Tax traps for Aussies working in the United Kingdom

Tax laws in the United Kingdom are considerably more complex than other countries.

Australia has a tax treaty with the UK, but there are still some tricky areas for ex-pat workers there.

With insights from Liam Branagan who is a manager of global mobility services and tax at KPMG

1. Tax resident or not?

Residency is more complex for expats working in the UK compared to other countries.

The UK now defines tax residence in statute. If an employee meets the requirements of any of the automatic residence tests and none of the automatic overseas residence tests, they will be a UK resident. Practically, the majority of expat employees who live in the UK for 183 days or more in a year will be treated as UK tax residents under these rules.

However, a sufficient ties test also operates where the automatic residence or overseas residence tests do not apply. This means that an expat employee who works in the UK for less than 183 days may still be a UK tax resident, depending on the sufficiency of their ties with the UK. 

Consideration is given to such matters as the location of the employee’s family members, the location of their accommodation, and the number of days worked in the UK.

In general, a UK tax resident is subject to tax in the UK on their worldwide income, while a non-resident is subject to tax on their UK-sourced income only. 

However, a resident employee of the UK may have a different tax base if they are not domiciled in the UK, and certain tax concessions may apply.

For instance, the employee can choose for the remittance basis of taxation to apply. Under the remittance basis of taxation, income from non-UK employment that is not remitted back to the UK may not be subject to tax in the UK.

This is a complex area and it is worth seeking out professional advice.

An Australian who departs for the UK will likely remain a tax resident of Australia, unless they intend to remain in the UK on a permanent basis (generally, longer than two years).

Under the tax treaty between the UK and Australia, Australians who are considered residents of both countries will, depending on their circumstances, generally be considered resident only of:

-          The country in which they have a permanent home available

-          The country in which their personal and economic ties are closer, or

-          The country of which they are a national.

2.  Salary packaging

There are some benefits to salary packaging certain items, and statutory formulas apply to determine how to value these in the tax return. Benefits in kind are generally included in an employee’s tax return.

Some items that may be worth including in a salary package include motor vehicles and home-leave flights.

Workers coming into the UK to work for less than 24 months may be able to obtain detached worker relief, which will allow them to claim items such as accommodation, meals and travel expenses as tax deductions.

3.  Retirement plans

Provided certain conditions are met, employer contributions to non-UK pension plans are not taxable. But there could be UK tax on the benefits subsequently received from the plan. There may also be additional tax on irregular employer and employee contributions.

The UK tax regime at a glance

Tax treaty between Australia and UK?

Yes

End of UK tax year

5 April

2015/16 UK tax rates

Taxable Income (GBP)

 

From

To

Tax rate(*)

0

31,785

20 per cent

31,786

150,000

40 per cent

150,001

Unlimited

45 per cent

(*) Different rates apply to dividends and interest income.

Personal allowance

Resident individuals are generally entitled to a personal allowance of £10,600 as a deduction in calculating taxable income. The allowance begins to phase-out when “adjusted taxable income” exceeds £100,000, with the allowance reducing to nil for incomes over £121,200. The personal allowance may not be available for residents using the remittance basis.

Relocation costs

Relocation expenses up to a limit of £8,000 that are paid or reimbursed by an employer are not assessed to the employee. Qualifying expenses include the cost of relocation airfares and the services of relocation management companies.

Allowances paid to cover relocation costs are taxable to the employee.

Housing allowance

These are subject to tax but employees can potentially access detached worker relief to reduce the taxable value of the allowance.

Retirement/ pension contributions

Any contributions to Australian superannuation funds may be taxable in the UK, unless the fund meets certain conditions for exemption. An Australian may need to pay National Insurance contributions once they are in the UK for more than 52 weeks.

Withholding tax

Tax is deducted at source from a variety of payments and a credit is permitted against the individual’s final tax liability. For example, foreign employers with a sufficient tax presence in the UK are required to withhold tax at source from employment income paid to a UK resident employee.

Australian tax considerations for employees continuing to be Australian residents

Housing allowance

This is taxable to the employee, unless the allowance is  a living away from home allowance (LAFHA).

If the allowance is a LAFHA, the allowance may either be subject to Fringe Benefits Tax (FBT) or exempt, depending on the employee’s personal circumstances.

Relocation costs

If this is paid as an allowance it will be subject to tax in Australia. If paid by the employer as a reimbursement of expenses, it may be exempt from FBT.

Superannuation contributions

Australians are generally able to continue to pay into a local superannuation fund. However, contributions could be subject to tax in UK. Employees who retain a self-managed superannuation fund (SMSF) should seek professional advice before departing Australia on assignment to ensure the fund remains a complying fund.

Main residence

If the employee continues to maintain his or her main residence in Australia while working in the UK, it is unlikely the main residence exemption will be jeopardised, unless the property is rented out for more than six consecutive years.

Capital gains tax issues

Note that an employee who ceases to be an Australian resident is considered to have disposed of any CGT assets (apart from any assets whose value is mostly made up of Australian real property) for their market value on the day they became a non-resident. In this case, there will be no further capital gains or losses realised when the assets are eventually sold (while the employee remains  an Australian non-resident).

If the employee does not want to crystallise a capital gain or loss when leaving Australia to live in the UK, they may elect for the deemed disposal rules to not apply. If the election is made, they will be required to report any capital gain or loss on the eventual sale of those assets after departure.

Checklists: Professional year-end tax resources from CPA Australia

An Australian in the UK

Here is an example of how much tax an Australian tax resident might pay

Assumed facts:

  • Australian employee sent on work assignment to the UK for two-plus years
  • Single employee (no partner or children)
  • UK employer pays employee a salary of AUD250,000
  • Exchange rate of AU$1.00 = 0.52 GBP
  • Australian tax rates used are for the income year ended 30 June 2016
  • UK tax rates used are for the income year ended 5 April 2016

If the employee continues to be a tax resident of Australia (Australian resident)

If the employee ceases to be a tax resident of Australia (non-resident)

UK tax position (AUD & GBP) amounts shown for comparison only)

AUD

GBP

Gross income

250,000

130,000

Less: UK basic allowance

0

Taxable income

250,000

130,000

National Insurance contributions

11,288

5,870

Income tax charged

87,775

45,643

Total

99,063

51,513

Australia tax position

AUD

Taxable income

250,000

Income tax charged[1]

87,447

Medicare levy[2]

5,000

Foreign income tax offset

(92,447)

Net tax payable

0

Total tax paid

AUD

Australia

0

UK

99,063

UK tax position (AUD & GBP) amounts shown for comparison only)

AUD

GBP

Gross income

250,000

130,000

Less: UK basic allowance

Taxable income

250,000

130,000

National Insurance contributions

11,288

5,870

Income tax charged

87,775

45,643

Total

99,063

51,513

Australia tax position

AUD

Taxable income

0

Income tax charged

0

Medicare levy

0

Foreign income tax offset

0

Net tax payable

0

Total tax paid

AUD

Australia

0

UK

99,063



[1] Includes the temporary budget repair levy of 2% on the amount of taxable income exceeding $180,000.

[2] It is assumed that the employee holds the appropriate level of private patient hospital cover for the year. 

Read next: UK 'open for business' while Australian tax reform languishing.


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