Category Archives: Tax For Contractors & Expats

UK Eases Visa Rules – 1st October 2013

Last Friday, Mark Harper, the immigration minister, announced changes which generally ease visa rules from 1st October 2013. Some of the key changes are:

  • Removal of the English language requirement for intra-company transferees.
  • Tourists and business visitors are allowed to do some study where it is not the main purpose of their visit.
  • Share ownership restrictions waived for senior staff earning £152,100 or more.
  • Artists of exceptional promise enabled to apply under Tier 1.
  • Graduate entrepreneurs will find it easier to switch into Tier 2.
  • New youth mobility scheme quotas set for 2014
  • Hong Kong will be added to the list of participating countries and territories on the UK’s Youth Mobility Scheme in order to further strenghten business, trade and cultural ties.
  • Some students will be allowed to work as interns under the Tier 5 government authorised exchange scheme.
  • The removal of the prospective student route.
  • The expansion of checks to ensure applicants for work and student visas are genuine, and that they intend to meet the conditions of leave they apply for.
  • The introducion of  powers to refuse Tier 4 extension applications where the applicant cannot speak English.
  • Dependants in the Points Based System and other work routes will be allowed to apply from within the UK, providing they are not here illegally, as visitors, or on temporary admission or temporary release. They will still need to satisfy all other existing requirements.
  • Special rules for overseas visitors to the Commonwealth Games 2014 were included.
  • With effect from the 28th October 2013 there will be changes to how applicants for indefinite leave to remain are required to demonstrate their knowledge of the English language and of life in the UK.

If you need a visa to work in IT, Engineering, Actuary or Finance Commonwealth Contractors may well be able to help.

To find out more about our solutions call now on 0800 294 4388 or Send us some details now and we will get right back to you!

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Tax for Contractors & Expats

Tax, and quasi-tax such as National Insurance, typically costs European those working in the UK and Europe from 1/3rd to 2/3rds of their earnings.  Tax planning can be particularly relevant for expats for whom there is often far more choice than exists for those living and working in their home countries.

Our guides are not a substitute for professional advice about your individual situation, but they may help give you an idea of the lie of the land, so that you can have a focussed (and thus shorter and cheaper) discussion with your advisor.

The guides cover:

 

General

Expat tax issues

Tax for Contractors & Freelancers   

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Capital Gains Tax and Entrepreneurs Relief

If you run a Contractor Limited Company it is a good idea to know about Capital Gains Tax and Entrepreneurs Relief.

Are you a highly skilled expat Contractor? Would you like to maximise your contract income and work towards a visa extension or visa transfer? If so Commonwealth Contractors can help!

To discuss your situation with an experienced advisor call Commonwealth Contractors now on 0800 294 4388 or Submit your Details and we will get right back to you!

Capital Gains Tax & Entrepreneurs Relief

The standard rate of UK Capital Gains Tax (CGT) is 28% (2015 / 2016). Each person has an annual CGT allowance which rises from £11,000 in 2014-15 to £11,100 in 2015-16. Thus only gains in excess of £11,100 in the year are subject to a CGT liability.

Individuals whose income means that they are not higher rate taxpayers pay CGT at the rate of 18% on that section of the gain which, if it were added to their income, would fall into the ‘basic rate’ earnings band.

Subject to a lifetime limit of £10million of such gains, a reduced Entrepreneurs CGT rate of 10% applies to ‘business assets’ such as interests in a qualifying sole-trader, partnership (either unincorporated, Limited partnership, or LLP) , or Limited company business.

To qualify for Entrepreneurs relief:

  • You must have owned the business asset for at least a year, AND
  • The asset must not be goodwill if the sale was after 3rd December 2014
  • If the business is incorporated;
    • It must be a trading company OR a holding company of a trading group, AND
    • You must hold at least 5% of the shares and voting rights, AND
    • You must be either an officer or employee of that company (or an officer or employee of one or more members of the trading group)

The requirement that it must be a trading company

  • Excludes companies that are property or investment holding companies. Running a furnished holiday let business counts as trading, but letting property on longer term tenancies does not.
  • Is assessed based on the activities of the company. To be classed as a trading company, the company must carry on trading activities and to no substantial extent carry on activities other than trading activities e.g. investment activities. If a company carries on trading activities and has no investments on the balance sheet it will qualify as a Trading Company. Once there are assets on the balance sheet which constitute investments, the company must consider the “to no substantial extent” requirement. Informal guidance suggests that a 20% threshold is used across the areas of;
    • The proportion of directors time spent on each activity (trading activity Vs Investment management/holding)
    • The proportion of the company’s income derived from each activity, (trading activity Vs Investment management/holding), and
    • The proportion of Balance sheet assets held in relation each activity (trading activity Vs Investment management/holding). In this respect
    • Large cash balances on a balance sheet can be a problem, but if the cash is not actively managed and it is derived from the trading activity it may be argued that the holding of the cash is incidental to the trade rather than a separate activity.

Entrepreneurs with companies that have significant assets may choose to take advance action so that during the 12 months running up to disposal, all the company’s activities unambiguously qualify as trading activities.

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To find out more about Commonwealth Contractors call now on 0800 294 4388 or Submit your Details and we will get right back to you!

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The Compound Effect of Corporation Tax & Personal Income Tax

Life would be far simpler if dividend Income was subject to tax at the same rate as earned income, and you got a personal tax credit for the corporation tax paid by the company before it declared your dividend.

Unfortunately, this is not how it works. Instead dividends are taxed at a lower rate than earned income, but there is no gain to you as you do not get full credit for the corporation tax paid by the company.

Are you a highly skilled expat Contractor? Would you like to maximise your contract income and work towards a visa extension or visa transfer? If so Commonwealth Contractors can help!

To discuss your situation with an experienced advisor call Commonwealth Contractors now on 0800 294 4388 or Submit your Details and we will get right back to you!

Rates of Tax on Dividends & Earned Income

The tables below show the rates of tax on dividends and on earned income (Tax rates on Earned income and Interest (bank interest, bond coupons) for 2015 / 2016)

Income Tax Rates (2015/2016) for someone under 65 earning under £100,000 per annum

Description

Rate of Tax

Paid on Earnings

Personal Allowance 0% £0 – £10,600
Basic Rate 20% £10,600 – £42,385
Higher Rate 40% £42,385 – £100,000

 

Income Tax Rates (2015/2016) for someone under 65 earning over £121,200 per annum

Description

Rate of Tax

Paid on Earnings

Personal Allowance 0% N / A
Basic Rate 20% £0 – £31,785
Higher Rate 40% £31,785 – £150,000
Top Rate 45%% Over £150,000

 

UK Tax Rates (2015/2016) on Deemed Dividend Income for someone under 65 and earning under £100,000 per annum

Description

Rate of Tax

Paid on Deemed Dividend

Personal Allowance

0% £0 – £10,600

Basic Rate

10% £10,600 – £42,385

Higher Rate

32.5% £42,385 – £100,000

UK Tax Rates (2015/2016) on Deemed Dividend Income for someone under 65 and earning over £121,200 per annum

Description

Rate of Tax

Paid on Deemed Dividend

Basic Rate

10% £0 – £31,785

Higher Rate

32.5% £31,785 – £150,000

Additional Rate

37.5% Over £150,000

**If you have earned income / interest as well as dividend income, it will affect the rate payable. You only have a single basic / higher rate allowance for use with all types of income.

Tax Credits on Dividends

The above table details the tax on ‘Deemed Dividend Income’.

If you receive a dividend from a UK company, it carries with it a tax credit (in partial recognition of the corporation tax paid by the company).

Dividend Paid to You

Tax Credit

Deemed Dividend Income

Cash (£) £1 £0.11 £1.11
Value (%) 90% 10% 100%

** Figures are rounded to the nearest penny. Actually the £0.11 recurs. For full accuracy start with £1/0.9)

Tax Paid – Basic, Higher & Top Rate Taxpayers

Basic Rate Taxpayer receiving a £1 cash dividend and £1.11 deemed dividend income

Tax Liability = 10% of £1.11 = £0.11

Tax Credit = £0.11

Tax Due = None (i.e. the tax liability is covered in full by the tax credit)

Higher Rate Taxpayer receiving a £1 cash dividend and £1.11 deemed dividend income

Tax Liability = 32.5% of £1.11 = £0.36

Tax Credit = £0.11

Tax Due = £0.25

Top Rate Taxpayer receiving a £1 cash dividend and £1.11 deemed dividend income

Tax Liability = 37.5% of £1.11 = £0.41625

Tax Credit = £0.11

Tax Due = £0.30625

Combined Effect of Corporation Tax & Personal Tax

N.B. All these tables use a corporation tax rate of 20%. This is the main rate in 2015-16;in earlier years it was the Small profits rate (payable on profits up to £300,000 pa;higher levels of profits attracted higher rates of corporation tax, but by 2014-15 the difference between the main rate and the Small profit rate was only 1%)

Breakdown

Basic Rate Taxpayer

Higher Rate Taxpayer

Additional Rate Taxpayer

Pre Tax Profit

£100.00 £100.00 £100.00

Corporation Tax Rate

20% 20% 20%

Post Tax Profit paid
as Dividend

£80.00 £80.00 £80.00

Deemed Dividend Income

£88.88 £88.88 £88.88

Tax Credit

£8.88 £8.88 £8.88

Tax Rate

10% 32.5% 37.5%

Tax Bill

£8.88 £28.89 £33.33

Dividend After Paying
Basic Rate Tax

£80.00 £59.99 £55.55

For those close to the £150,000 top rate threshold, and those close to the £100,000 gross earnings point at which they loose their personal allowance (and thus suffer in effect a 60% marginal income tax rate), the ability to structure earnings as dividends is particularly valuable as the deemed dividend income is less than the underlying corporate profits.

For a company paying corporation tax at the small company rate, pre-tax of 20% profits are c12.5% higher than deemed dividend income. For a company paying corporation tax at the Large company rate of 25%, profits are c20% higher than deemed dividend income.

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Income Tax on Dividend Income

If a Company in which you own shares makes a profit, it will generally be subject to corporation tax on its profit. After allowing for tax, any profit remaining may be distributed to the shareholders in the form of a Dividend.

UK taxpayers are liable to personal income tax on dividend income if that dividend income pushes their total income over the level of their tax free allowance.

The following table shows UK Dividend Income Tax rates (all assume income beyond the tax free allowance).

Tax year 2011-12  

Tax Band

Income Level

Tax Rate (%)

Basic Rate Up to £35,000 10%
Higher Rate £35,001 to £150,000 32.5%
Additional Rate £150,001+ 42.5%

Tax year 2012-13  

Tax Band

Income Level

Tax Rate (%)

Basic Rate Up to £34,370 10%
Higher Rate £34,371 to £150,000 32.5%
Additional Rate £150,001+ 42.5%

Tax year 2013-14  

Tax Band

Income Level

Tax Rate (%)

Basic Rate Up to £32,245 10%
Higher Rate £32,246 to £150,000 32.5%
Additional Rate £150,001+ 37.5%

The calculation of your tax liability is complicated by the fact that, where a dividend is received from a UK company, it is accompanied by a tax credit. The tax credit is in recognition of the fact that the company has probably already paid corporation tax on the profit, but is not actually linked to or affected by the amount of corporation tax actually paid. Some companies will pay corporation tax at the ‘Large Company’ rate of 23%, some at the ‘Small Company’ rate of 20%, and some may pay no corporation tax at all due to eg R&D tax credits, or the treatment of goodwill. Whatever the company has paid,

  • The shareholder receives the same deemed tax credit: 11% of the cash dividend received.
  • The shareholder’s taxable income = cash received (say £1.00) + the tax credit (£0.11 in this case) = £1.11
  • For basic rate taxpayers the £0.11 tax credit cover the tax cost of 10% x £1.11

(all figures below are rounded, and apply to 2010-11 thresholds, see above for tables showing how the thresholds have changed for 2011-12 and 2012-13): If your earnings are;

  • Less than £35,000 – you would not pay any further Income Tax
  • More than £35,000 (but less than £15,000) then: Your taxable income = £1.11, the tax due is 32.5% of £1.11 = £0.36 After allowing for the £0.11 tax credit, the additional tax due is £0.25 which is 22.5% of £1.11
  • More than £150,000 then: Your taxable income = £1.11, the tax due is 42.5% of £1.11 = £0.47 After allowing for the £0.11 tax credit, the additional tax due is £0.36 which is 32.5% of £1.11

If you receive dividend from a non-UK company, the default assumption is that you do not receive a tax credit unless one is due under a double tax treaty between the UK and the country where the company is based; that country may impose a withholding tax on dividend payments to overseas shareholders (the UK does not impose such withholding taxes).

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Income Tax on Savings Interest Income

In the UK, the taxation of savings interest income is relatively straightforward.  The key points are: (more…)

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National Insurance on Earned Income

National Insurance Contributions (NICs) are payable on employment income (further to Class 1) and self employment income (further to Class 2 and Class 4). Contributions are paid in order to gain entitlements to ‘State Benefits’, including the State Pension and the National Health Service (NHS). (more…)

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Income Tax on Earned Income

As a Contractor you need to pay Income Tax on (1) PAYE earnings received via an Umbrella Company, OR (2) on Salary and Dividends received via your own Contractor Limited Company. (more…)

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Pay Part Onshore and the Rest Offshore

Split Payroll

Some organisations have been known to structure Income payments between ‘Onshore’ and ‘Offshore’ by running a spit payroll. (more…)

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Hope you do not get found out

Billing contract income earned in the UK to an offshore service provider for the purpose of not paying tax is tax evasion regardless of whether or not the person to whom the money belongs is resident in the UK. (more…)

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