Changes to the Taxation of Non-UK Domiciled Individuals

The Finance Bill 2024–25 will introduce legislation to abolish the remittance basis of taxation for non-UK domiciled individuals from 6 April 2025, replacing it with a residence-based regime.

Individuals eligible for this new regime will not pay UK tax on foreign income and gains (FIG) for the first four years of UK tax residence, provided they have not been UK resident in any of the ten consecutive tax years prior to their arrival. However, the planned 50% reduction in foreign income subject to tax in the first year of the new regime —previously announced by the former government—will not be implemented.

For capital gains tax purposes, current and past remittance basis users will be permitted to rebase their foreign assets held on 5 April 2017 to the value at that date when they dispose of them, provided certain conditions are met.

Any foreign income or gains arising on or before 6 April 2025, whilst an individual was taxed under the remittance basis, will continue to be taxed when remitted to the UK under the current rules. This includes remittances made by individuals eligible for the new regime.

For individuals who have previously claimed the remittance basis, a Temporary Repatriation Facility will be available whereby it will be possible to designate and remit foreign income and gains that arose prior to the changes at a reduced rate. This Temporary Repatriation Facility will be available for a limited period of three tax years with a reduced rate of 12% applying for the first two years and 15% in the final year.

The current domicile-based system of inheritance tax will also be replaced with a new residence-based system. From 6 April 2025, an individual will be within the scope of inheritance tax on their non-UK assets if they are considered a long-term resident. According to the legislation, an individual is classified as a long-term resident when they have been UK resident for at least ten of the last 20 tax years. Additionally, non-UK assets will remain within the scope of inheritance tax for between three and ten years of leaving the UK.

Overseas Workday Relief

Currently, earnings from employment duties performed outside the UK by a non-UK domiciled individual may benefit from the remittance basis for the first three tax years in which the individual is UK resident. This relief is known as overseas workday relief (OWR). Employees eligible for OWR only pay tax on their earnings from employment duties performed outside the UK if those earnings are remitted to the UK.

From 6 April 2025, overseas workday relief will be extended from its current three years to four years to align with the new four-year foreign income and gains regime. As the remittance basis is also being abolished, there will no longer be a requirement to keep income offshore. However, relief will be limited to a maximum of either £300,000 or 30% of employment income (whichever is the lower) per year.

The new system will be simpler to operate, as employers or their agents will no longer have to wait for HMRC to approve their application for a ‘section 690 direction’ to operate PAYE on the portion of an employee’s employment income relating to work performed in the UK.

Similarly, the time limit applicable to the exemption of travel costs incurred by non-domiciled employees travelling to the UK for work (and their return journeys home from the UK) that are paid for by employers, is reduced from five years to four years, aligning with the four-year foreign income and gains regime.

National Insurance Contributions

The rate of employer National Insurance contributions (NICs) will increase to 15% from 6 April 2025, up from the current rate of 13.8% (a 1.2% rise). Simultaneously, the ‘secondary threshold’ at which those contributions start to be paid is almost halved, decreasing from £9,100 to £5,000.

To help offset the additional cost for employers, the Employment Allowance will more than double, rising from £5,000 to £10,500 per annum. Additionally, large employers will now be able to qualify for this allowance, as the current restriction that limits the relief to employers whose total NICs liability was less than £100,000 in the previous tax year will be removed.

The combined effect of these changes is expected to generate an additional £25billion in revenue.

The lower earnings limit for Class 1 NICs will be increased to £125 per week (from £123 per week) and the corresponding small profits threshold for Class 2 NICs will be increased to £6,845 per annum (from £6,725). These increases are in line with the Consumer Prices Index (CPI) as of September 2024 (1.7%). However, they will have minimal practical impact as contributions are not physically payable until the primary threshold/lower profits limit is reached —neither of which is changing.

In addition, while there has been no change to either the rate or payment thresholds for employees (and thus, no manifesto pledges are broken), the operation of ‘fiscal drag’ allows the Government to collect more in both income tax and NICs each year as wages increase and more employees are sucked into the net.

A small number of individuals whose income currently exceeds the lower earnings limit/small profits threshold but will not do so from April 2025 may be adversely affected, as they will no longer be credited with NICs. These individuals will need to consider paying voluntary NICs to ensure they have a qualifying year.

The rates of voluntary NICs from 6 April 2025 are as follows:

• Standard Class 2 increases to £3.50 (up from £3.45)

• Special Class 2 for share fishermen increases to £4.15 (up from £4.10)

• Special Class 2 for volunteer development worker increases to £6.25 (up from £6.15)

• Class 3 increases to £17.75 (from £17.45)

Rates of Tax on Carried Interest

Following a call for evidence in July and August 2024 on the tax treatment of carried interest (a performance-related reward received by fund managers), it was announced in the Autumn Budget that the normal and higher rates of capital gains tax (CGT) on carried interest will be consolidated into a single unified rate of 32% for the 2025–26 tax year. 

From April 2026, the Government will introduce a revised regime for carried interest, treating this as trading profits subject to income tax and Class 4 National Insurance contributions. A 72.5% multiplier will be applied to the income tax rate for qualifying carried interest brought into charge. The government plans to engage expert stakeholders to ensure the revised regime is both robust and effective.

Changes to Capital Gains Tax (CGT) Rates

Legislation will be included in Finance Bill 2024–25 to increase the main rates of CGT from 10% and 20% to 18% and 24% respectively for disposals made on or after 30 October 2024. The CGT rates applicable to residential property gains (18% and 24%) will remain unchanged. Similarly, the rates applicable to trustees and personal representatives will also increase from 20% to 24% for disposals on or after 30 October 2024.

The Finance Bill 2024–25 will also include legislation to increase the rate of CGT for disposals eligible for both business asset disposal relief (BADR) and investors’ relief. The rate will rise to 14% for disposals on or after 6 April 2025 and to 18% for disposals on or after 6 April 2026.

Inheritance Tax (IHT)

IHT Nil-Rate Bands

Inheritance tax (IHT) nil-rate bands are already set at current levels until 5 April 2028, and legislation will be introduced in Finance Bill 2024–25 to freeze these for another two years until 5 April 2030. The nil-rate band (NRB) will remain at £325,000 and the residential nil-rate band (RNRB) at £175,000. The tapering of the RNRB will continue to start at £2 million.

Therefore, estates qualifying for both nil-rate bands can pass £500,000 (or £1 million if an individual has inherited their deceased spouse/civil partner’s allowances) without incurring an IHT liability.

Agricultural Property Relief (APR) and Business Property Relief (BPR)

The Autumn Budget 2024 announced that the Government will reform agricultural property relief (APR) and business property relief (BPR) from 6 April 2026. The existing 100% rate of relief will continue, except in relation to shares that are designated as not listed on a recognized stock exchange, where the rate will reduce to 50%. However, the 100% rate of relief will be limited to the first £1 million of qualifying property value, with the balance eligible for only 50% relief. A technical consultation is expected in early 2025, with legislation to be included in a future Finance Bill.

The policy paper published on 30 October 2024 contains the following further detail:

• The £1 million allowance will apply to the combined value of property in an estate qualifying for 100% BPR and APR. If the total value exceeds £1 million, it will be applied proportionately across the qualifying property.

• The allowance will cover property passing on death as well as failed Potentially Exempt Transfers (PETs) and chargeable lifetime transfers.

• For trustees, there will also be a £1 million allowance on the value of qualifying property to which 100% relief applies, in relation to ten-year charges and exit charges. The Government intends to introduce rules to ensure the allowance is divided between trusts set up by the same settlor on or after 30 October 2024. The detailed application of the rules to trusts will be included in the technical consultation.

• The new rule will apply to lifetime transfers made on or after 30 October 2024 if the donor dies on or after 6 April 2026.

IHT – Unused Pension Funds and Death Benefits

Widely speculated prior to the Autumn Budget, the Government announced that it will bring unused pension funds and death benefits payable from a pension into a person’s estate for IHT purposes from 6 April 2027, a move that will remove the incentive to use pensions as wealth planning tools. This measure will apply to both defined contribution and defined benefit schemes.

As part of these changes, pension scheme administrators will become liable for reporting and paying any inheritance tax due on unused pension funds and death benefits.

The Government is conducting a technical consultation on the processes for implementing these changes for UK-registered pension schemes. The consultation ran until 22 January 2025, after which draft legislation will be published for further input.

Interest on Underpayments of Tax

The Chancellor has announced that the rate of interest charged on underpayments of tax will increase by 1.5% starting 6 April 2025. This presumably means that the rate will be calculated as Bank of England base rate plus 4% (up from the current base rate plus 2.5%). Further information, including any indication of whether this increase will apply ‘across the board’ to all taxes, has yet to be provided.

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