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Is it now Cheaper to Work Overseas?

The howl of protest has been muted enough so far; perhaps we all have bigger things at the moment to concern ourselves with. Nevertheless, over the next twelve months or so, as dividends get paid out for the tax year 2016/17, contractors working through their own PSCs will discover that the favourable cost differential for working in The UK compared to working in many other European countries has dwindled and in some cases disappeared completely.

It is impossible to be specific due to the number of variables that can affect contractor costs in different countries. The contract rate obviously has a major impact. Marital status (and number of dependents) is also of course a big factor affecting tax liabilities (especially in France and Germany). The amount of expenses incurred can also reduce the taxable base. In addition, these variables can interact with each other in different ways and have substantially different impacts in different countries due to local tax laws.

There are however some very general cost indicators in some countries. For contractors who qualify for the expatriate tax scheme in Denmark for example, due to the fact that the tax rate is flat and it is not possible to combine expenses allowances with the tax scheme, it is possible to say that contractor costs will almost always be approximately 35% including management company fees. In The Netherlands, there is a tax break for expatriates called the 30% ruling which eases the pain of the relatively high local taxes for high level expatriates. For contractors who qualify for this, total costs usually emerge in the range of 37% to 39%. In many countries in Eastern Europe, there are flat tax rates and therefore it is possible to say that in many of them, contractor costs should be lower than 30% on a fully compliant basis. In Poland they could be slightly higher than 30%.

In France and Germany which are the two largest and most popular European countries for contracting, it is a lot more complicated to be specific about costs because of the number of variables involved and total contractor costs can vary widely between 20% and roughly 48% in each country. However, with good tax planning and depending on what modus operandi is used, costs are often around the middle of that range.

For more adventurous contractors, the cost differential in the far east can be even sharper. The top tax rate in Singapore is just 17% with lower progressive rates leading up to that. There is a flat tax rate of 11% in Hong Kong. In both countries there is a provident fund that slightly increases costs but overall, the costs of working compliantly are much lower than they are in The UK from tax tear 2016/17 onwards.

As usual with Personal Service Companies, percentage costs in The UK will always vary depending on contract rate, expenses and dividend policy. However, the new provisions in the 2016 Finance Act will seriously increase the tax on dividends for most contractors (see the table below). Together with the fact that personal allowances will be reduced by £2 for every £1 of income over £100,000 and the fact that salaries above £8,060 will be subject to national insurance contributions for tax year 2016/17, this represents a major assault by HMRC on the income of high earning contractors in The UK.

Will this ultimately lead to an increase in contractors wanting to work overseas? Of course the outcome of the Brexit negotiations and the uncertainties that Brexit has created will probably have a large bearing on this. Nevertheless, it will definitely reduce the cost differential for contractors between working in The UK and working in many other countries. The reputation of The UK as relatively low income tax haven for contractors will be diminished (and even more so for contractors working in the public sector who will now have to run all of their contract income through a payroll). 

This table shows how much more dividend tax will be paid in 2016/17 compared to the previous tax year, assuming that the personal allowance is taken as salary in each tax year (£10,600 and £11,000 respectively).

 

Net Dividends

2015/16 Tax

2016/17 Tax

Difference

£28,606.50

£0

£1,770

£1,770

£30,000

£348

£1,875

£1,527

£40,000

£2,848

£4,625

£1,777

£50,000

£5,348

£7,875

£2,527

£60,000

£7,848

£11,125

£3,277

£70,000

£10,348

£14,375

£4,027

£80,000

£12,848

£17,625

£4,777

£90,000

£16,541

£21,000

£4,459

£100,000

£20,233

£25,500

£5,267

£110,000

£22,733

£30,000

£7,267

£120,000

£25,233

£33,375

£8,142

£130,000

£27,986

£36,625

£8,639

£140,000

£31,041

£39,931

£8,890

£150,000

£34,097

£43,741

£9,644

£200,000

£49,374

£62,791

£13,417

 

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