Personal Taxation in the UK

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Personal Taxation in the UK

In the UK, an individual is assessed for income tax for the financial year starting on 6 April in one year and ending on 5 April in the following year. The UK operates a system of independent taxation. In determining an individual’s liability to UK tax it is necessary to consider their residence and domicile status.

An individual’s residence position is determined by the amount of time they are physically present in the UK during each tax year as well as their original intentions regarding their stay in the UK.

Broadly an individual will be regarded as resident in the UK if they:

• are physically present in the UK for 183 days or more in the tax year; or

• visit the UK regularly and the visits average at least 91 days in a tax year (over a maximum 4 year period)

HM Revenue & Customs considers an individual to spend a day in the UK if they are physically present in the UK at midnight.

Individuals will be resident from the day they arrive in the UK if they come to the UK for a settled purpose and expect to spend more than 2 years in the UK. In certain circumstances other factors may also be taken into account in determining whether an individual is resident in the UK, including family, property, business and social connections with the UK. The UK Government are undertaking a consultation starting in June 2011 regarding the introduction of a statutory residence test. This will take effect from 6 April 2012.

Domicile is a general law concept and is distinct from nationality and residence. In very broad terms, an individual is regarded as domiciled in the country they consider their ‘home country’ (often the country where they have their long term permanent home).

Income Tax

UK income tax is chargeable on any UK source income received by an individual in the UK if they are UK resident. Foreign income is subject to UK tax where the individual is either i) domiciled in the UK, ii) not domiciled in the UK but the income is remitted to the UK or iii) not domiciled in the UK but the individual chooses to be taxed on the arising basis of taxation. For the 2011/12 tax year, the starting rate of income tax is 20% for the first taxable slice of income up to £37,400, 40% between £37,401 and £150,000 and 50% over £150,000.

Capital Gains Tax (CGT)

Capital Gains Tax (CGT)

Individuals who are resident or ordinarily resident in the UK are liable to capital gains tax on:

• worldwide gains - if domiciled in the UK
• gains on UK situated assets, and gains on foreign assets only if remitted to the UK – if domiciled outside of the UK and they elect for the remittance basis to apply

For the 2011/12 tax year, basic rate taxpayers are subject to tax on capital gains at 18% and higher rate taxpayers at a rate of 28%.

Entrepreneurs' relief is available for individuals who make a material disposal of a business asset; namely:

• shares or securities of an individual's 'personal' company
• the whole or part of a business, including partnership interests
• assets used for the purpose of the business at the time the business ceased
• trust business assets or
• assets owned by individuals and used in a business in which he was a partner or by his 'personal' company.

There are qualifying conditions attached to each category, for example in the case of the personal company the requirements are that for at least 12 months prior to the disposal:

• the individual must hold at least 5% of the ordinary share capital and 5% of the voting rights exercisable by virtue of that holding
• the company must be a trading company or holding company of a trading group
• the individual must be an officer or employee of the company or a company within the group

The rate of tax on gains qualifying for Entrepreneurs’ Relief is 10%. The maximum amount of gains which qualify for Entrepreneurs’ Relief during an individual’s lifetime has been increased from £5million to £10million from 6 April 2011.

Inheritance Tax (IHT)

The UK does not impose wealth tax. However non-UK domiciled individuals may be subject to IHT if they own any assets located in the UK.

A person’s IHT liability depends on their domicile position rather than their residence position. A UK domiciled individual is subject to IHT on their worldwide assets, wherever they are situated. A person who is non-UK domiciled (and not deemed domiciled), is only subject to UK IHT in respect of assets situated in the UK; any assets located outside the UK are outside the scope of UK IHT. Broadly a person is regarded as deemed domiciled for IHT purposes only, if they have been resident in the UK for more than 17 out of the past 20 years. They remain non-UK domiciled for income tax and capital gains tax purposes.

Individuals are generally subject to UK inheritance tax on their worldwide assets if they die whilst domiciled in the UK, or in the case of chargeable lifetime gifts (e.g. on the transfer of assets to a trust) if they are domiciled in the UK at the time of making the gift. No IHT is charged on gifts transferred from one individual to another, provided that the person making the gift outlives the gift by 7 years. IHT is charged at 40%.

Tax Tables and Information

UK tax datacard 2011/12 (2010/11 in brackets)

Income Tax

Notes: Dividends are taxed at 10% (10%), 32.5% (32.5%) or 42.5% (42.5%) as the top slice of total income.

Other savings income, primarily bank and building society interest, is taxed at 10% up to £2,560 (£2,440). This 10% rate is not available if taxable non-savings income exceeds £2,560 (£2,440).

There are special rules for trusts, and also for individuals with income assessable on the remittance basis.

The personal allowance is reduced by £1 for each £2 by which income exceeds £100,000.

Pension Contributions

a.    The lifetime allowance reduces to £1,500,000 on 6 April 2012. Special rules can apply to individuals with larger bene?ts at 5 April 2006, and for those with bene?ts over £1,500,000 on 5 April 2012. Excess   over the lifetime allowance may be subject to a 25% charge plus income tax on balances drawn, or 55% for lump sum bene?ts
b.    Unused allowances from the previous three years (by reference to a limit of £50,000) may be carried forward, potentially increasing the current year’s allowance in 2011/12 and subsequent tax years
c.    For 2010/11 anyone with income higher than £130,000 may have had tax relief on pension contributions restricted to the basic rate

National Insurance Contributions

Class 1 employees:

Class 1 employers:

Other

Class 1A (employers only): 13.8% (12.8%) based on the amounts of taxable bene?ts.

Class 1B (employers only): 13.8% (12.8%) in respect of amounts in a pay as you earn (PAYE) settlement agreement and the income tax thereon.

Class 2 (flat rate for self-employed): £2.50 (£2.40) per week.

Class 3 (voluntary): £12.60 (£12.05) per week.

Class 4 (self-employed): 9% (8%) of pro?ts between £7,225 (£5,715) and £42,475 (£43,875) per annum and 2% (1%) on pro?ts above £42,475 (£43,875).

Inheritance tax Aggregate chargeable value (nil rate band):

• up to £325,000 (£325,000) – 0% (0%); over £325,000 (£325,000) – 40% (40%)

Reduced charge on lifetime gifts within seven years of death apply.

A surviving spouse or civil partner may claim the unused proportion of an earlier deceased spouse’s or civil partner’s nil rate band up to the current nil rate band.

Capital Gains Tax