Taxation in the United Kingdom

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BAFUNCS INF 5 (April 2017) BRITISH ASSOCIATION OF FORMER UNITED NATIONS CIVIL SERVANTS Taxation in the United Kingdom (as at 6th April 2017) T axation in the UK is levied in several ways.

1 BAFUNCS INF 5 (April 2017) BRITISH ASSOCIATION OF FORMER UNITED NATIONS CIVIL SERVANTS Taxation in the United Kingdom (as at 6th April 2017) T axation in the UK is levied in several ways. Income Tax, Capital Gains Tax and Inheritance Tax are paid to central government through Her Majesty s Revenue and Customs Service (HMRC) while Council Tax is paid to local government. Value Added Tax, which is paid at the time of purchase of goods and services, and Excise Duties on such things as petrol, alcoholic drinks and tobacco also represent central government revenue and are collected by HMRC. The sum of all these taxes will be in the range of percent of total income, depending on your financial status (unless your income is too low for you to pay income tax, when it will be somewhat less). Income Tax In the UK a person s tax position is determined by reference to his/her residence and domicile status. If the HMRC classifies an individual as being resident and domiciled in the UK, then that person is assessed for income tax on his/her worldwide income and capital gains (the so-called arising basis). If on the other hand, the individual is classified as being resident but not domiciled or not ordinarily resident in this country, he/she is assessed for income tax only on income and capital gains that are remitted to this country during a financial income tax year (the so-called remittance basis). The tax year runs from 6 April to 5 April of the following year. Individuals arriving in the UK during a tax year will normally be entitled to split-year treatment (see HMRC website: tax-return-uk), meaning that they will be taxed only on income arising after their arrival. At present, spouses are assessed separately for tax purposes in the UK. It is important for individuals to agree their domicile and residence status with HMRC. In December 2013 HMRC published a guidance note (RDR3) on the Statutory Residence Test, downloadable from the HMRC website ( The document describes a series of automatic tests governing tax residence in the UK or abroad. The basic rule is that individuals are treated as resident in the UK for tax purposes unless they meet any of the automatic overseas tests and they either meet one of the automatic UK tests or the sufficient ties test. An attempt has been made by HMRC to make the document as comprehensible as possible, and many illustrative examples are provided. In terms of domicile, persons of UK origin, even though they may have worked abroad for many years, will usually be considered as being domiciled in the UK if they intend to retire and settle in the UK. Non-domiciled tax payers who will have been resident for more than 12 of the prior 14 years can opt to either pay tax on an arising basis on their worldwide income and capital gains or pay a flat tax of 50,000 on top of their remittance-based income liability. In the latter case they lose their personal allowances and annual exemptions. It is not worth applying for non-domiciled status and paying tax on a remittance basis unless you are very wealthy. It is recommended that you seek specialist advice from an accountant if you wish to claim non-domiciled status and reside in this country. An individual s domicile and residence status also has a bearing on the tax treatment of the UN pension. An individual who is considered to be resident but not domiciled or not ordinarily resident in the UK will be subjected to income tax only on the amount of UN pension that is remitted to the UK during a particular tax year. Domiciled residents may qualify for relief on their UN system pension through the US- UK double taxation agreement (see later). Overseas health insurance premiums are not tax deductible. 1

2 Pension lump sums can almost always be brought into the UK without payment of tax (see Foreign Pension Schemes December 2016); the same appears to be the case for pension fund withdrawal settlements where UN service exceeds five years. However, income derived from investing lump sums is taxable. It is possible to place some capital each year in a tax free Individual Savings Account (ISA). From 6 April 2017 the annual allowance for an individual ISA has risen to 20,000, which can be placed in a cash ISA or stocks & shares ISA or any combination of the two, each spouse qualifies for an individual ISA. Other tax-efficient investment opportunities exist, but it is advisable to consult an independent financial adviser on their usefulness in the light of individual circumstances. Individuals are responsible for filing their annual Self-Assessment Returns. If you file a paper return, it will be due by 31 October following the end of the tax year, and HMRC will inform you of the tax payable. If you file online, the deadline is 31 January following the end of the tax year, and the income tax due will be calculated automatically. Payment of any tax liability is also due on 31 January following the end of the tax year along with an advance on the first half of the estimated tax for the next tax year. HMRC imposes penalties and interest for non-compliance and late payments. Many publications previously issued by HMRC have been withdrawn but the information they contained is available on its web site. There are some documents available at tax offices or online that may be of interest and help to retired UN staff members. Apart from the Statutory Residence Test guidance note mentioned above, they include the Notes for Self-employment (SA103S or F), Income from UK Property (SA105), Foreign Income (SA106), Capital Gains (SA108), and Residence, Remittance Basis etc. (SA109). HMRC runs a self-assessment helpline on telephone number ; from abroad call You are warned, however, that there is often a long wait to be connected and that callers are charged by the minute once connected. Many organizations including Which? and Age UK contain useful information about tax on their websites. For those preferring hard copy, a number of tax guides are available annually. A general guide is The Good Retirement Guide published by Kogan Page ( 17) although the tax treatment is fairly basic. Dedicated tax guides include the Daily Telegraph Tax Guide 2016 ( 12). These and some of the HMRC booklets listed above may be available in UK lending libraries. Tax allowances tend to be increased annually. Changes in tax rates and allowances apply from the start of a tax year (6 April). The current tax rates for the 2017/2018 tax year, which vary depending on the source of income, and taxable income bands are: Income tax band 0 to 5,000 Starting rate (savings only) Tax on earned income/pensions Not applicable Tax on savings 0 percent Tax on dividends 0 to 45,000 (known as the basic rate) 20 percent 20 percent (but see below) 7.5 percent 45,001 to 150, percent 40 percent 32.5 percent Over 150, percent 45 percent 38.1 percent Savings and dividends are added to earned income and taxed last. This means that tax on these two sources of income is based on an individual s highest tax band. Taxable income is established after deducting certain allowances, which for the tax year 2017/2018 are: Personal allowance: 11,500 per person The personal allowance, for all ages, is reduced by 1 for every 2 of taxable income above 100,000. These amounts are reduced by 1 for every 2 that total taxable income exceeds 28,000 but will not be less than 10,600 unless income is above 123,000. 2

3 Married Couples Age Allowance 10 percent of 8,455 if born before 6 April 1935 This allowance is also reduced by 1 for every 2 of taxable income over 28,000, but the allowance will never fall below 3,260 for persons born before 6 April Marriage transferable tax allowance The new marriage allowance applies to someone born after 5 April 1935 who is married or in a civil partnership, whose annual income is below 10,601 (plus up to 5,000 of tax-free savings interest), and whose partner s annual income is between 10,601 and 42,385. The allowance permits a transfer of some of the personal allowance to the partner, reducing the partner s tax by up to 212. There is also a 5,000 tax-free dividends allowance on top of the personal allowance and a Personal Savings Allowance of 1,000 for basic rate tax payers and 500 for higher rate tax payers. The United States-United Kingdom Double Taxation Agreement With effect from tax year , the 10% tax allowance on foreign pensions has been abolished. As a result of a case concerning World Bank retirees in the UK and the experience of some BAFUNCS members, we now believe (subject to final HMRC agreement) that we can utilize the US/UK double taxation agreement to obtain relief on our pensions. The relevant double taxation agreement came into force on 1 January 2004 and is known as the Double Taxation Relief (Taxes on Income) the United States of America Order 2002 Statutory instrument 2002 No The UNJSPF is considered to be established in the USA for the purposes of applying the UK/USA double taxation agreement, regardless of the jurisdiction in which the retiree worked. To determine any possible tax reduction, UN system retirees will need their end of service statement giving the total relative amounts paid into the pension pot by both the UN system and by the applicant as well as all relevant service information. If you do not have the end of service statement a similar certificate, an Attestation of Contributory Service and Contributions, can be obtained from UNJSPF Geneva (or New York) which provides the following information: Name of participant, contributory service, date from which retirement benefit has been received, total of participant s and organization s contributions. For those with long service the amount of relief could exceed the prior allowance of 10%. However as the length of time that contributions have been paid is part of the calculation to determine the amount of double taxation relief, those with shorter service will not necessarily receive relief that exceeds the prior 10% level. The calculation should be prepared by an accountant familiar with the US tax system and reference to any deduction should be disclosed on any relevant tax return or claims. National Insurance Individuals with earned income from self-employment, for example from consultancies, must pay national insurance contributions at the self-employed rate if they are under UK pensionable age (currently between 60 and 63 for women, depending on date of birth and 65 for men) and where their annual income from self-employment exceeds 6,025. The self-employed (Class 2) rate for the tax year 2017/2018 is 2.80 per week. In addition, net income between 8,164 and 45,000 per year is subject to the Class 4 contribution rate of 9 percent, with 2 percent levied on profits over that amount. Class 2 contributions will be abolished in 2018 but Class 4 contributions are due to rise to 10 percent. Stamp Duty Those intending to purchase property in the UK will have to pay stamp duty land tax. Each rate of duty applies to the whole price once thresholds have been passed. For freehold residential purchases and new residential leasehold properties, the rates are: 3

4 Property cost up to 125,000 Property cost between 125,001 and 250,000 Property cost between 250,001 and 925,000 Property cost between 925,001 and 1,500,000 Property cost over 1,500,000 zero 2 percent 5 percent 10 percent 12 percent Removable fixtures and fittings are not subject to stamp duty. If you intend that your home in the UK will be a second home then the above amounts are increased by 3%. A different system will applies to Wales Capital Gains Tax (CGT) Chargeable gains made by an individual, resident in the UK, must be shown on the annual Self- Assessment Return. Capital gains which in aggregate total less than the annual exemption ( 11,300 per individual in the 2017/2018 tax year) are free of Capital Gains Tax (CGT). Gains above this limit are taxed at a rate of 10 or 20 percent, depending on the individual s taxable income. Husbands and wives are each entitled to their own annual exemption, on gains made in their name as individuals or on jointly owned investments. Individuals who are resident and domiciled in the UK are subject to CGT on all worldwide gains on an arising basis. From 6 April 2015, non-resident individuals disposing of UK residential property are also subject to a capital gains tax charge. Any gains on selling a stocks and shares ISA (see above) are not subject to CGT. Inheritance Tax (IHT) Transfers between spouses (in lifetime or upon death) are not subject to IHT, providing both spouses are domiciled in the UK. Otherwise, IHT is charged at a flat rate of 40 percent on residual estates valued in excess of the present exemption threshold of 325,000. Properties with a value of up to 850,000 will not be subject to IHT. Spouses are entitled to roll over any unused IHT allowance upon death, such that the surviving spouse may leave up to the joint limit of 650,000 free of IHT if none of the allowance has been used previously. The first 3,000 of gifts made each tax year by each individual is also exempt from IHT and any gifts under 250 are exempt from this limit. People who leave 10 percent or more of their net estate to charity can choose to pay a reduced rate of inheritance tax of 36 percent. An individual who was resident and domiciled in the UK is likely to be subject to IHT on the value of his/her worldwide estate. The same applies to an individual who, while not domiciled in the UK, has nevertheless been resident in the UK for 17 out of the past 20 years. There are ways of minimizing the amount of IHT due through the establishment of trusts, etc. but specialist advice is essential to ensure that the correct options are chosen and that the relevant restrictions concerning asset disposal are appropriate. Council Tax Council taxes are payable on the assessed value of a property. Assessed values are classified in bands that have little relation to present-day house prices since assessments were carried out in 1991 for England and Scotland and in 2003 for Wales. The bands for Scotland and Wales are somewhat different, while Northern Ireland has a different system of rates. The bands for England are: A up to 40,000 B 41,001 to 52,000 C 52,001 to 68,000 D 68,001 to 88,000 E 88,001 to 120,000 F 120,001 to 160,000 G 160,001 to 320,000 H over 320,000 Council Tax is paid in full if two or more persons are living in the property, but is reduced to 75 percent of the full rate if only one person is in residence. Some other reductions and exemptions can 4

5 apply. Except in London, there are relatively modest variations in Council Tax rates from one local authority to another; in England, the average band D tax in was 1,500. In , it varied from a low of 670 in Westminster to a high of 1,820 in Weymouth. Rates in Wales and Scotland tend to be lower. These figures include amounts to cover the cost of police, fire authorities and parish councils. Vehicle Tax Rates The structure of vehicle tax rates is designed to encourage the purchase of fuel-efficient vehicles. Vehicle tax for cars already registered falls into one of twelve bands ranging from 30 per annum for the most environmentally friendly vehicles to 515 per annum for the most polluting; cars emitting less than 100 grams of CO 2 per kilometre attract no duty. Rates for the first year of registration vary from zero (cars emitting less than 130 g/km of CO2) to 1,120. Value Added Tax (VAT) Value Added Tax (VAT) is levied on most goods and services at a standard rate of 20 percent, although some items such as domestic fuels (gas, electricity, heating oil etc.), energy-saving materials and security goods are taxed at only 5 percent, and others such as most food items, books and children s clothing are zero-rated or exempted altogether. Insurance premium tax on most policies is also charged at 10 percent. Excise Duties Excise duties on petrol, tobacco and alcohol are high in the UK. Fuel duty is currently about 58 pence per litre (less on LPG and Biogas) and duty rates on beer and spirits have recently been cut slightly. In April 2017 petrol cost around 1.19 per litre depending on grade, location of sale and per barrel market price; diesel was about 4 pence per litre higher. Cigarettes cost around 8 for a packet of 20 and standard blended whisky cost around for a 70 cl. bottle. In all cases well over half the cost is excise duty. The air passenger duty standard rate is currently 26 per passenger for flights up to 2000 miles ( 13 for the lowest class of travel) and 142 for longer hauls, ( 71 for the lowest class of travel) but has been abolished for children under 12 flying economy class. In 2018 a tax will be introduced on sugary soft drinks. These notes are issued for guidance only. Tax matters are of great importance and complexity and it is recommended that appropriate professional advice be sought. It is often important to consult a specialist tax advisor before retirement and repatriation to the UK, as advice and proper planning from the start may help to mitigate significant UK tax liabilities. The Executive Committee cannot accept responsibility for the accuracy of the information, or the validity or otherwise of any recommendation in this document. The Executive Committee welcomes any suggestions for additions and improvements. Members with access to the Association s website ( should select the appropriate Executive Committee officer on the Contact Us page. Other members should address all enquiries to: The Secretary, BAFUNCS, Hayward House, 18 Pelhams Walk, Esher, Surrey, KT10 8QD who will forward them to the appropriate person. 5

1, *For 2015/16 the higher personal allowance is reduced by 1 for each 2 of income above 27,700 until 10,600 is reached.

1, *For 2015/16 the higher personal allowance is reduced by 1 for each 2 of income above 27,700 until 10,600 is reached. Tax Card 2016/17 TAXABLE INCOME BANDS AND TAX RATES Starting rate limit for savings 5,000* 5,000* Starting rate for savings 0% 0% Basic rate band 32,000 31,785 Basic rate 20% 20% Dividend ordinary rate