Tax returns and compliance
Termination of residence
Economic employer approach
Types of taxable compensation
Salary earned from working abroad
Taxation of investment income and capital gains
Additional capital gains tax (CGT) issues and exceptions
General deductions from income
Tax reimbursement methods
Calculation of estimates/prepayments/withholding
Relief for foreign taxes
General tax credits
Sample tax calculation
All income tax information is summarized by KPMG LLP, the U.K. member firm of KPMG International, based for the most part on Income and Corporation Taxes Act 1988; Income Tax (Earnings and Pensions) Act 2003; Income Tax (Trading and Other Income) Act 2005; Income Tax Act 2007; Taxation of Chargeable Gains Act 1992; Taxes Management Act 1970;; Her Majesty’s Revenue & Customs (“HMRC”) booklets “Guidance Note: Statutory Residence Test (SRT), RDR3” published December 2013; “Guidance Note: Overseas Workday Relief (OWR), RDR4” published May 2013; Social Security Contributions and Benefits Act 1992; Social Security (Contributions) Regulations 2001; and Inheritance Tax Act 1984 (all as amended by subsequent legislation).
When are tax returns due? That is, what is the tax return due date?
If an individual meets the requirements to report his/her income to HMRC, they are required to notify HMRC of this by 5 October following the relevant tax year end. The deadlines for tax returns to be submitted to HMRC are as follows:
What is the tax year-end?
What are the compliance requirements for tax returns in the United Kingdom?
Just after the end of the tax year, a tax return or notice to file should be received from HMRC. The return must be completed and filed with HMRC. The return requires a statement of income and capital gains for the tax year that has just ended.
Where substantial additional tax is payable by 31 January, for the next year, an individual will be required to make prepayments of tax (based, broadly, on the previous year’s underpayment) on 31 January in the tax year and on the following 31 July. Any final, balancing payment subsequently found to be due must be made by the following 31 January. For example, a tax return has been filed for 2015/16 which shows a significant underpayment. This underpayment will be payable by 31 January 2017. HMRC will also advise that a prepayment of tax (known as payments on account (“POA”)) for 2017/18 will be required on 31 January 2017 and 31 July 2017. Each of the two POAs will usually be based on half of the 2015/16 underpayment. Once the final 2016/17 liability is then calculated, and a deduction made for the two POAs made, if there is still an underpayment for 2016/17, then the balance must be paid by 31 January 2018. The POAs for 2017/18 are then based on the 2016/17 liability before deducting the POAs made.
If payments are not made on time, interest is charged. Additionally, if the tax is paid more than 30 days late, a penalty of 5 percent of the tax unpaid is charged. Another 5 percent is charged if the delay exceeds 6 months, and again another 5 percent penalty is charged if the delay exceeds 12 months.
A late filing penalty of GBP100 applies if a return is not delivered by the filing date.
If the filing failure continues for more than 3 months after the penalty date, and HMRC decide that a penalty is due and give written notice of the date from which the penalty is due, a daily penalty of GBP10 may be charged. This penalty may run for a maximum of 90 days from any date specified in the notice that is later than 3 months after the penalty date (the date of the notification itself is irrelevant). The daily penalty ceases to accrue if the failure is remedied before the expiry of the 90 day period. If the failure continues for more than 6 months after the penalty date (i.e. a further 3 months after daily penalties become payable, there is a further fixed penalty of either GBP300 or 5 percent of the tax liability that would have been shown on the return (whichever is the greater).
If the failure continues for 12 months a further penalty is imposed. For a non-deliberate failure to file a return the penalty is the greater of GBP300 or 5 percent of the tax liability.
For example, HMRC issued a notice to file to Mr Smith for the 2014/15 tax year on 6 April 2015. Mr Smith was waiting for some of his financial information for the year to arrive and so put the notice to one side and subsequently forgot about it. He then failed to submit his tax return by the 31 January 2016 deadline. As he was very busy with work, he failed to notice the reminders from HMRC and notices of the penalties accruing and did not submit his tax return until 15 February 2017. His tax return showed a liability for the year of GBP15,800. His penalties are as follows:
|Penalty accrual date||Amount (GBP £)|
|Late: 15 February 2017
|3 months late: 1 May 2016 – 29 July 2016 (90 days x GBP10 per day)
|6 months late: 1 August 2016 (the larger of GBP300 or 5% x GBP15,800)
|12 months late: 1 February 2017 (the larger of GBP300 or 5% x GBP15,800)
TOTAL PENALTY FOR LATE FILING
Tax-based penalties apply also to returns that are incorrect due to negligence or fraud.
Married persons are treated separately for tax purposes, and spouses are individually responsible for completing his/her own tax return. Their tax liabilities are calculated separately.
If a non-U.K. resident has U.K. taxable income or gains, the remarks above concerning U.K. residents apply equally to him/her.
What are the current income tax rates for residents and non-residents in the United Kingdom?
Income tax is calculated by applying a progressive tax rate schedule to taxable income.
Income tax table for 2016/17
|Taxable income bracket||Total tax on income below bracket||Tax rate on income in bracket|
|From GBP||To GBP||GBP||Percent|
||0||20 (basic rate)|
||40 (higher rate)|
||45 (additional rate)|
There is a 10 percent starting rate (starting rate band (“SRB”)) which applies only to savings income, with a limit of GBP5,000 in 2016/17. If an individual has taxable non-savings income, this reduces the available SRB accordingly, and so if the individual’s non-savings income is above this limit, the entire SRB is not applicable. From 6 April 2016 a Personal Savings Allowance will apply to exempt up to GBP1,000 from income tax. Higher rate taxpayers will have an allowance of GBP500. There is also a separate Dividend allowance of £5,000 which will exempt the first £5,000 of dividend income from tax.
The remittance basis of taxationNon-U.K. income and gains of non U.K Domiciled but U.K resident individuals may be taxed, if the individual wishes, on the remittance basis of taxation rather than on the arising basis. That is to say, such amounts are not taxed as they arise but only if and when they are remitted (taken into) to the United Kingdom.
As a consequence of changes in legislation which took effect on 6 April 2008, this is now a highly complex subject. It is beyond the scope of this publication to go into much detail about this, as to do so could prove misleading; specialist advice should be taken on any particular situation. However, the following should be noted.
Non-residents are taxed at the same rates as residents, however, they may not be entitled to any UK personal allowances. Their entitlement will depend on their nationality and/or country of residence.
For the purposes of taxation, how is an individual defined as a resident of the United Kingdom?
An individual’s tax liability can be affected not just by his/her residence status but also by his/her domicile status.
Prior to 6 April 2013, an individual’s UK residence status was determined according to case law and guidance issued by HMRC (latterly known as “HMRC6”). However, due to these existing “uncertain and complicated residence rules” (the UK government’s own wording in the consultation document it issued in June 2011 titled “Statutory definition of tax residence: a consultation”) the government introduced a statutory residence test (SRT) which applies from 6 April 2013.
Broadly, the SRT, which applies from 6 April 2013, is made up as follows:
An individual will be classed as non-UK resident if one of the following three automatic overseas tests applies (there are a further two automatic overseas tests which are only applicable when the individual dies during the relevant tax year):
If any one of the automatic overseas tests is met, the individual is classed as non-UK resident for the tax year and does not need to consider the SRT any further. Otherwise, if none of the automatic overseas tests are met the automatic UK residence tests have to be considered.
An individual will be classed as UK resident for the relevant tax year if they have not met any of the automatic overseas tests and they meet any one of the following three automatic U.K. residence tests (there is a further test applicable only if the individual dies during the relevant tax year):
If the individual has met none of the automatic overseas tests and then none of the UK tests, they must then consider the sufficient ties test to determine their UK residence status.
To determine whether an individual meets the sufficient ties test to be regarded as a U.K. resident for the relevant tax year, a number of factors are considered in association with the number of days an individual spends in the United Kingdom. These factors or ‘ties’ relate to location of family, availability of UK accommodation, extent of U.K. work, U.K. presence in earlier tax years and/or, where an individual is leaving the U.K., whether they spend more time in the U.K. than any other country.
For the sufficient ties test a distinction is drawn between “arrivers” (i.e. individuals who have been not U.K. resident throughout the previous three tax years) and “leavers” (individuals who have been U.K. resident in one or more of the previous three tax years).
Where the individual has been regarded as not resident in the U.K. throughout all of the three previous U.K. tax years, the four ‘UK ties' to be considered are:
The combination of the number of ties the individual has with the U.K. during the relevant tax year and the number of days the individual is in the U.K. determine whether the individual has become U.K. resident for that tax year. The criteria are as follows:
|Days spent in the U.K.||Number of U.K. Ties|
|Fewer than 46 days||Always non resident|
|46 – 90 days||Resident if has 4 U.K. Ties|
|91 – 120 days||Resident if has 3 U.K. Ties|
|121 – 182 days||Resident if has 2 U.K. Ties|
|183 days or more||Always resident|
Where an individual has been regarded as resident in the U.K. in at least one of the three previous U.K. tax years, the five ‘U.K. ties' to be considered are:
The combination of the number of ties the individual has with the U.K. and the number of days the individual is in the U.K. during the relevant tax year determine whether the individual has become U.K. resident for that tax year. The criteria are as follows:
|Days spent in the U.K.||Number of U.K. Ties|
|Fewer than 16 days||Always non resident|
|16 – 45 days||Resident if has 4 U.K. Ties|
|46 – 90 days||Resident if has 3 U.K. Ties|
|91 – 120 days||Resident if has 2 U.K. Ties|
|121 – 182 days||Resident if has 1 U.K. Tie|
|183 days or more||Always resident|
A person’s domicile is, broadly, his/her permanent homeland. The majority of foreign nationals employed by foreign employers who are working on secondment to the U.K. will not be regarded as domiciled in the United Kingdom.
An individual who is UK resident but non-UK domiciled and who chooses to be taxed on the remittance basis is liable to UK tax on his/her UK source income as normal. Overseas investment income and capital gains are only subject to UK tax to the extent that these funds are taken into, or remitted to, the United Kingdom, whether in that same tax year or later.
Where a resident but non-UK domiciled individual has earnings arising on U.K. and non-U.K. duties, these are fully taxable in the U.K. whether or not the funds are remitted to the U.K. However, please see below regarding overseas workday relief which may, subject to the individual satisfying the relevant tests, relieve from U.K. taxation any earnings attributable to non-UK duties that are not remitted top the U.K.
Under the pre-6 April 2013 rules, UK tax law included the concept of “ordinary residence”. This was broadly for individuals whose intention was to remain in the UK for a significant period of time or otherwise met one of the relevant tests. Where an individual was classed as not ordinarily resident, particularly relevant for extended business travellers coming to the UK for less than three years, they could obtain certain U.K. tax advantages such as overseas workday relief (“OWR”).
As part of the introduction of the SRT, the U.K. government abolished apart from for a few limited circumstances the concept of ordinary residence for income and capital gains tax purposes from 6 April 2013. The concept remains for U.K. social security (National Insurance) Contribution purposes. Consequently the OWR rules have been amended so they no longer depend on someone’s ordinary residence status part apart from employees who were resident and not ordinarily resident at 5 April 2013 and may continue to qualify under the old rules under transitional provisions.
Taxation of short-term business visitors (“STBVs”)
If an employee works in the United Kingdom for a period of less than a year in total, and spends less than 183 days in the United Kingdom in any one U.K. tax year, the employee will be treated for tax purposes as a STBV. Such an employee is liable to U.K. tax on his/her remuneration attributable to duties performed in the United Kingdom, even if the employer is overseas. Such an employee is likely to be non resident and consequently not taxable on remuneration relating to non-U.K. duties. If the employee was resident under the SRT rules outlined above then OWR and the remittance basis would need to be considered.
If the STBV remains a resident of his/her home country and there is a double taxation agreement between the United Kingdom and that country, the agreement may exempt the employee from U.K. tax on all his/her remuneration provided the following.
Certain UK treaties have other conditions that need to be met so the particular treaty needs to be considered.
For the purpose of counting days for the 183-day test in a treaty, any day on which an individual is present in the United Kingdom will count as a day.
It is the stated intention of HMRC to deny treaty relief in cases where a U.K. entity is viewed as the economic employer.
Is there a de minimis number of days rule when it comes to residency start and end date? For example, a taxpayer can’t come back to the host country for more than 10 days after their assignment is over and they repatriate.
Under the automatic overseas tests in the SRT, an individual will always be not-UK resident if they do not spend 16 or more days in the UK during a UK tax year, whether or not they have previously been UK resident.
For the purpose of counting days for this test a day is when the individual is in the UK at midnight, except in some limited circumstances, such as where the individual is in transit in the UK or for exceptional circumstances (e.g. war, natural disaster, civil unrest) which prevent the individual from leaving the UK (it is not enough that they are prevented from entering another country).
What if the assignee enters the country before his/her assignment begins?
Depending on the circumstances, it is possible that residency could commence from the first day in the tax year, or the date the assignment begins, or from the date of an earlier entry to the United Kingdom.
Even if not resident in the United Kingdom until the commencement of the assignment, business trips before that date could give rise to a U.K. tax liability.
Are there any tax compliance requirements when leaving the United Kingdom?
HMRC should be notified of an individual’s departure, and provided with details to determine his/her residence status in advance of the annual tax return. This will then allow exemption from withholding taxes to be claimed if appropriate.
What if the assignee comes back for a trip after residency has terminated?
This depends on the precise circumstances. It could prolong the period of U.K. residence. Even if it does not, if the trip relates to business, the associated earnings could give rise to a U.K. tax liability.
Do the immigration authorities in the United Kingdom provide information to the local taxation authorities regarding when a person enters or leaves the United Kingdom?
No, not as a matter of routine.
Will an assignee have a filing requirement in the United Kingdom after he/she leaves the country and repatriates?
If there is a liability to U.K. tax, there is likely to be a filing requirement. Strictly speaking, if HMRC have issued a tax return to an individual to complete, even if the individual has left the U.K. and there is no further U.K. tax liability, the tax return is still required to be submitted unless HMRC withdraw the notification to file. Therefore, when assignees leave the U.K. and are aware there is no further liability to U.K. tax, they should ensure that they contact HMRC to advise them of their departure and to request that no further tax returns after the year of departure are issued to them.
Do the taxation authorities in the U.K. adopt the economic employer approach1 to interpreting Article 15 of the OECD treaty? If no, are the taxation authorities in the U.K. considering the adoption of this interpretation of economic employer in the future?
Yes, the economic employer approach has already been adopted.
Is there a de minimis number of days2 before the local taxation authority will apply the economic employer approach? If yes, what is the de minimis number of days?
60 days (generally).
What categories are subject to income tax in general situations?
The following categories of income are subject to income tax:
Other types of income and capital receipts may also be subject to UK income taxes but are outside the scope of this document.
Employment income is taxable when received, or when the employee is entitled to receive it, if earlier. Employment income is subject to U.K. tax to the extent it was earned during a period of U.K. residence or, in the case of income earned while non-resident, to the extent it was earned in respect of duties performed in the U.K. (subject to treaty relief).
Generally speaking, all types of remuneration and benefits received by an employee for services rendered constitute taxable income, regardless of where paid (but if the amount relates to work performed outside the U.K., in certain circumstances, the amount which is taxed might be based on the amount remitted to the U.K.). Typical items of an expatriate compensation package set out below are, in most circumstances, fully taxable unless otherwise indicated.
Are there any areas of income that are exempt from taxation in the United Kingdom? If so, please provide a general definition of these areas.
The costs of transporting an employee and close family to the U.K. at the beginning and end of U.K. assignments are not taxable in most circumstances. Certain other moving expenses may also be non-taxable up to a maximum of GBP8,000.
The exercise of most foreign share incentives gives rise to taxable income from employment.
The categories of income that are exempt from income tax include the following.
Winnings from betting (including pool betting, or lotteries, or games with prizes) are not chargeable gains, and rights to winnings obtained by participating in any pool betting, or lottery, or game with prizes are not chargeable assets. Strictly, where the prize takes the form of an asset, it should be regarded as having been acquired by the winner at its market value at the time of acquisition.
Long service awards are fully tax-exempt if made in the following circumstances.
From April 6, 2015, the annual ISA investment allowance is GBP15,240. If they wish, ISA savers are permitted to invest in two separate ISA investments each tax year - a cash ISA and the other a stocks and shares ISA.
If they wish, ISA savers are permitted to invest in two separate ISA investments each tax year - a cash ISA and the other a stocks and shares ISA.
Any income arising from funds invested in such accounts, such as interest or dividends, are exempt from UK tax.
Some pensions and allowances paid to war widows and dependents are exempt from tax, as well as similar pensions or allowances payable under the laws of a foreign country.
These include (note that the list is far from exhaustive) the following:
Are there any concessions made for expatriates in the United Kingdom?
There are no special tax concessions for expatriates other than the treatment of home leave reimbursements outlined above. However, assuming the foreign national is not a U.K. domiciliary and chooses to be taxed on the remittance basis (see earlier - The Remittance Basis of Taxation), non-U.K.-source investment income and gains are potentially exempt from tax as they would be liable to tax only if remitted to the United Kingdom.
Furthermore, the introduction of a statutory Overseas Workday Relief from 6 April 2013 allows certain non U.K. domiciled employees to exempt from UK tax such of their unremitted employment income as is attributable to non-UK duties for the year of arrival and the next 2 years.
Certain expenses such as travelling, housing, and subsistence may be deductible when associated with a short-term assignment of up to 24 months in which the employee is required temporarily to work away from his/her normal or permanent workplace.
Is salary earned from working abroad taxed in the United Kingdom? If so, how?
Yes, unless the employee is taxed on the remittance basis - in which case the following comments apply.
Taxable compensation of individuals who, though resident, meet the conditions as laid out in the new Overseas Workday Relief statutory rules can be reduced by allocating (usually on a time-spent basis) income to foreign business trips, provided an amount of compensation (at least) equal to that allocated to the business trips is paid and retained outside the United Kingdom.
If a non-domiciled U.K. resident is employed by a non-U.K. resident employer and performs all of his/her duties outside the United Kingdom, the compensation arising is taxable only to the extent it is received in, or remitted to, the United Kingdom. However, if the non-domiciled UK resident individual also has an employment for duties performed in the United Kingdom, for the income arising from the other contract to be taxable on the remittance basis, the two employments must be quite separate and, assuming the employers are associated, the compensation for the overseas employment should be reasonable in relation to the time spent working abroad.
New legislation was introduced from 6 April 2014 which further limits the availability of the remittance basis to earnings from the offshore contract. Where the offshore contract is with an associated company the earnings may be taxable on the arising basis unless certain conditions are met.
Are investment income and capital gains arising to a U.K. resident individual taxed in the United Kingdom? If so, how?
Yes, unless the employee is taxed on the remittance basis - in which case the following comments apply - but only in relation to non-U.K. income/gains.
There is legislation aimed at preventing individuals avoiding capital gains tax by becoming temporarily non-U.K. resident.
From 6 April 2016 CGT is charged at 10 percent of the gain for basic rate taxpayers, to the extent that their total income plus gains less any allowances are within the basic rate tax band (i.e. less than GBP32,000). Any gains over GBP 32,000, and gains of higher and additional rate taxpayers are subjected to CGT at 20 percent. Gains made on residential property and carried interest are taxed at 18 percent for basic rate taxpayers and 28% for higher and additional rate taxpayers. There is an annual exemption available – that is, an amount which is exempt from tax – unless the individual has claimed to be taxed on the remittance basis (see earlier). CGT is based on the gain made, as adjusted for CGT purposes. Gains of up to GBP10 million that qualify under the conditions for Entrepreneurs’ Relief , broadly on disposals by an individual or individuals of trading businesses or business assets used in a trade held for a specified period, and in various other prescribed circumstances, are liable to CGT at 10 percent.
These are regarded as investment income. See comments above.
The rules have changed with effect from 6 April 2015. It is no longer possible to claim under U.K. domestic law that there is no U.K. tax on exercise when an award granted to a non-U.K. resident has vested whilst the employee has been resident or performing duties in the UK.
The new rules apply to existing options and other share incentives. The gain on exercise will be apportioned based on the time was performing duties in each country, and for the period when U.K. duties are performed income tax will arise. This taxable pay may then be relievable under a double tax treaty.
UK tax advantaged share incentive plans plans may also not be liable to U.K taxation.
In the United Kingdom, the legislation in this area is complex and, in some circumstances, its meaning disputed. Most non-U.K. plans are not U.K. tax advantaged plans and do not qualify for preferential tax treatment.
From April 6, 2012 foreign currency gains arising on withdrawals from foreign currency bank accounts are exempt from Capital Gains Tax.
A disposal of foreign currency in more complicated scenarios involving, for example, foreign currency options may still give rise to a taxable gain or allowable loss.
In most circumstances, an individual’s only or main Principal Private Residence (PPR) is exempt from U.K. capital gains tax on sale. However, exemption may be only partial where the property has not been considered as the main residence for the entire period of ownership. The legislation acknowledges that the following periods of non-occupation may be regarded as deemed occupation and therefore exempt, provided that (a) both before and after those periods the property was the individual’s actual PPR and (b) during the period of absence there was no other property eligible for relief as a PPR.
The last 18 months of ownership are always treated as deemed occupation so long as the property was the individual’s main residence at some point prior to this.
An individual may have only one PPR for tax purposes at any time. Where the individual has more than one residence, he/she can nominate which property is to be considered as the main residence.
From 6 April 2015 non-residents who dispose of UK residential property have 30 days to report the disposal. Penalties apply for failure to report the disposal whether or not there is tax to pay. If the individual making the disposal has already received a notice to file a tax return for the year of disposal or the prior year tax need not be paid within the 30 day reporting deadline but with the Self-Assessment Tax Return.
Capital losses are usually claimed on the tax return for the tax year in which the loss arose. The time limit for claiming capital losses is 4 years from the end of the tax year in which the loss arose. There is no time limit for claiming losses for 1995-96 and earlier years which can be carried forward indefinitely until there are gains against which they can be set.
Chattels disposed of for less than GBP6,000 do not give rise to a chargeable gain. If the disposal proceeds exceed that amount, the chargeable gain is restricted to five-thirds of the excess proceeds.
A gift can constitute a disposal which may be subject to capital gains tax.
Are there additional capital gains tax (CGT) issues in the United Kingdom? If so, please discuss?
Unless taxed on the remittance basis, an individual is entitled to an exempt amount of capital gains each year. For 20116/17, the amount is GBP11,100.
Are there capital gains tax exceptions in the United Kingdom? If so, please discuss?
The following disposals, amongst others, not mentioned above, will usually not give rise to capital gains tax:
Capital gains tax was first introduced on 6 April 1965. There are special rules for the computations of gains on assets acquired before that date.
A capital sum may arise as a result of a deemed, rather than actual, disposal. The main circumstances in which this would apply include the following:
What are the general deductions from income allowed in the United Kingdom?
Annual subscriptions to certain approved professional bodies or learned societies, where the body’s activities are relevant to the duties of the employment.
Higher rate taxpayers will be able to claim tax relief for payments made to U.K. charities, if the payment is made under Gift Aid arrangements or other approved arrangements. Payments made to a charity using a payroll giving scheme will receive tax relief at source.
A deduction is allowed for expenses incurred in performing the duties of an employment, such as business travel expenses. In certain circumstances, it may be difficult to obtain a deduction for business entertaining expenses.
Deductions are also allowed for employee contributions to a registered pension plan, or to a foreign pension plan that satisfies certain criteria. There are both annual and lifetime contribution limits which apply to such contributions. An additional tax charge will arise if the contribution limits are exceeded.
The personal allowance (effectively, income taxed at zero percent) for 2016/17 is GBP11,000. For 2016/17 the personal allowance reduces where the income is above GBP100,000 - by GBP1 for every GBP2 of income above the GBP100,000 limit. This reduction applies regardless of age.
A child tax credit has applied since 6 April 2003. This is a means-tested benefit paid directly (rather than through the tax system) to the individual mainly responsible for looking after the child or children. There are no personal allowances in respect of children, although children themselves are entitled to the standard personal allowance if they have income in their own right.
Generally, no deduction is allowed for alimony and child support payments, and neither is the recipient taxable on the amount received.
No deduction is available for interest on a loan to purchase a main residence.
No deductions are allowed for investment expenses such as a safe deposit box, safekeeping fees, or investment management fees. However, it is possible to obtain tax relief for amounts invested in certain qualifying unquoted companies (30% relief on up to GBP1 million per year—the Enterprise Investment Scheme), in certain qualifying venture capital trusts (30% relief on up to GBP200,000 per year), in small early stage companies in the Seed Enterprise Investment Scheme (50% on up to GBP100,000 and in certain buildings on sites in designated enterprise zones). They cannot create an additional tax refund (other than tax already paid at source). Therefore, it is important that an individual obtains advice before making their investment to ensure they can utilise the available reliefs effectively.
Remittances to invest in certain commercial businesses can be made without incurring a tax charge.
To curtail what the Government views as excessive use of tax reliefs, it has introduced a limit on all uncapped income tax reliefs from 6 April 2013. For anyone seeking to claim more than GBP50,000 of reliefs, a cap is set of 25 percent of income (or GBP50,000, whichever is greater) applies. Again, any individual wanting to obtain tax reliefs in excess of these sums should seek advice first.
What are the tax reimbursement methods generally used by employers in the United Kingdom?
The most common form of tax reimbursement is current year gross-up. This enables the tax payable by the employer and the income to which it relates to be dealt with together in the same year’s tax calculation.
How are estimates/prepayments/withholding of tax handled in the United Kingdom? For example, Pay-As-You-Earn (PAYE), Pay-As-You-Go (PAYG), and so on.
Employers in the United Kingdom are required to withhold tax from cash payments made to employees. The system by which the tax is withheld is known as Pay-As-You-Earn (PAYE). Employers must inform HMRC of payments made to employees on or before the day on which the payments are made to the employee. Employers must also pay over to HMRC the amounts withheld on a monthly basis by the 19th of the following month (22nd if payment is made electronically). The tax month runs from the 6th of one month to the 5th of the next month. Broadly, PAYE should be applied to all cash payments made to employees. In addition to cash payments, PAYE should be operated on a number of additional items such as readily convertible assets (that is, assets which can easily be converted into cash, such as shares in a listed company).
PAYE must also be accounted for in respect of individuals who are employees of non-U.K. resident employers but who are working for entities in the United Kingdom. If the PAYE is not paid by the overseas employer, the entity for which the employee is working is treated as the employer for the purpose of withholdings.
As well as salary, an employee will often be provided with benefits-in-kind. These benefits are reported on forms P11D. Forms P11D must be provided to employees and HMRC by 6 July following the end of the tax year.
In recognition of the complexity of operating PAYE with regard to expatriates assigned to the United Kingdom and who are taxes equalized, HMRC may allow, upon request, the employer to operate a Modified PAYE arrangement. Under the arrangement, the employer can prepare a best estimate of all earnings, (including cash allowances and non-cash benefits), for the year at the beginning of each year, grossed-up for tax purposes, and calculate the PAYE tax due and make the appropriate payments. The employer is required to undertake an in-year review during the period December to April to take account of any material changes such as calendar or tax year-end bonuses and taxable awards of securities and options.
In broad terms, if the tax paid through PAYE is less than 80 percent of the final total tax liability and the employee is not dealt with under Modified PAYE, the employee is required to make payments on account in respect of the subsequent tax year’s liability (on 31 January in that year, and on 31 July following the year-end – see above under Tax Returns and Compliance).
Nearly all employers who withhold tax under PAYE are required to report details of earnings and deductions to Her Majesty’s Revenue and Customs electronically on or before the time of payment of the earnings to the employee.
See previous discussion.
When are estimates/prepayments/withholding of tax due in the United Kingdom? For example: monthly, annually, both, and so on.
See previous discussion.
Is there any Relief for Foreign Taxes in the United Kingdom? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on?
The United Kingdom has a broad network of double taxation treaties. Usually, for dual resident individuals, an exemption from, or a reduced rate of, U.K. tax will apply where the individual is determined to be ‘treaty resident’ for treaty purposes in the other state.
If the individual is a resident of the United Kingdom for treaty purposes, relief in respect of income taxable in the other state is generally given by means of a foreign tax credit rather than by exemption.
The U.K. domestic tax legislation provides, in cases where there is no applicable tax treaty, for relief to be given unilaterally by the United Kingdom for foreign tax suffered on foreign income and gains arising in the other state, which are also subject to U.K. tax.
What are the general tax credits that may be claimed in the United Kingdom? Please list below.
The U.K. tax system is such that, in various circumstances, deductions are permitted when arriving at the amounts of chargeable income or gains but credits against the tax liability are rare. Apart from tax deducted at source, the most common example is foreign tax permitted to be credited against the U.K. tax liability arising on the same income or gains.
This calculation3 assumes a married taxpayer with two children whose assignment to the United Kingdom begins 17 August 2014 and ends 18 October 2016. The taxpayer’s base salary is USD100,000 and the calculation covers three U.K. tax years.
|Company car||See assumptions||See assumptions||See assumptions|
|Moving expense reimbursement||20,000||0||20,000|
|Interest income from non-local sources||6,000||6,000||6,000|
Exchange rate used for calculation: USD1.00 = GBP0.64529.
Calculation of taxable income
|Days in the United Kingdom during year||232||365||196|
|Earned income subject to income tax|
|Moving expense reimbursement||4,906||0||0|
|Other income (overseas)||2,461||3,872||2,079|
|Personal savings allowance
|Total taxable income||62,242||99,058||45,790|
|U.K. tax thereon||18,524||33,266||11,916
Social security liability
In the above example, it is more beneficial for the individual to file on the arising basis for all three tax years (shown above). This is because his/her overseas income is below the level of the individual’s personal allowance and as his/her overall income is below GBP100,000 when filing on the arising basis the personal allowance is not fully phased out and can cover the overseas income for the tax years 2014/15 to 2016/17. If the individual were to file on the remittance basis he/she would have lost his/her entitlement to claim the personal allowance for those years which would have resulted in a higher tax liability.
1Certain tax authorities adopt an "economic employer" approach to interpreting Article 15 of the OECD model treaty which deals with the Dependent Services Article. In summary, this means that, if an employee is assigned to work for an entity in the host country for a period of less than 183 days in the fiscal year (or, a calendar year of a 12-month period) and the employee remains employed by the home country employer but the employee’s salary and costs are recharged to the host entity, then the host country tax authority will treat the host entity as being the "economic employer" and therefore the employer for the purposes of interpreting Article 15. In this case, Article 15 relief would be denied and the employee would be subject to tax in the host country.
2For example, an employee can be physically present in the country for up to 60 days before the tax authorities will apply the ‘economic employer’ approach.
3Sample calculation generated by KPMG LLP, the U.K. member firm of KPMG International, based for the most part on Income and Corporation Taxes Act 1988; Income Tax (Earnings and Pensions) Act 2003; Income Tax (Trading and Other Income) Act 2005; Income Tax Act 2007; Taxation of Chargeable Gains Act 1992; Taxes Management Act 1970; Finance Act 2013; Her Majesty’s Revenue & Customs (“HMRC”) booklet “Guidance Note: Statutory Residence Test (SRT), RDR3” published in December 2013. Liability to tax in the United Kingdom’; Social Security Contributions and Benefits Act 1992; Social Security (Contributions) Regulations 2001; and Inheritance Tax Act 1984 (all as amended by subsequent legislation).
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