Residence and Domicile claims
The basis on which an individual is taxed in the UK is largely dependent upon their residence status. Broadly, an individual can be a non resident, a temporary resident (not ordinarily resident) or a permanent resident (ordinarily resident). The status assigned to an individual has as much to do with the intended length of stay on arrival as days of physical presence.
Residence claims are made through the completion and submission of Inland Revenue arrival form P86 and care should be taken when completing this form. The status allocated by the Inland Revenue could be the difference between paying tax on worldwide income, or UK source income only.
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 do not intend to remain in the UK permanently are likely to be able to claim non domicile status. An individual who is considered non domiciled in the UK will only pay UK tax on overseas investment income and gains to the extent that the income or proceeds are remitted to the UK. The claim is made through the submission of Inland Revenue form DOM1.
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, and advice should therefore be sought at an early stage to maximize any applicable tax savings.
In general, tax savings can be made for individuals who:
- Intend to remain in the UK for up to three years and will have business trips outside of the UK
- Are assigned to the UK by an overseas employer for a period of up to 2 years
- Are in receipt of non UK investment income or gains from non UK assets
The UK tax year runs from 6 April to the following 5 April. There is no system of joint filing and therefore married couples must submit separate tax returns.
For all tax resident individuals, a personal allowance of tax free income is available (this is £4,895 for 2005/06 tax year). Non residents who are nationals of EU or Commonwealth countries can also claim a personal allowance.
Pay As You Earn (PAYE)
If you are working in the UK, your employer (or UK company you have been seconded to) will be required to operate Pay As You Earn tax withholding on cash payments and certain benefits. This applies even if you are paid outside of the UK. The Inland Revenue will issue a tax code to your employer once they have received a completed Form P46 (which your employer will give you to sign). This code is used to determine the amount of tax the company is required to withhold each pay period.
If the Inland Revenue issues a tax return, it must be completed and submitted (even if you have no taxable income). You do not generally need to report pre or post assignment income or gains.
If you do not receive a tax return but have taxable income or gains which are not covered in full by withholding, you should tell your tax office by 5 October following the tax year end.
If you want the Inland Revenue to calculate your tax, you should submit your tax return by 31 September following the tax year end (or 30 December if you are filing online). In other cases, the return and self assessment must be filed by 31 January following the tax year end (unless your return is issued late in which case you have three months to complete it). If your return is filed late, there are automatic fixed penalties.
Unless your tax return is issued late, the full amount of any tax due must be made by 31 January following the tax year end. 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 installment due will also be 31 January with the second payment due by the following 31 July.
It is generally beneficial to file tax returns for the year of arrival and departure, as it is likely that a taxpayer will have paid too much tax in these years.
Leaving the UK
You will need to submit a completed form P85 to the Inland Revenue on departure. If you are leaving on the completion of a UK assignment, you should complete the shorter version of the form, P85(S). This form is generally used to claim non resident status in the UK, from which point only UK source income remains taxable.
Your requirement to pay UK National Insurance will depend upon which country you have come 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 have come to the UK from the European Economic Area, you can continue to pay in your home country only, provided that your secondment is expected to last no longer than 12 months (which can be extended to a further 12 months whilst on assignment). For longer assignments, depending on the agreement between the member states in question, you may be able to pay in your home country only for up to five years. To make the claim your home country employer will be required to complete form E101.
If you have come from a country which has a reciprocal social security agreement with the UK, you may also be able to remain in your home country scheme for two to three years (or up to five years if you are from the USA). If you expect your assignment to last longer than the specified period, you will normally cease payments in your home country and commence payments in the UK. To make the claim, your home country employer will be required to request a certificate of coverage.
If you come from a country other than the above, you will normally be required to pay UK Class 1 contributions from 52 weeks after your arrival.
With the exception of EEA nationals, all individuals coming to work in the UK will require a work permit. If you are coming to the UK on assignment, you will need to obtain your permit before your assignment starts to avoid being refused entry to the UK.
In certain cases, it is possible to continue to participate in your employers overseas pension plan and gain the same tax advantages as a UK plan. This would mean that your contributions would be tax deductible (subject to a maximum) and your employer's contributions would be tax free. For this to apply, your employer in the UK will need to submit the rules of the overseas pension scheme to the Inland Revenue Pension Schemes Office with a claim for corresponding acceptance (this is standard practice with US 401k plans). Without this, you will not receive any tax relief on contributions and your employer's contributions will be taxable.
Generally, no tax liability should arise in the UK on the exercise of non-UK stock options if the options were granted before you came to the UK, the proceeds are kept outside of the UK and you are not domiciled in the UK.
If you are granted stock options whilst in the UK, you may be liable to UK tax on exercise, even if this occurs after you have left. Specialist advice should be sought if this applies.
The UK authorities pay what is known as child benefit in respect of all children under the age of sixteen. You may be able to claim this benefit if you cannot claim an equivalent benefit in your home country and you come to the UK from an EEA country or a country with which the UK has a child benefit agreement.
Child benefit is not taxable in the UK.