Double tax relief

How double tax relief arises

Many people are under the impression that if you pay all your taxes in Norway, then there is no further tax liability in the UK.  This is not correct, but your liability will be limited by double tax relief.

There can often be a further tax liability in the UK in some cases, and the following examples show how a liability can arise, and how it can be calculated.

If you are a UK resident, then you are taxed on your worldwide income and given credit for the tax paid in Norway (and many other countries) in the form of double tax relief.

Caveats

The examples that follow are based on Norwegian tax rates and allowances for calendar 2013 and UK tax rates and allowances for 2013/14 and as such are nothing more than an indication of how the computations works.

The Norwegian PAYE system is non-cumulative – basically a week 1/month 1 tax system throughout the year – and it is sometimes difficult to ascertain your correct tax position just by looking at one payslip in isolation.

There are also some allowances available in Norway that can only be claimed on your tax return.  These have not been taken into account.

In the UK it is possible to use the earnings and tax paid in Norway in the previous calendar year on your UK tax return, meaning that we don’t have to split the income between UK tax years.  This is discretionary, but most Tax Inspectors will permit it, and we are assuming that this applies in the following examples.

Please be aware that your circumstances may differ dramatically from the example given, and you should not take assume that this general example is entirely applicable to your circumstances; although the vast majority of individuals should be able to use this as guidance.

For ease of computation, we have assumed that £1 = 10 kr.

General position

For simplicity the examples look only at Income Tax, and National Insurance and Norwegian NIS is not considered.

To summarise the situation, Norwegian income taxes start at 28% (compared to 20% in the UK) and climb up to 40% tax at about £83,000.  In the UK the 40% band starts at £32,010 and the 50% band at £150,000, but you lose your personal allowance if your income exceeds £100,000.

The consequence is that if your annual income is below about £60,000 then you pay more tax in Norway, and if it is above that figure you pay additional tax in the UK.  That is to say, the UK has a higher tax rate when your income exceeds around £60,000.

Example 1

Alex works in Norway from 1 January to 31 December and earns 500,000 kr (£50,000).  The tax due in Norway on this is £10,632, and this is paid by his employer.

HMRC will know that he have been working outside the UK, as the employer has to notify this, and Alex will almost certainly be asked to prepare a UK tax return.  The UK Tax Return shows UK tax due of £9,822 and a claim for double tax relief for the £10,632 already paid.  No UK tax liability arises, and no refund is due in the UK.

Example 2

Billy works in Norway from 1 January to 31 December and earns 900,000 kr (£90,000).  The tax due in Norway on this is £25,743, and this is paid by his employer.

HMRC will know that he have been working outside the UK, as the employer has to notify this, and Alex will almost certainly be asked to prepare a UK tax return.  The UK Tax Return shows UK tax due of £25,822 and a claim for double tax relief for the £25,743 already paid.  Tax will be due in the UK for the shortfall of £79 on 31 January following the UK tax year end.

Example 3

Colin works in Norway from 1 January to 31 December and earns 1,200,000 kr (£120,000).  The tax due in Norway on this is £37,743, and this is paid by his employer.

HMRC will know that he have been working outside the UK, as the employer has to notify this, and Alex will almost certainly be asked to prepare a UK tax return.  The UK Tax Return shows UK tax due of £41,598 and a claim for double tax relief for the £37,743 already paid.  Tax will be due in the UK for the shortfall of £3,855 on 31 January following the UK tax year end.

National insurance

If you are being paid via a Norwegian payroll, then you will probably pay Norwegian NI.  Your employer can apply for an A1 to exempt you from Norwegian NI and pay UK NI instead, but this is administratively complex, and should not affect your UK pension or benefits entitlement unless you stay in Norway for over a year.  (This can be a very tricky aspect where specific advice should be sought.)

The computation of National insurance is quite complex, but the general principles are that in the UK employees pay 12% on all earnings between £149 and £797 per week, and 2% on anything above that.

In Norway, employees pay 7.8% on all earnings above £3,960 per annum.  (There is a slightly higher for those on the very lowest earnings, but the details are not important).

NI summary position

This means that if you earn less than £22,100 per annum or more than £55,432 then you will pay more National Insurance in Norway.  Between those levels you will pay more NI in the UK.

Further information

If you need further information then please contact us, or you may want to download our free TaxApp which will help you calculate your UK tax liability.

Our free TaxApp availbale from iTunes

 

 

 

 

Our free TaxApp from Google Play