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Tax

Tax savings on your return to the UK

Tax

11/03/2011Tax savings on your return to the UK

British expatriates moving back to the UK must question whether they will face financial hardship or ruin on their return to British soil.

Expert tax tips: Considerations for UK expats

Mind-boggling British tax system

For months the UK Press has reported that thousands of wealthy Britons will actually leave the UK as the burden of taxation increases. For British expatriates who are moving back to the UK the question must be whether they will face financial hardship or ruin on their return to British soil. After all, with the top rate of income tax now set at 50%, will the result be a huge bill to the taxman?

It makes sense to start by looking at how harsh the UK’s tax environment will become. The headlines tell us that those earning more than £150,000 per annum will pay 50% of their income to the tax man.

What of those earning more realistic salaries or, crucially in this context, enjoying substantial pensions?

Here is the first example. A UK resident earning or receiving a pension of £80,000 per annum will pay income tax of £21,930 (an average tax ‘hit’ of 27.4%) resulting in a net income of £58,070. Of course, the Government will take more of that through VAT, Council Tax and so forth but let’s stick to basics. In truth, most European countries will tax income at roughly the same rate – if not more - although some (Cyprus for example) have much lower rates. However, the decision to live in Cyprus is more of a lifestyle choice.

Younger expatriates planning their return to the UK can do very little to reduce the burden of income tax on their eventual salaries other than by saving tax-efficiently. Those expatriates who will receive a pension might be able to reduce the eventual income tax charge via the Foreign Pension Allowance which can exempt 10% of the income from tax in particular circumstances. It might be possible, subject to scheme rules, for that pensioner to commute a lump sum and, in terms of tax planning at least, that could be a sensible step.

This second example explains why. An expatriate couple have built up their capital over the years and have a total of £2 million invested in a mix of property, bonds and cash deposits. Overall that capital generates a yield of 4% or £80,000 per annum. With some basic tax planning (holding assets jointly) they will pay £10,410 of income tax – an average rate of 13%. So the retired couple with £80,000 of investment income will pay £10,410 of income tax whilst the person enjoying a similar salary will pay an extra £11,520 of income tax (and that’s before we take National Insurance into the reckoning).

What’s more, with some further planning that income tax liability could be reduced even further. For example, income tax could be cut to £8,000 (an average rate of just 10%) with net income being £72,000.

So, whilst we should pity the working Briton the conclusion is that those retiring in the UK are able to plan for a much lower contribution to the taxman. Of course there is still the extra burden of VAT, excise duty on wine and tax on air travel to contend with, but at least these examples will show that all is not as bad as the press might have us fear.

Our example shows the situation for a couple with substantial assets - but do remember that good planning can help whatever your situation and can ensure that you enjoy more of your own wealth.

Whether a resident in the UK or living overseas, The Fry Group offers you advice to support every aspect of your financial affairs. Their highly experienced teams of experts are there to help you plan your future with confidence, and in a manner that keeps your personal goals in mind. If you would like them to help you save tax, please contact Graham Barnes.

The Fry Group / Expatica 2011