Contractors, does non-dom reform (potentially nasty for some), affect you from April 6th 2025?

Mirroring it being more far-reaching than was expected, the chancellor’s ‘non-dom’ reform is probably the farthest away Spring Budget 2024 tax change in the calendar affecting some UK contractors, given it’s not effective until April 6th 2025, writes chartered accountant Kevin Austin, boss of contracting overseas advisory Access Financial.

Spring Budget’s non-dom changes, in a nutshell:

I will try to outline the changes to the non-dom regime which are relevant to UK contractors, particularly those working through their own limited company.

But almost regardless of your set-up, the main take-away from this non-dom reform from chancellor Jeremy Hunt is that from early next April, anyone who has been tax resident in the UK for more than four years will pay UK tax on foreign income and gains, as is the case for other UK tax residents. So it’s a leveller, of sorts, with overtly political drivers (which I’ll come to).

What is the current system for non-doms, and how will it change from April 6th 2025?

The current system governing so-called ‘non-doms’ is based on the domicile system.

Sounds obvious, perhaps, but ‘non-doms’ are individuals who are UK residents but who aren’t domiciled in the UK, as they have a male parent who was born outside the UK.

They are taxed in the UK on their worldwide income and gains. But thanks to the current ‘remittance basis’ of taxation, such non-doms can choose to be taxed on their non-UK income and gains only as and when that income/gains are brought into the UK. The government says this is a complexity that “incentivises” individuals to keep their foreign income and gains (FIG) offshore

Under the official banner of modernisation, this system dating back over 200 years is being replaced by a test based on residence. It means the government will abolish the remittance basis for non-doms, with what HMT says (and I broadly agree), will be a simpler regime.

From April 6th 2025. a new 4-year window will apply to individuals becoming UK residents after 10 years of non-residence.

Put another way, individuals electing to be part of the new regime won’t pay UK tax on their FIG in their first four years of tax residence, provided they have not been resident for the last 10 years. So, there will be no tax on FIG for the first four years -- if the individual ‘opts in’ to the new regime, versus 15 years of no tax currently.

Who is affected?

This reform will affect non-domiciled contractors currently resident in the UK and contractors considering moving to the UK after a period of non-residence.

Such individuals should note that Overseas Workday Relief (OWR) for the first three years of UK residence will continue for those using the 4-year window.

However trust protections for income and gains will be removed for non-doms electing not to be in the new 4-year system.

More positively if you’re affected by this shake-up, those moving from the remittance to the new arising basis of taxation will receive a temporary, 50% tax break on foreign income for the first year of the new system.

Transitional arrangements

It’s one of the transitional rules which the government will put in place, and another will allow the rebasing of some assets for capital gains tax. Similarly, a temporary facility will offer a reduced tax rate for repatriating FIG pre-2025.

And as domicile is being got rid of here but domicile affects IHT, this most-disliked levy will also move to a residence-based system. A consultation on this is opening now, allowing you to have your say.

Consultation details

We await the consultation document release date, but we expect the government to gather feedback soon on designing the new residence-based system.

The specific consultation areas have been specified in advance by HMRC, and they include transitional provisions to ease the change, the length of residency criteria for IHT purposes, potential exceptions or 'tail provisions,' and interaction with trusts and gifting rules.

Where this non-dom reform came from…

But don’t expect too many more official openings to have a say on this non-dom reform!

The government won’t want it pointed out to them that the £2.6billion a year which this non-dom reform is totted up to raise (so it can pay for the 2% point cut in NI), is flaky at best. And likewise, the government probably won’t want it pointed out that in a Budget which has more to do with an election than economics, that the non-dom reform is arguably the most political of all this Tory chancellor’s tax changes.

Labour previously targeted the regime, condemning non-dom status as outdated and unfair, no doubt informed by Akshata Murty, prime minister Rishi Sunak’s wife, previously having this tax-efficient status.

But for any currently ‘non-dom’ contractor wanting to plan, the politicised nature of the reform provides some rare certainty. That’s because we can expect no opposition to introducing these changes if, as the polls predict, Labour wins the 2024 general election.

The British ISA, with lukewarm receptions from almost all quarters, is the obvious contrast, as due to be consulted on, it might never see the light of day.

Something borrowed, something stolen?

In short, the Tories have borrowed (or ‘stolen’ if you’re a Sir Keir Starmer fan) Labour's proposals, in a bid for a quick political gain. But there can be little doubt that Mr Sunak's wife previously managing to pay no UK tax on her foreign income prompted this reform.

Nonetheless, it should be acknowledged that ‘Mrs Sunak’ has rescinded her status for tax purposes and now pays tax on her foreign income. It should also be acknowledged that Downing St insists the PM was only given sight of this policy of non-dom reform until its “final decisions” were taken. And yes contractors, they would say that wouldn’t they?!

But back to implications for contractors. The reform’s main thrust is to abandon the system based on domicile with one based on residence.

A unique idea, which has had its time

Until now, those whose fathers were not born in the UK could claim that they were non-domiciled in the UK. In this respect, the idea of domicile is unique to the UK. An individual keeps one's domicile of birth unless they subsequently adopt a domicile of choice.

Non-dom status, therefore, confers on people who come to live in the UK a tax status denied to those whose fathers were born in the UK.  

Interestingly, and supporting my comments to ContractorUK on the release of Spring Budget 2024 on March 6th 2024, the rise in immigration in 2023 alone would bring in some 750,000 people enjoying a tax status not available to Britons with British fathers!

The (arbitrary) four-year rule

Keep in mind, HMRC currently taxes ‘non-doms’ on their foreign income only to the extent that they remit them to the UK. If they do not remit them, they are tax-free in the UK, although potentially taxable where they arose.

In its place from April 6th 2025, the government will replace the old, somewhat antiquated regime with the new 4-year regime that applies to individuals becoming UK residents after 10 years of non-residence.

To reiterate, there will be no tax on FIG for the first four years if the taxpayer claims exemption, where they haven’t been UK resident for a decade prior. But the political drivers for the change don’t really explain this exemption being a length of four years. Why four years? The four-year regime will benefit individuals with income abroad that they have yet to remit to the UK, but the exact reason for it being four years isn’t known. Four years seems arbitrary, almost random.

Overseas Workday Relief 

Earlier on I mentioned OWR. Well, Overseas Workday Relief is a tax relief available to UK non-doms utilising the remittance basis of taxation for those who work abroad during the tax year. It effectively enables a non-dom to legitimately avoid paying tax on earnings from a UK employment when they perform duties wholly or partly overseas.

As mentioned, the OWR for the first three years of UK residence will continue for those using the 4-year regime. But also as mentioned, if a non-dom uses trusts for protection, the charges will remove protection for those not in the 4-year regime.

IHT, the Revenue’s nice little earner

In addition, I touched on IHT. While the consultation on this area is ongoing, the proposal is to alter Inheritance Tax to a residence basis.

Under current rules, non-doms suffer UK Inheritance Tax only on assets situated in the UK. The rest of their estate outside the UK escapes IHT.

The changes from April 6th 2025 will mean that HMRC will assess non-doms for IHT on their assets worldwide. A nice little earner for the Revenue? No doubt.

Bottom line

If you are a contractor living and working in the UK but are not domiciled in the UK you will be hit by these non-dom changes. They will affect you whether you operate through a UK company, a foreign company, or no company whatsoever.

Also, if you enjoyed the relief of no tax on income you earned abroad but did not remit your profits to the UK, this will be a nasty change for you. Furthermore, if you performed any of your duties associated with employment in the UK, this relief will eventually disappear. You will also be affected if you’re a contractor or temporary professional and are considering moving to the UK after a period of non-residence.

Finally, my recommendation

Lastly, if you’re a wealthy non-dom individual with a significant income and wealth outside the UK, you will now need to think long and hard about becoming a UK tax resident. My advice? Become very familiar with the UK's Statutory Residence Test before these changes catch you -- and as there’s a lot of new detail to digest, and given it takes time to move money and assets around, maybe that far-off commencement date from millionaire Mr Hunt of April 6th 2025 makes sense after all!