07718128235
omar@aswatax.co.uk
07718128235
omar@aswatax.co.uk
April 9, 2024

Disregarded Income including Comparative Calculations

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Disregarded income (also known as ‘excluded income’), put broadly, is investment income such as interest, dividends and pension income and more specifically, includes:

  • interest and alternative finance receipts from banks and building societies
  • dividends from UK companies
  • income from unit trusts
  • income from National Savings and Investments
  • profits or gains from transactions in deposits
  • certain social security benefits, such as State pensions or widows’ pensions
  • taxable income from purchased life annuities except annuities under personal pension schemes

The disregarded income provisions can only be used by non-UK resident individuals and therefore, cannot be used in a year of split year treatment. (SYT is only available for UK residents)

EFFECT?

These non-resident individuals with UK source income can either:

  • be taxed on UK source income under the normal rules; or 
  • use the rules on limiting UK tax liability in ITA 2007, ss 811–828 (referred to here as disregarded income).

In basic terms, if the non-UK resident individual is taxed under the normal rules, he/she will be entitled to their personal allowance as normal (so long as they are resident in a territory covered by ITA 2007, s 56)

If they prefer the ‘disregarded income’ route, they will not be able to benefit from the personal allowance (i.e. they will lose their personal allowance and the annual exempt amount for capital gains tax purposes).

The effect is that no further tax is due in the UK and higher/additional rate liabilities are avoided.

Note also that these rules are subject to anti-avoidance provisions in relation to temporary non-residence.

IMPLEMENTATION

The non-resident can choose which rules to use. In order to make this choice it may be necessary to prepare comparative calculations which we regularly compute for clients.

There is no need to decide in advance of the tax year and no claim is required. If the non-resident is required to complete a tax return, this is prepared under whichever provisions provide the best outcome. 

If the non-resident uses the special rules, it is a good idea to include a note in the white space stating that the return has been prepared under these rules.

Non-resident companies are also able to limit to their liability to income tax under similar rules.

ITA 2007, ss 815–816

As far as non-resident trusts are concerned, the trustees are only able to limit their liability to UK income under these rules so long as there are no UK resident beneficiaries.

ITA 2007, s 812

HOW IT WORKS

The way it works is that UK income tax on disregarded income is limited to the amount of tax paid at source, or deemed to have been paid at source. This means that no further income tax is due on this income.

ITA 2007, s 811(3), (4)

This is because for example, no tax is paid at source on UK bank interest since 6 April 2016 and likewise for dividends.

Now each and every individual circumstance will be different and it all mainly depends on the type of income and the amounts we are talking about.

TO CONCLUDE

All of the above is best demonstrated with examples which will be laid out in next week’s blog post. Moreover, this is just a general guidance and there are many more angles that would need to be looked at.

When it comes to these matters, we are often asked to assist with the tax calculations and any related advice that you or your client require. So feel free to get in touch! 

Comparative Calculations

Example 1

Illustrating where the ‘disregarded income’ rules produce the best result

Emily is a UK national living in Spain who is non-resident in the UK. She has UK property income (after allowable expenses) of £100,000, UK bank interest of £500 and UK dividends of £30,000 in 2021/22. She is not a temporary non-resident.

As a non-resident, Emily can either:

  • be taxed on UK source income under the normal rules and therefore be entitled to a personal allowance, or
  • use the special rules on limiting UK tax liability in ITA 2007, ss 811–814, but under these rules, she cannot benefit from the personal allowance or the married couple’s allowance.

Under the normal rules, in 2021/22, Emily’s UK income tax liability is:

 TotalNon-savings incomeSavings incomeDividend income ££££UK property income100,000100,000  UK savings income500 500 UK dividend income30,000______________30,000 130,500100,00050030,000Less: personal allowance (restricted to nil) (N1)________________________________Net taxable income130,500100,00050030,000

Tax thereon:

   £Non-savings income£37,500@20%7,500 £62,500@40%25,000Savings income (N2)£500@0%NilDividend income (N3)£2,000@0%Nil £28,000@32.5%9,100    41,600 Less:    Income tax treated as paid on UK dividend (£30,000 x 7.5%) (N4) (2,250) Tax due  39,350

Notes

  1. The personal allowance is reduced by £1 for every £2 the income exceeds £100,000. As Emily’s income exceeds £125,000 (£100,000 plus 2 x personal allowance of £12,500), the personal allowance is reduced to nil. 
  • As Emily is a higher rate taxpayer, she is entitled to the savings nil rate band of £500. She receives bank interest of £500 and all of this is covered by the savings nil rate band.
  • Emily is entitled to the dividend nil rate band of £2,000. This means the first £2,000 of her dividend income is taxed at 0% and the balance is taxed at her marginal rate, the dividend upper rate of 32.5%.
  • As Emily is a non-resident, she is treated as having paid income tax at the dividend ordinary rate of 7.5% on her UK dividends under ITTOIA 2005, s 399 and this can be deducted from her UK tax liability. The income tax treated as paid cannot generate a repayment of tax.

Conclusion

Emily has a UK tax liability of £39,350 under the normal rules. She then compares this to the liability which would arise under the special rules in ITA 2007, ss 811–814.

The disregarded income is the interest and dividends, leaving the UK property income (£100,000) to be taxed without the benefit of the personal allowance. Her tax due would be £32,500 (£37,500 x 20% plus £62,500 x 40%).

Therefore, it would be more advantageous for her to be taxed under the special rules. Emily is not disadvantaged by the loss of her personal allowance as she is not entitled to this under the normal income tax calculation rules.

Example 2

Illustrating where the normal calculation rules produce the best result

Steve is a UK national living in France who is non-resident in the UK. He has UK property income (after allowable expenses) of £55,000, UK bank interest of £75 and UK dividends of £10,000 in 2021/22. He is not a temporary non-resident.

As a non-resident, Steve can either:

  • be taxed on UK source income under the normal rules and therefore be entitled to a personal allowance, or
  • use the special rules on limiting UK tax liability in ITA 2007, ss 811–814, but under these rules, he cannot benefit from the personal allowance or the married couple’s allowance.

Under the normal rules, in 2021/22 Steve’s UK income tax liability is:

 TotalNon-savings incomeSavings incomeDividend income ££££UK property income55,00055,000  UK savings income75 75 UK dividend income10,000______________10,000 65,07555,0007510,000Less: personal allowance(12,500)(12,500)________________Net taxable income52,57542,5007510,000

Tax thereon:

    £Non-savings income£37,500@20%7,500 £5,000@40%2,000Savings income (N1)£75@0%NilDividend income (N2)£2,000@0%Nil £8,000@32.5%2,600    12,100 Less:    Income tax treated as paid on UK dividend (£10,000 x 7.5%) (N3) (750) Tax due  11,350

Notes

  1. As Steve is a higher rate taxpayer, he is entitled to the savings nil rate band of £500 at 0%. He receives bank interest of £75 and all of this is covered by the savings nil rate band. 
  • Steve is entitled to the dividend nil rate band of £2,000. This means the first £2,000 of his dividend income is taxed at 0% and the balance is taxed at his marginal rate, the dividend upper rate of 32.5%.
  • As Steve is a non-resident, he is treated as having paid income tax at the dividend ordinary rate of 7.5% on his UK dividends under ITTOIA 2005, s 399 and this can be deducted from his UK tax liability. The income tax treated as paid cannot generate a repayment of tax.

Conclusion

Steve has a UK tax liability of £11,350 under the normal rules. He compares this to the liability which would arise under the special rules in ITA 2007, ss 811–814.

The disregarded income is the interest and dividends, leaving the UK property income (£55,000) to be taxed without the benefit of the personal allowance. His tax due would be £14,500 (£37,500 x 20% plus £17,500 x 40%).

Therefore, it would be more advantageous for him to be taxed under the normal rules, and to benefit from the personal allowance, as this saves him over £3,000 in UK tax.

For non-residents with multiple sources of income, comparative calculations must be produced in order identify the best possible method. As mentioned in last weeks post, no formal claim is required but a white space disclosure is advisable if one is to use the rules on limiting UK tax liability in ITA 2007, ss 811–828.

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