and life insurance premiums may be taxable in certain circumstances. However, contributions by an employer to an occupational pension plan registered with HM Revenue and Customs are normally not taxed (see Pensions).
Subject to certain limits and conditions, individuals assigned temporarily to the United Kingdom for periods of 24 months or less are not taxed on employer-paid temporary housing or reimbursed costs of subsistence.
Employees not resident in the United Kingdom who work there for a short time are subject to tax on their earnings for duties performed in the United Kingdom. A double tax treaty may grant an exemption from U.K. taxation to employees of an overseas company (see Section E).
Education allowances provided by employers to their expatriate and local employees’ children are taxable for income tax and social security purposes.
Self-employment income. Self-employment income includes income from a trade, profession or vocation. Whether a person is considered to be employed or self-employed is determined by the individual’s particular circumstances.
A self-employed taxpayer is taxed on business profits. A self-assessment system applies, which means that self-employed individuals are generally taxed on the business profits earned during an accounting period ending in the current tax year.
For tax purposes, profits are usually determined in accordance with normal accounting principles, but adjustments may be necessary. Any non-trading income, including interest, must be excluded and taxed under the applicable rules.
Investment income. Income from most investments in the United Kingdom is received after tax is withheld or paid at source. Tax on savings income other than dividends is limited to 20% for basic-rate taxpayers. This 20% rate also applies to savings income earned abroad by U.K.-domiciled residents who are basic-rate taxpayers. Individuals who are not basic-rate taxpayers are taxed at a rate of 40% on savings income if their taxable income is not more than £150,000 or at a rate of 50% if they have more than £150,000 of taxable income.
U.K. dividends are subject to a nonrefundable 10% notional withholding tax. Dividends from non-U.K. companies are also subject to a nonrefundable 10% notional withholding tax, effective from 6 April 2008. U.K. dividends are taxed at a rate of 10% if included in income up to the higher rate threshold of £35,000, and at a rate of 32.5% if included in income above that threshold. Effective from 6 April 2010, U.K. dividends are taxed at a rate of 42.5% if the individual has more than £150,000 of taxable income. Effective from 6 April 2008, foreign dividends remitted to the United Kingdom by an individual claiming or entitled to benefit from the remittance basis are taxed at a top rate of tax of 40% rather than 32.5%. Effective from 6 April 2010, these rates are increased to 50% and 42.5%, respectively, if the individual has more than £150,000 of taxable income; see Remittance basis. Foreign dividends received by resident individuals who are not using the remittance basis are taxed at the same rates as U.K. dividends. Certain foreign dividends are also deemed to be subject to a nonrefundable 10% notional tax credit. As a result, the effective tax rate on such dividends is 44.44% and 36.11%, respectively.
U.K. banks, building societies and other financial institutions must withhold tax on interest income at a rate of 20%. If an individual is subject to tax at a rate higher than the basic rate, tax is assessed on net investment income received plus the tax withheld, and credit is given for the 20% tax already withheld.
Special provisions enable certain investors to certify to a deposit taker that they are unlikely to be subject to tax (for example, if their total income is less than their allowances), thereby exempting them from withholding on interest payments. Individuals who claim the remittance basis and accordingly lose their right to a personal allowance may not claim exemption from withholding.
Unless HM Revenue and Customs issues a direction not to withhold tax, withholding tax is levied by the leasing agent on income derived from the rental of real property paid to a nonresident landlord, which for this purpose is an individual living outside the United Kingdom for at least six months. If no leasing agent is involved, the tenant must levy the withholding tax on rent paid to a nonresident landlord, unless HM Revenue and Customs issues a direction not to withhold the tax. Net profit from rentals is included in taxable income and taxed at the rates set forth in Rates.
A nonresident individual’s income derived from certain investments in the United Kingdom may be paid without deducting tax. These investments include government securities and interest from bank and building society accounts. Other investment income, including interest other than bank and building society interest, annuities and royalties, is subject to withholding tax, normally at the basic rate of tax. However, withholding tax may be reduced if the United Kingdom has a double tax treaty with the individual’s country of residence.
Stock options and share incentive schemes. Detailed, complicated legislation applies to the taxation of share incentives provided to employees by their employers. This legislation now covers “securities,” which includes, but is not limited to, shares in the employer company. Professional advice should be sought on the implications of this legislation to a particular case.
Effective from 6 April 2005, share option income is sourced from grant to vesting rather than from grant to exercise if a double tax treaty applies, unless the relevant double tax treaty specifically mentions that the sourcing period is from grant to exercise.
Unapproved employee share schemes. If an employee is resident and ordinarily resident at the date a share option is granted under an unapproved employee share scheme, income tax applies at the date the option is exercised. An option granted to a resident and ordinarily resident employee is not taxed at the grant date. No tax applies to the exercise of an option granted before an individual takes up residence in the United Kingdom, unless the grant was made specifically in anticipation of U.K. duties or unless the employee was liable to U.K. tax on the basis of U.K. workdays at the date of grant.
For options granted after 26 November 1996, the employer must withhold income tax in most circumstances. Social security contributions are levied on the exercise of options granted after 5 April 1999.
The taxation of options granted to employees who are resident but not ordinarily resident is complicated. The precise U.K. tax consequences depend on the date the option was granted.
Options granted before 6 April 2008 are taxed differently from options granted on or after 6 April 2008. For options granted on or after 6 April 2008, the U.K. tax treatment is similar to the treatment given to options granted to an employee who is resident and ordinarily resident but with the possibility of claiming that a specified portion of the gain should be taxed only if remitted to the United Kingdom.
The value of shares awarded to an employee is subject to income tax and social security contributions on the date of the award, unless the shares are subject to a risk of forfeiture for a period of up to five years, in which case the liability arises on the date the award vests. Various employer and employee joint elections are available to change the date of taxation and the taxable value of such securities.
For options granted to resident and ordinarily resident employees under unapproved schemes after 5 April 1999, an employer may avoid paying social security contributions on the option spread by entering into a voluntary agreement with the employee. Under the agreement, the employee pays any employer-owed social security contributions due on the exercise of the options; the employee may then deduct the contributions paid when calculating the amount of the gain liable to U.K. income tax. This treatment is available only if the social security liability arose on or after 28 July 2000. A similar agreement can be made with respect to restricted stock awards made to resident and ordinarily resident employees on or after 1 September 2004. Such agreements may now be made with respect to options and restricted stock awards made to resident but not ordinarily resident employees.
Approved employee share schemes. The United Kingdom currently has several approved employee share schemes that are usually not subject to withholding tax or to National Insurance contributions. These include the Approved Company Share Option Plan, the Approved SAYE Share Option Scheme, the Share Incentive Plan (formerly the All Employee Share Ownership Plan) and the Enterprise Management Incentives. Each scheme has different characteristics and is therefore relevant to particular employer and employee circumstances. The advantage of the schemes over unapproved schemes is that they generally put employer shares into the hands of employees free of income tax and National Insurance. The principal disadvantage is that the value of awards that may be made to employees is limited.
In general, the underlying shares acquired from approved schemes are still subject to capital gains tax when they are sold. (However, shares in a Share Incentive Plan subject to a minimum holding period may be exempt from U.K. capital gains tax on disposal.) If the qualifying conditions are not met and if the gain either on the exercise of the options or on the release of the shares is already charged to income tax, the cost of the shares for capital gains tax purposes is considered to be the share value at the time of exercise.
Pensions. Individuals may contribute any amount into a U.K.-registered pension scheme. However, the following principal restrictions apply:
- The annual amount of contributions eligible for tax relief is the lower of 100% of annual earnings or the annual allowance of £50,000, effective from 6 April 2011.
- The total savings that may be accrued in a lifetime without penalties being incurred is £1,800,000, effective from 6 April 2010. This limit is set to be reduced to £1,500,000, effective from 6 April 2012.
In determining whether the above limits are breached, employer and employee contributions need to be added together. If one or both limits are breached, penalty-type charges may apply.
Effective from 6 April 2011, tax relief for pension contributions to pension funds for individuals is limited to the annual allowance of £50,000. This limit applies to pension contributions made in the pension input period, which is generally the pension plan year for a U.K.-registered scheme and the U.K. tax year for non-U.K. registered schemes. Unused annual allowances can be carried forward for up to three years in certain circumstances.
Before 6 April 2011, the annual allowance for pension contributions was £255,000 for the 2010-11 tax year. Rules were introduced to restrict the tax relief for “irregular” pension contributions made between 22 April 2009 and 5 April 2011.
In principle, employer contributions paid into non-U.K. pension schemes are not taxable to the employee, but any employee contributions are tax-deductible only if a claim is successfully made under the Migrant Member Relief (MMR) or Transitional Corresponding Relief (TCR) provisions, or those of a relevant double tax treaty. If a claim is available under one of these three relieving provisions, the employer contributions are also deductible for corporation tax purposes. Certain penalty-type charges may apply either when the employee is in the United Kingdom or at some point after departure, regardless of whether a claim for relief is made.
The circumstance under which a penalty-type charge is most likely to apply is if benefits are withdrawn at a time or in a manner that is not permitted by U.K. law. Such penalty-type charges are not overridden by the provisions of a relevant double tax treaty. As a result of the complexity of the pension legislation, advice should be sought in all cases.
Deductions
Deductible expenses. U.K. tax law is not generous with deductions. Most deductions must be incurred wholly, exclusively and necessarily in the performance of an employee’s duties, a condition that precludes the deduction of many employment-related expenses. For example, no deduction is normally available for the purchase of business attire or for travel between home and work. Nevertheless, membership subscriptions to approved professional bodies are specifically deductible, as are contributions by an employee to an occupational pension plan registered with HM Revenue and Customs, within specified limits (see Pensions).
Personal deductions and allowances. A U.K. taxpayer is entitled to a limited number of personal deductions and allowances. However, these deductions are not allowed if an election is made for the remittance basis for that year. Relief for alimony and maintenance payments is available only if at least one of the spouses was 65 years of age or older on 5 April 2000 and if certain other conditions are met.
U.K. resident taxpayers are normally entitled to personal allowances reflecting their personal circumstances. For the 2011–12 tax year, £7,475 of assessable income is exempt from tax. This deduction is decreased by £1 for every £2 of income over £100,000. Married couples also qualify for the married couples allowance if one or both of the spouses was 65 years of age or older on 5 April 2000. The maximum amount of this allowance is £7,295, depending on the taxpayers’ age and income. This relief may be taken only at a rate of 10%.
Nonresident European Economic Area (EEA) nationals, as well as residents and nationals of some countries with which the United Kingdom has entered into double tax treaties, are entitled to the full personal allowance of £6,475 unless they elect the remittance basis, subject to the reduction for individuals with more than £100,000 of income. Nonresident British Common-wealth subjects were also previously entitled to the full personal allowance. However this was withdrawn, effective from 6 April 2010.
Business Deductions. Losses and other allowable tax deductions may be offset against each individual’s personal income and gains. In calculating the taxable profit or allowable loss, the taxpayer may not deduct certain expenses, including the following:
- • Entertainment and gifts (except for certain inexpensive gifts bearing conspicuous advertising)
- • Depreciation, other than the capital allowances
- • Expenses not incurred wholly and exclusively for the purposes of the business
- • Costs of a capital nature
- • Profits or capital withdrawn from the business
Although deductions for depreciation and expenditure of a capital nature are not allowed, deductions in the form of capital allowances (tax depreciation) are available.
Relief for losses. Trading losses may be offset against a taxpayer’s total taxable income in both the year a loss is incurred and in the prior year. For married couples, losses may be offset only against the income of the spouse incurring the loss. Special rules provide for the carryback of losses incurred in early trading years. In addition, a taxpayer may carry forward unused trading losses to offset future income from the same trade. Special rules apply at the cessation of an individual’s trade or business.
B. Other taxes
Capital gains tax. An individual resident or ordinarily resident in the United Kingdom is taxed on gains arising on disposals of assets situated anywhere in the world. However, an individual not domiciled in the United Kingdom who elects to be taxed on the remittance basis for that year is taxed on disposals of overseas assets only if the proceeds are remitted to the United Kingdom.
The gain element of the sale proceeds is regarded as being remitted ahead of the capital. Individuals who leave the United Kingdom to reside abroad and do not remain nonresident for at least five complete tax years remain subject to capital gains tax (CGT) on gains derived from the disposal of assets held at the date of departure unless they were not resident in the United Kingdom during any part of four of the seven tax years immediately preceding the year of departure. In general, gains on the disposal of assets acquired while an individual is nonresident and sold while the individual is still nonresident are not subject to CGT. However, an individual who has been absent from the United Kingdom for less than five complete U.K. tax years is liable to CGT on any gains made in the year of return to the United Kingdom, regardless of whether the sale occurs before or after the date of return.
Beginning 6 April 2008, all capital gains were taxed at a flat rate of 18% with the exception of gains derived from the disposal of a business. Effective from 23 June 2010, the 18% rate applies to basic rate taxpayers only. Higher rate taxpayers (individuals with taxable income exceeding £35,000) pay capital gains tax at a rate 28%. Gains derived from the disposal of a business are taxed at a rate of 10%. A lifetime allowance known as “entrepreneurs’ relief,” is granted. This lifetime allowance is increased to £10 million, effective from 6 April 2011. The allowable cost of assets held before 31 March 1982 is adjusted to reflect the market value at that date.
Capital losses may be deducted from capital gains in the same year. Any unused losses may be carried forward indefinitely to relieve future gains. Special rules apply to losses incurred on the disposal of non-U.K. assets by individuals who elect to be taxed on the remittance basis.
An annual exemption of £10,600 for 2011–12 is granted. This exemption is forfeited if a claim for the remittance basis is made for the tax year.
Inheritance and gift tax. Inheritance tax (IHT) may be levied on the estate of a decedent who was domiciled in the United Kingdom or who was not domiciled in the United Kingdom, but owned assets situated there. An individual who does not have a U.K. domicile for IHT purposes is taxed only on U.K.-located assets. For IHT purposes, the concept of domicile is extended to include residence in the United Kingdom for substantial periods (currently defined as residence in the United Kingdom in any 17 of the last 20 U.K. tax years).
IHT is levied on the probate (confirmed) value of an individual’s estate at death. If the deceased was domiciled in the United Kingdom for IHT purposes, the taxable estate includes worldwide assets; otherwise, it includes only U.K. assets.
The inheritance tax rate is 40%. A nil rate band of £325,000 applies for 2010-11. Any unused allowance of a spouse or civil partner may be transferred to the second deceased estate, provided the second death occurs after 9 October 2007.
IHT is also levied on gifts made by the deceased within seven years prior to death.
Exemptions and deductions are available for inter vivos gifts and for estate transfers at death. Gifts between spouses are exempt, but the exemption is limited to £55,000 if the transferor isdomiciled in the United Kingdom but the transferee is not. Inter vivos transfers into all types of family trusts are subject to IHT at half the normal rates, subject to certain limited exemptions.
Relief provisions to reduce the tax ultimately levied on gifts made within seven years prior to death.
Business Property Relief and Agricultural Property Relief are available at either 100% or 50% on the transfers of certain assets if various conditions are satisfied.
To prevent double taxation, the United Kingdom has entered into inheritance tax treaties with the following countries.
France
Netherlands
Sweden
India
Pakistan
Switzerland
Ireland
South Africa
United States
Italy
C. Social security
Contributions. In general, National Insurance contributions are payable on the earnings of individuals who work in the United Kingdom. Special arrangements apply to individuals working temporarily in or outside of the United Kingdom. Under certain conditions, an employee is exempt from contributions for the first 52 weeks of employment in the United Kingdom.
The contribution for an employed individual is made in two parts
—a primary contribution from the employee and a secondary contribution from the employer. For 2011–12, the employee contribution is payable at a rate of 12% on weekly earnings between £139 and £817 and at a rate of 2% on weekly earnings in excess of £817.
An employer contributes at a rate of 13.8% on an employee’s earnings above £136, with no ceiling. However, if the employee contracts out of the state second pension (S2P), which is permitted if the employee is a member of a registered occupational pension scheme, the employer’s and employee’s required contribution rates are reduced. Except under certain circumstances related to the exercise of a share option or the award of restricted securities, the employer is not entitled to reimbursement for any secondary contributions made, but these contributions are an allowable expense for purposes of determining the employer’s income tax or corporation tax. Contributions are collected under the Pay-As-You-Earn (PAYE) system (see Section D). Employers must also pay National Insurance contributions on the provision of taxable benefits in kind (for example, employer-provided car or housing).
Different rules apply to self-employed individuals. For 2011–12, a weekly contribution of £2.50 is due if annual profits are expected to exceed £5,315. In addition, a self-employed individual must make a profit-related contribution on business profits or gains, which is collected together with income tax. The 2011–12 profit-related contribution rates are 9% on annual profits ranging from £7,225 to £42,475 and 2% on annual profits in excess of £42,475. Nonresident self-employed individuals are not subject to profit-related contributions.
Totalization agreements. Contribution liability for individuals transferring to or from the United Kingdom varies, depending on whether the individual is covered under the European Community (EC) social security legislation or another reciprocal agreement or whether the assignment is to or from a country with which the United Kingdom has not entered into a social security agreement.
Each category is discussed below.
EC social security legislation. New European Union (EU) social security legislation (EEC Council Regulation No. 883/2004) is effective from 1 May 2010. This legislation applies to all inter-EU moves for EU nationals. However, for the time being, the United Kingdom has not decided whether to extend the application of 883/2004 to non-EU nationals. In addition, moves involving Iceland, Liechtenstein, Norway and Switzerland are also not covered by these new rules (these four countries have delayed implementing the new legislation). The previous EU legislation (EEC Council Regulation No. 1408/71) continues to apply to non-EU nationals and to these four countries until agreement is reached for them to implement the new regulations.
Under the EU legislation, a covered worker normally pays social security contributions in a single member country, usually the country where his or her employment duties are performed, even though he or she may not live there.
Under an exception to this rule, a worker seconded to work in the United Kingdom from another member state normally remains subject to social security contributions in his or her home country if the assignment is for 12 months or less (if Regulation 1408/71 applies) or 24 months or less (if Regulation 883/2004 applies). Individuals may remain in their home country scheme for significantly longer periods if they are deemed to work partly in more than one member state (multistate workers), or if they are considered special cases by virtue of specific skills or knowledge.
Reciprocal agreements. The United Kingdom has reciprocal social security agreements with several non-EEA countries, although the terms of the agreements vary. Therefore, to determine an individual’s liability or benefit entitlement, it is important to consult the particular agreement relating to the individual’s home country.
Without reciprocal agreement. If no reciprocal agreement exists between the home country of an individual and the United Kingdom, the individual is subject to both the domestic law of his or her home country and the law of the United Kingdom. For these individuals who come to work temporarily in the United Kingdom, exemption from payment of certain contributions for the first 52 weeks of their stay is common. The exemption depends on both the employee and the employer meeting various requirements.
To prevent double social security taxes and to assure benefit coverage, the United Kingdom has entered into totalization agreements with the following jurisdictions.
EEA countries (a)
Israel
Philippines
Barbados
Jamaica
Switzerland (c)
Bermuda
Japan
Turkey
Canada
Jersey
United States
Guernsey
Korea (South)
Yugoslavia (b)
Isle of Man (d)
Mauritius
(a) Some of the “old” U.K. agreements with these countries continue to apply for non-EU nationals. The following countries joined the EU, effective from 1 May 2004.
Cyprus
Latvia
Poland
Czech Republic
Lithuania
Slovak Republic
Estonia Malta Slovenia
Hungary
Bulgaria and Romania joined the EU, effective from 1 January 2007.
(b) The United Kingdom honors the Yugoslavia treaty with respect to Bosnia-Herzegovina, Croatia, Macedonia, Montenegro and Serbia. The EC social security rules have applied to Slovenia since 1 May 2004.
(c) The EC social security rules apply to assignments to and from Switzerland, effective from 1 January 2002.
(d) The Isle of Man agreement is limited, and liability is generally determined according to place of residence.
You can read more about the United Kingdom Income Taxes and Procedures
We have been preparing US income tax returns for US Citizens and permanent residents living in the United Kingdom for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in the United Kingdom and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the United Kingdom tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in United Kingdom.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email