For the calculation of income tax, the residence of an individual plays a factor and it’s a general perception that, an individual either resides in the UK or is a non-resident for the entire tax year. There are some specific rules that are applicable in the income tax calculation for the tax year when an income is acquired from working in a UK company incorporation, or by establishing a new company formation UK, or earning overseas. However, in some specific scenarios, the tax year for the income tax calculation may be divided into UK and foreign parts. The regulations related to this splitting will be considered in this blog along with the discussion of domicile and regulations related to the liability to UK income tax.
Splitting the Tax Year
In a strict manner, each tax year should be looked at in its entirety. The main principle under the tax setup UK states that an individual resides in the UK or is a non-resident either for an entire tax year or not at all.
However, it is possible that an individual may be able to divide a tax year into UK and foreign parts in some cases. The treatment of split year can only be applicable for a year in which an individual is residing in the UK according to the usual rules. In case where the splitting of a tax year is done, the taxation of the individual is done by considering him/her as a resident of UK for the UK part and considered as a non-UK resident for the foreign part.
The individual who is arriving in the UK can make use of a split year treatment if that individual does not reside in the UK in the year before the split year and if one of the following scenarios are applicable:
The individual who is leaving the United Kingdom, can make use of the treatment of split year if before the split year, the individual as considered to be a resident of the England, and after the split year, in the tax year, that individual was considered to be a non-UK resident and in case if one of the scenarios mentioned below is applicable:
Examples for Illustration
Domicile of the Individual
The country in which the individual has his/her own permanent home, the individual is said to be domiciled in that country.
It should be kept in mind that the domicile is a different entity than the residence or nationality. An individual may be a resident of multiple companies, but at a single time, he/she can be domiciled in only a single country.
When an individual is born, the acquisition of the domicile is done at the origin of birth which is, in normal practice, their father’s domicile, or mother’s if the father had passed away before their birth or their parents were not bound in marriage at the time of their birth, and hence not mandatorily the country of their birth. The retaining of this domicile is done by the individuals until the acquisition of a different domicile of dependency is done by them (if, during the time in which their age is less than 16, the domicile of their father changes) or a domicile of their choice. The acquisition of a domicile of own choice can be done only by the individuals whose age is 16 or above.
The individuals who wish to acquire the domicile of their choice, should sever their ties with the country on which their previous domicile was based and they should settle in some other country having the intention of settling there with the help of a permanent home. Being the resident of some other country is not in itself sufficient to prove that the acquisition of a domicile of choice is done by the individuals, there has to be a proof to make sure that their intention is firm to live there permanently.
Basic Principles of UK Income Tax Liability
In general, a resident of UK has the liability of UK income tax on the income acquired from UK or from overseas upon its occurrence. An individual has the liability of income tax UK on the income present in the UK, who is a resident of the UK but does not hold a domicile in the UK and he may have an entitlement of taxation on the foreign income on the basis of remittance. A person who does not reside in the UK, has the liability of income tax UK only on the income being present in UK.
The arriving basis states that in general, an individual who is a resident of the UK has the liability of income tax UK on the income being earned from an establish company in UK or from overseas.
According to the basis of remittance, an individual who resides in the UK but does not hold a domicile in the UK has the liability of income tax UK on the foreign income only to the extent that its remittance is done to the UK. The individual may have to make a payment of the charge of remittance basis. In case if the remittance basis does not hold applicable (such as, its claim is not made), the taxation of the foreign income is done on the arising basis. Individual who does not have UK domicile but is a resident of the UK has the liability of income tax UK only on the income that occurs within the UK.
Summary of the Basis of Income Taxation of an Individual
In a nutshell, depending on the residence and status of domicile, the taxation of an individual is done in the following manner: