The UK tax year started on April 6, so how will this impact your pocket? UK tax changes can affect you even if you are living in Portugal, so here we outline the key announcements in the last two UK budgets.
Lifetime Allowance and other pensions tax changes
Probably the biggest surprise of the UK’s 2023 spring budget was the abolition of the pensions’ Lifetime Allowance and resulting tax charges. Abolishing this extra tax was welcome news for those who have built up larger pension savings over decades of contributions and growth.
A future government could, however, reverse this move and the Labour Party quickly pledged to do so. The next general election must be held no later than January 2025. Bearing in mind that pension transfers can take up to six months, there may be a limited opportunity to transfer your pension out of the UK and avoid any future UK charges.
Other pension changes effective from April 6, 2023 include an increase to the Money Purchase Annual Allowance and minimum Tapered Annual Allowance from £4,000 to £10,000. The Annual Allowance for pension contributions also increased from £40,000 to £60,000.
UK income tax
The spring budget did not include any significant changes to income tax, but the autumn statement of 2022 included a measure to increase taxation.
The income tax personal allowance, higher rate threshold, national insurance contributions, upper earning limit and upper profits limit, that were already frozen at their 2021 levels until 2026, will continue for a further two years, until April 2028.
Freezing allowances and thresholds is often referred to as ‘tax by stealth’ since it increases taxation without putting up tax rates.
The income threshold for the additional 45% tax rate (47% in Scotland) has reduced from £150,000 to £125,140 with effect from April 6, 2023.
As previously confirmed, from the start of this new tax year corporation tax has increased to 25% for businesses making over £250k in profits.
Capital gains and dividends taxation
As announced in the Autumn Statement, the Capital Gains Tax Annual Exempt amount has dropped from £12,300 to £6,000 for the 2023-2024 tax year. It will be cut in half again, to £3,000, in April 2024.
The Dividend Allowance has also been halved, from £2,000 to £1000 from April 2023, and then to £500 in 2024.
UK inheritance tax
Both the general Nil Rate Band and Residential Nil Rate Band will remain frozen at £325,000 and £175,000, respectively, until April 2028. Coupled with rising house prices, this will drag more and more families into the IHT net unless you take action. The general nil rate band has actually been frozen since 2009, which has impacted many families.
In comparison – the tax benefits of non-habitual residence status in Portugal
Portugal introduced the NHR regime in 2009, offering foreign nationals reduced tax rates and some tax-free exemptions for the first 10 years living in Portugal.
Income taxes – Most of the advantages for non-habitual residency applies to foreign income, but if you are employed in one of the pre-defined ‘high value’ activities here, you can receive a flat 20% income tax rate on the money earned from your employment. This is very generous considering the usual scale rates that can reach as high as 48%.
As a tax resident of Portugal, you would normally pay tax on your worldwide income, but with non-habitual residence, much of foreign income will not be subject to further Portuguese tax. So, your NHR status will potentially allow you to receive most UK rental income, capital gains on real estate, interest, dividends and non-Portuguese employment income tax free (with progression).
Capital gains tax – Gains made on UK shares remain fully taxable in Portugal even if you are a non-habitual resident due to the double tax treaty, however, any gains made on the sale of UK real estate are exempt from tax (with progression) under the regime.
Tax on UK pensions – UK pension income will only be subject to a 10% flat rate of tax under non-habitual residency, which is a considerable advantage from the usual scale rates, especially for those with a higher pension income.
Getting the right advice
Take personalised advice from a cross-border specialist to establish if and how the UK tax changes could impact you and your family, and on how to fully benefit from NHR status in Portugal. If you have not yet left the UK, take advice before you dispose of UK assets to ensure you do that as tax-efficiently as possible.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com
Sharon Farrell is a Partner of Blevins Franks in Portugal.