An overview of Labour killing the UK’s non-domiciled tax regime (includes the politics and practicalities).
There’s been a lot of bedtime reading for the contractor sector courtesy of last month’s Autumn Budget 2024.
But what seems underreported in the sector is Labour using its first fiscal statement in 14 years to abolish the non-domiciled (‘non-dom’) tax regime for good, but potentially with consequences that will be bad, writes Kevin Austin, managing director of overseas contracting advisory Access Financial.
What Labour’s announcement for non-doms means
In particular, chancellor Rachel Reeves declared on October 30th 2024 that the UK government would be “replacing the non-dom tax regime with a new residence-based system”.
The objective? To ensure “everyone who makes their home in the UK pays their taxes here.”
A document released by the government alongside the Autumn Budget puts the death of the non-dom system beyond doubt.
Unveiling the 34-page document, its authors HMRC and HM Treasury said in a joint statement: “The current rules for the taxation of non-UK domiciled individuals will end”.
What are the current non-dom rules?
Non-doms benefit from significant tax advantages; only paying UK tax on income and gains that are brought into the UK (i.e. ‘remitted)’
Before looking at the ‘politics’(for policy wonks like me) and the ‘practicalities’ (for affected contractors), it should be acknowledged that as a concession, non-dom status has been available since 1914.
Non-dom regime: a potted history
The origin of the UK’s non-dom tax regime is as follows:
- The concept of domicile has been a significant part of UK common law for over 200 years, with non-dom status initially introduced to accommodate British Empire citizens with substantial interests abroad.
- The UK sought to attract wealthy individuals and investors from around the world. By allowing them to avoid paying UK tax on their foreign income and gains, as long as these earnings were not brought into the UK, the country became a more appealing destination for internationally mobile individuals.
- The UK has been competing with other international financial centres to attract high-net-worth individuals and businesses and maintain its competitive edge. The non-dom status was widely seen as a means to achieve this goal.
- Taxing foreign income can be complex and administratively burdensome. The remittance basis simplifies matters by focusing on income brought into the UK instead of trying to track and tax income earned worldwide.
The UK’s non-dom system has encouraged many to establish residency in low-tax jurisdictions while maintaining strong ties to the UK.
Where do ‘non-doms’ typically live, and why?
Six popular ‘non-dom destinations’ include:
- Monaco: Known for its luxurious lifestyle, absence of income tax, and favourable wealth taxes.
- Dubai: Offers a tax-free environment, modern infrastructure, and excellent connectivity to other parts of the world.
- Switzerland: Renowned for its political stability, strong financial system, and attractive tax rates for high-net-worth individuals.
- Portugal: Provides a favourable tax regime for non-habitual residents, with exemptions on certain foreign-source income.
- Caribbean Islands: Offer tax havens with minimal or no taxes on income, capital gains, and wealth.
- Cyprus: Offers a low-tax environment that is Inheritance Tax-free, with Capital Gains taxed only on immovable property and numerous income tax breaks.
Implications for non-doms of Labour’s abolition
For these individuals, Autumn Budget’s abolition of the current non-domiciled rules means they will become liable for UK tax on their worldwide income and gains starting as soon as April 6th 2025.
In tax year terms, that’s 2025-26.
These changes could significantly increase their tax burden, potentially prompting them to relocate or restructure their financial affairs.
Why has the death of non-dom come about?
As a policy, non-dom has faced criticism for three key reasons:
- It is considered unfair that some wealthy individuals can avoid paying UK taxes while benefiting from public services.
- Concerns arose regarding the use of non-dom rules for tax avoidance.
- The government likely lost substantial tax revenue due to the non-dom regime.
Politics, headlines, and my mistake…
These three concerns are not new.
Labour’s predecessor — the previous Conservative government — was concerned about embarrassment stemming from the then-prime minister’s wife.
As the wealthy daughter of the founder of multinational IT and technology Infosys, Akshata Murty did not have to pay UK income tax on her substantial overseas income, unless she brought the income into the UK.
Due to unflattering media headlines, then-chancellor Jeremy Hunt (Rachel Reeves’ predecessor) was compelled to declare that the government would end non-dom status.
And that’s how it came about that in a previous article for ITContracting.com, and due to press reports at the time, I signalled that the Labour government would likely soften the impact of the Hunt proposals.
I was mistaken.
Why Rachel Reeves wants to rid the UK of non-doms
Potentially due to the need to fill what they’ve called an inherited “£22billion black hole,” the Labour government has embraced the ‘old’ anti-non-dom proposals of the Tories – fully, insofar as the new government looks committed to passing them into law on April 6th 2025.
Other than financial, the argument that very likely convinced chancellor Reeves to maintain her predecessor’s stance is that it is unfair for individuals whose fathers were not born in the UK — regardless of their residency status — to face a unique, preferential tax treatment that is not applied to those whose fathers were born in the UK.
Other attempts to hit non-doms
It should be noted that this is not the first time that action has been taken against non-doms, even if this time it does look definitive.
In 2017, the rules were tightened by introducing a 15-year limit for claiming non-dom status.
It is potentially that starting pistol to claim non-dom status before the clock runs out that motivated one reader of ITContracting.com to try and claim non-dom status.
More recently, in April 2023, the-then government announced plans to abolish the remittance basis for non-domiciled individuals, commencing April 6th 2025.
HMRC ‘non-dom’ guidance is incoming, sort of
Since Labour took office in July 2024, HMRC said following the Autumn Budget that from April 6th 2025, the current rules for the taxation of non-UK domiciled individuals will “end.”
Fortunately for affected individuals, HMRC says guidance will be “made available in the lead up” to April 6th 2025.
Implications for individuals near non-dom status
But I don’t anticipate that many non-doms or soon-to-be non-doms will wait around to read HMRC’s advice, which incidentally is only going to be on “applying the legislation.”
In particular, individuals who are currently eligible or nearing eligibility for non-domicile status have an important decision to make.
Such individuals may need to expedite their plans to claim non-dom status (before the commencement date of April 6th), or they may need to reconsider their long-term residency plans — while being mindful of the evolving tax environment.
Non-dom’s death: three tax considerations for contractors with a UK limited company
Contractors operating through a limited company (also known as a UK Personal Service Company) face specific challenges under Labour’s plan to do away with non-dom status.
- Tax on worldwide income
Profits generated by a contractor limited company, even from ‘overseas clients,’ will be subject to UK tax.
2. Dividend taxation
Dividends received from a limited company will (likewise) be taxed, potentially at higher rates than those under the current non-domiciliary regime.
3. Heavier admin burden
Individuals acting as their own PSC or limited company director will need to navigate complex tax rules and reporting requirements related to their worldwide income.
These not-insignificant effects from Labour abolishing the UK’s non-dom tax system are at odds with the brief mention of the decision on page four of the Autumn Budget 2024.
These three not-insignificant effects also make the lack of reportage since the Autumn Budget more problematic.
What the end for non-doms says about Labour
The truth is that this change to end non-dom status represents a big shift in policy priorities, focusing on tax fairness and revenue generation.
It also indicates that the still relatively new administration running the UK believes that the nation can still be an attractive destination for talent and investment — without providing tax advantages to non-domiciled individuals.
While the first statement is accurate, the second is unprovable and likely incorrect. Wealthy and mobile individuals have many options, and the UK may not have all the advantages necessary to attract those who can invest their money and entrepreneurship where they are treated best.
Impact for contractors of Labour abolishing non-dom tax status
Specifically for the UK contracting sector, where many have benefited from non-dom’s favourable tax rules, while the move was somewhat anticipated, Autumn Budget’s proposed abolition of the non-dom regime still represents a significant change in the UK tax landscape.
Individuals who are non-doms or those close to this 200-year-old status, need to assess their options carefully and plan accordingly.
Contractors operating through a UK personal service company (typically a limited company) will likely see an increase in their tax liabilities and administrative responsibilities.
It is therefore essential to seek professional tax advice to fully understand the implications of non-dom’s death, and mitigate any potential tax or liability risks.
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