Certain in this world: Taxes
Days are really slowing down. Maybe it’s a function of the general decrease in our touristic activity or possibly routine is continuing to take a greater hold. It could be a function of waiting – I am in the middle of the fun period of knowing the size of my bonus but not actually possessing the money yet.
Well, we’ll make up for lack of sightseeing in the next several days in Brussels. And the waiting for bonus money will soon be replaced by the no less fun procedure of converting the currency of payment (regardless of where you work, my employer pays out bonuses in US dollars) into currency of need (there is certain sense in making some funds available to us in UK just as there is some in leaving everything in US deposits and securities). I’m going to lose tons of money on exchange rate. I will also have to pay the taxman in the UK if I actually start using the money brought from the US.
It is a curious subject – taxation in the UK. Not that I am fully conversant in it, but here is an overview.
As with other well-established social democracies in Europe, British taxation is draconian. It is also very simple, for natives. You do not pay any taxes on approximately the first five thousands of your income. You pay 10% on the next 2K. You then pay 22% on the next 31K. Finally, you pay 40% on everything above that. A person earning 50K would pay roughly 12K in taxes, whereas earning twice as much means tax burden of almost 32K. But anybody could calculate their tax liability on a napkin, as there are practically no allowances, deductions and such.
There is also National Insurance Contribution along the same lines, but it is negligible compared with the primary tax burden.
Things get interesting when it comes to foreigners. As local employees, we are being taxed on our UK income along the exact same lines as above, but not on any income earned overseas, as long as we keep that offshore. However, as soon as money from overseas land in a UK onshore account, they become taxable, on a schedule that I am not familiar with yet.
One quirk is that you can have a UK offshore account. Channel Islands – a bunch of small isles near the French coast – are considered offshore for banking purposes. If you keep your money in a bank branch located on one of those, then you are not bringing them into the UK until the moment that you actually use them for something on British mainland.
Furthermore, there are two types of foreigner classifications – residency and domicile – that dictate additional rules as to how non-British are taxed. If you are an ordinary resident, domiciled in the UK, then in taxman’s eyes, you are the same as a native Briton. If you are a non-ordinary (read: temporary) resident, domiciled abroad, then you get some tax breaks. For instance, if you happen to spend some time on business trips outside the UK, and you are paid into an offshore account, and you leave enough in that account to cover your wages for the duration of said trips, then you can exclude that amount from your UK income (i.e., it is considered foreign-earned income, which is not taxable), even when your paycheck comes out of a UK payroll.
You declare how you are to be classified when you start your residency in the country. As time goes by, however, new criteria will keep kicking in, and you will end up re-classified. You can only stay non-ordinary for the first couple of years. If you buy a house as your primary residence, it will possibly be a critical factor in determining your domicile.
Of course, being a US citizen, I also get hit by the dear old Uncle Sam. About $90K of my UK-earned income is excluded from taxation, but the rest is taxed according to the standard US taxation practices. I do get the foreign tax credit for the amount paid to the UK taxman on the remaining portion of my income, and it strangely works in my favor that the UK taxes are high, as my credit is very likely to cover my entire federal tax liability.
In the US, however, I will also be liable for the New Jersey state tax – on the entire amount earned overseas – if I maintain a semblance of New Jersey residency. There is an official checklist of things that indicate my continuing residency in the state, among them the expectation of re-establishing primary residence in the state at the completion of my foreign assignment. How I get around that for the next few years, I don’t have a clue. Upon some investigative work by my private CPA – Thanks, Mom! – I can maintain New Jersey domicile, but declare to be a non-resident, freeing us up from any state tax liability.
Finally, the UK tax year runs from April 7th until April 6th, with tax returns due by the following January 1st. That creates additional complications for me in respect of asynchronous cycle with the US (how do I claim foreign tax credit for the 12 months starting in January, when the taxes are paid for the 12 months starting in April?). Plus, I need to establish my foreign residency for US purposes, which only kicks in after I have been out of the country for certain number of days…
I am sure that only CPAs in my audience have enjoyed this discourse . My company pays for the first year of my tax return preparation on both sides of the ocean, and then it will be back to Mom to figure this stuff out…
As Becky incredulously asks when told of the amount of taxes that we pay: Who made the rule that hard-earned money have to be given away?