Double taxation of income from the United Kingdom

The lives of Poles in the United Kingdom changed significantly when the transition period following the approval of the UK’s exit from the European Union came to an end. Many regulations, particularly those concerning taxes and how they are settled, were changed, taking advantage of the opportunity presented by Brexit. The law containing the method for avoiding double taxation in Polish-British relations underwent a major transformation. In practice, this means that Polish tax residents who earn money in the United Kingdom have to pay tax twice. Who do these changes affect? How much tax should you pay? Let’s find out.

What is the abolition relief?

The change of the double taxation avoidance method in relations between Poland and the United Kingdom from the exemption with progression method to the proportional deduction method turned the tax reality of Poles earning in pounds upside down. The protective barrier that was meant to shield taxpayers from excessive burdens to the tax office was the so-called abolition relief.

Currently, taxpayers who are Polish tax residents and earn income in the United Kingdom are required to declare their income in Poland and state the amount and type of income tax paid abroad. Due to the tax treaty signed between a given country and Poland, income taxes can be settled using one of two methods: proportional deduction or exemption with progression.

The practical application of these methods can be understood as follows: under exemption with progression, foreign income is not subject to taxation in Poland. Under the proportional deduction method, on the other hand, income earned abroad is also subject to taxation in Poland.

This means that tax must be calculated at Polish rates and the difference between the result and the tax paid in the United Kingdom must be paid into the state budget.

To even out the difference between the two methods, the abolition relief was introduced, whose purpose was to protect against double taxation and thanks to which, in practice, companies and private individuals did not have to pay tax in both the UK and Poland. Now, however, the Polish government has decided to limit this relief and, in practice, abandon it. For 2022, the relief amounts to 1,360 PLN per year and covers income not exceeding 8,000 PLN, which means it does not help anyone who works in the UK for more than a few weeks a year.

Who does double taxation affect?

The new Income Tax rules apply to people who hold Polish tax residency. A Polish tax resident is a person who:

• has their centre of vital interests in Poland, which is understood as having a spouse, children, close family, property, investments and similar personal or economic interests in the country,

• spends more than 183 days in Poland during the tax year.

People who live permanently in the United Kingdom with their loved ones and spend most of the tax year there are not tax residents in Poland, but in the UK. Double taxation in Poland does not apply to them.

The impact of Brexit on Polish Income Tax regulations

The UK leaving the EU has no direct impact on the mechanism for settling Income Tax under international rules. It must be stressed, however, that Brexit translates into specific tax consequences for part of the Polish PIT Act regulations.

From 1 January 2021, the following regulations no longer apply:

• spending the housing tax relief on one’s own housing purposes in another country,

• joint tax returns for spouses and single parents living in another EU country,

• exemption from tax on winnings from gambling organised within the EU,

• deduction of health and social insurance contributions paid in another EU country,

• the seafarers’ exemption.

The consequences of the change in taxation methods for Ltd companies?

A Ltd company in the United Kingdom will not suffer directly from the abolition of the relief and double taxation. Its director, however, will feel this change acutely if they remain a Polish tax resident.

The situation is not helped by the fact that the tax-free allowance in the United Kingdom is almost eight times higher in this case, standing at around 60,000 PLN (depending on the pound’s exchange rate). Poles who do not exceed this amount will not pay tax in the UK, but will be forced to hand over 17% of their income in Poland.

Fortunately, all the other taxation rules for a Ltd company remain the same. The director’s salary will still fall within the allowances free of insurance contributions. The company will still be able to pay business expenses, finance the director’s business travel and reimburse mileage.

Double taxation - a practical example

Simplifying the situation, if Poles in the UK earn the equivalent of more than £12,500 (around 62,500 PLN), they will pay 20 per cent of the local Income Tax (the higher 40% tax band only applies to income above £50,000, i.e. around 250,000 PLN).

In Poland, income above the tax-free allowance (30,000 PLN) is taxed at a rate of 17%. The second tax band, taxed at 32%, starts once income exceeds 85,529 PLN (around £17,000). Above this threshold, Poles earning income in the United Kingdom will pay a further 17 per cent of tax in Poland to make up the difference between the English tax and the Polish 32 per cent rate, in line with the rules for the second tax band.

What does the situation look like for owners of Ltd companies in England who are Polish tax residents? Let’s assume that a person holding the position of director of a Ltd company, whose income comes from professional activity in the United Kingdom, earned an average of around 60,000 PLN in 2020. Under the old settlement rules, it would have been enough to pay insurance contributions on this salary - Employee NIC and Employer NIC - of around 4,500 PLN. However, with the new rules in force (from 2021), this year they can expect the same contribution cost plus around 8,000 PLN of income tax in Poland. The difference is significant and will hit the pockets of Poles working professionally in the UK who remain tax residents in their home country.

Why was double taxation introduced?

Double taxation was certainly not introduced to make filing taxes in the UK easier. The reasons for changing the method of settling personal income will translate into higher tax revenues for the state budget in Poland.

Some people earning in pounds will try to move their tax residency to the UK and establish their centre of vital interests there. We can also expect some economic migrants to return from the United Kingdom to Poland, given that working abroad has become less profitable. Unfortunately, double taxation may also lead to an increase in the number of people working cash in hand to avoid the higher taxes. Another consequence will be the penalties and interest imposed by the Polish tax office on those who fail to meet their obligation to declare foreign income and pay the tax due in Poland when filing for 2021.

How to prepare for double taxation?

It is worth stressing that avoiding higher tax burdens is not easy. We do, however, recommend reviewing and assessing the currently available models for paying out profits and forms of employment in the UK, as it may turn out that in a given situation other arrangements will be optimal and help reduce or avoid double taxation.

In particular, you should look for solutions that can be used domestically. Of course, every structure must be justified primarily in a business context, but certain changes to how liabilities are settled may actually fit existing relationships and business assumptions even better. For those affected by double taxation, we recommend seeking advice from accountancy practices specialising in settling income earned abroad.

Double taxation of income Poland - England - summary

The rules on double taxation of income earned by Poles in the United Kingdom have become even more complicated with the UK’s exit from the EU and the change in the settlement method. They are currently unfavourable for Polish tax residents.

It can therefore be expected that the lion’s share of the Polish community, especially those who have led their professional lives in the United Kingdom for many years, will want to change their tax residency. Unfortunately, this procedure is very complicated and made difficult by the local tax authorities.