Living in United kingdom – UK

The UK personal income tax

The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a sovereign state with a territory of 243,610 square kilometers and an estimated population of 62,262,000. The country includes the island of Great Britain, the north-eastern part of the island of Ireland, and many smaller islands. The United Kingdom is a parliamentary democracy with a constitutional monarch. The UK is a member of several international organizations, such as the EU, the NATO, and the OECD. HM Revenue & Customs is the government body entrusted with the task to administrate and collect the UK taxes.

Personal income tax

Scope of the personal income tax

In the UK, the tax liability of individuals depends on their residence, ordinary residence and domicile status, together with the location of their assets and the sources of their income.

For tax purposes, individuals are considered residents if they reside at least 183 days in the UK. An individual is ordinary resident if he/she is present in the UK in the ordinary or regular course of his life. In relation to the domicile, the English law stipulates that an individual’s domicile of origin (where he was born) can be changed if he establishes a permanent home elsewhere. An individual can have only one domicile.

An individual who has always lived and worked in the UK, i.e. someone who is resident, ordinarily resident and domiciled in the UK, has to pay personal income tax on worldwide income, capital gains tax on worldwide assets, and inheritance tax on worldwide assets.

An individual who has always lived and worked outside the UK, i.e. someone who is not resident, ordinarily resident, or domiciled in the UK, has to pay income tax only on UK source income and inheritance tax only on UK assets. Such an individual is not obliged to pay capital gains tax, unless the asset sold is used in a UK trade.

Rates of the personal income tax

The rates of the personal income tax are progressive. The lowest rate of income tax is 20% for the first taxable slice of income up to GBP 37,400; 40% between GBP 37,401 and GBP 150,000; and 50% over GBP 150,000.

The taxable income

The taxable income includes various types of income, such as income from employment, income from self employment/partnerships, pension income, interest on savings, investment income, state benefits, rental income, pensioner bonds, and trust income. It should be noted that state benefits, interest on savings, rents, tax credits, and premium bonds are excluded from the taxable income.

Tax incentives

Two tax incentives concerning individuals should be mentioned, namely, personal tax allowance (A) and the tax regime for individuals resident but not domiciled in the UK (B).

A: Personal tax allowance

Almost everyone who lives in the UK is entitled to a personal tax allowance. This is the amount of income a person can receive each year without having to pay tax on it. People with incomes over GBP 100,000 get a reduced allowance or no allowance. The personal allowance can be set against all types of income.

There are three amounts of personal tax allowance, but only the basic allowance is given automatically. The three amounts are: (1) a standard amount (the basic allowance) for most people under 65 (including people over 65 having an income above certain limits); (2) a higher amount for people aged 65 to 74; (3) the highest amount for people aged 75 or over.

B: Tax regime for individuals resident but not domiciled in the UK

The foreign income of individuals who are resident but not domiciled in the United Kingdom (a “non-dom”) is taxed on the remittance basis. It means that only income and gains remitted to the United Kingdom are taxed (that is why, for such people, the United Kingdom is a tax haven). However, as of the 6th of April 2008, a non-dom willing to retain the remittance basis is required to pay an annual tax of GBP 30,000.

Residence in the UK

Residence is important as a legal concept because it is related to taxation of individuals, to educational benefits, to drivers licensing, and to voting for municipal elections. The purpose of this article is to provide a brief description of the current rules with regard to residence in the UK.

The current rules with regard to residence in the UK

Pursuant to the UK Income Tax Act of 2007, individuals residing in the UK for more than 183 days, even if only for a temporary purpose, are taxed in the UK.

The concept of residence as such is not clearly defined. In case Shepherd v IRC 2006[1], the court stated that the concepts of residence and ordinary residence should be understood in their natural and ordinary meanings. In this context, the court pointed out that the words “residence” and “to reside” meant “to dwell permanently or for a considerable time, to have one’s settled or usual abode, to live in or at a particular place”. The court stressed that “ordinary residence” meant more than mere residence because it connoted residence in a place with some degree of continuity.

Further, the court noted that the question of whether a person was a resident in the UK was a question of fact for the Special Commissioners. In particular, they had to take into account the following circumstances: (1) the duration of an individual’s presence in the United Kingdom, (2) the regularity and frequency of visits, (3) birth, family and business ties, the nature of visits and the connections with this country, (4) the availability of living accommodation in the UK.

In relation to the circumstances decisive for answering the question of whether an individual was a resident of the UK, the court stated that the reduced presence in the UK of an individual whose absences were caused by his employment did not necessarily mean that the individual was not residing in the UK. In the same context, the court stated that the fact that an individual had a home elsewhere was of no consequence. This is because a person might reside in two places but if one of those places was the UK, he was chargeable to tax there.

Conclusion

Many people arriving in the UK are surprised of the fact that the concept of residence is not currently defined by legislation, but hinges on the interpretations of various legal cases. Most of these cases happened decades ago when the society was at a different level of development.

In order to solve this problem, the UK government plans to introduce a new statutory residence test from April 2013 on. Although the proposal is still in a draft version, it has been well accepted by the tax profession and will likely to become law in a similar form. To decide on a person’s residence status, the proposed rules look at the number of days in the UK, and several objective criterions, which link an individual to the UK. The test has three parts (A, B, and C). The purpose of parts A and B is to decide on the status for the majority of people whose cases are relatively straightforward. Part C is intended for people with more complicated situations.


[1] See Shepherd v IRC 2006 STC 1821

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