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Hundreds of thousands of non-residents could lose their tax-free allowance on UK earnings, under Treasury proposals.
It says the UK’s allowance is higher and, combined with restrictions in other countries, means tax paid by many non-residents is not proportionate to how much they earn in the country.
The plan could mean the UK getting more tax from 400,000 non-residents.
Most of the individuals would get tax relief in their home country so would not be worse off, the Treasury says.
The UK Personal Allowance – the amount you can earn in the UK before having to pay any tax – is currently set at £10,000, and is due to rise to £10,500 from April 2015.
The total amount claimed of tax-free earnings by non-residents is estimated to be worth about £400m a year.
In its consultation document the Treasury suggests that few countries have as generous an allowance, and that the UK grants it to more non-residents than many other countries.
Most of the EU, the US, Australia and Canada restrict non-residents’ entitlement to their equivalent tax-free allowance, the document says.
As a result, it suggests, “the current UK rules on the Personal Allowance can, in certain cases, mean that there is little correlation between economic activity in the UK and a tax liability in the UK”.
Low income ‘protection’
The document cites the example of a European Economic Area national temporarily employed in the UK earning less than £10,000, who would pay no UK tax but would instead be taxed on those earnings in their country of residence.
It compares that with the example of a UK resident similarly employed overseas who would be taxed there as a non-resident, then could claim a credit in the UK for the tax paid overseas.
The Treasury argues that “the division of taxation between countries will often not reflect the way that the income actually arises in those different countries”, and is proposing changes to improve the UK’s link between economic activity and tax liability.
About 175,000 non-resident landlords earning property rental income could be affected, but the Treasury says they ought to be able to claim relief in their home country if they lost their UK allowance.
The largest group likely to be affected is some 250,000 migrants earning below the level of the allowance in the UK – for instance people who travel to the UK to do summer agricultural work.
Although they would be able to claim the allowance back against earnings in their home country, they might not earn enough to do so.
The consultation suggests possibly setting a total income level, below which the new restriction would not apply, “as a possible protection for non-residents with very low global incomes”.
But it admits possible difficulties in terms of cash flow if these low earners were asked to reclaim tax at the end of the year, as well as in the creation of a “cliff edge” beyond which tax liability would leap significantly.
The Treasury says: “The government wants a tax system that is simple to understand and administer.
“It is also committed to ensuring that everybody benefitting from the UK’s economic and social environment pays a fair amount of tax in the UK.”