What does the abolition of Poland's abolition relief mean for companies in England?

The reality for Poles working and running companies in the United Kingdom changed significantly when the method used to avoid double taxation in Polish-British relations was changed.

The exemption with progression method was abandoned in favour of the proportional deduction method.

In practice this meant higher taxes for companies in England, which could however count on partial protection of their interests thanks to the so-called abolition relief. This relief protected the Polish community abroad from having to top up their tax at home. Now, however, the Polish government has decided to cap this relief - and in practice to scrap it. The abolition relief - what does this mean for companies in the UK? Let’s find out.

What is the abolition relief?

Any discussion of the abolition of the abolition relief should start with an explanation of what this tax instrument means. Currently, taxpayers who are Polish tax residents earning income in the United Kingdom are required to declare their income in Poland, along with the amount and type of tax paid abroad. Under the tax treaty signed between a given country and Poland, income tax can be settled using one of two methods: proportional deduction (currently applied to the UK) or exemption with progression.

The methods work as follows: under exemption with progression, foreign income is not taxed in Poland. Under the proportional deduction method, income earned abroad is also subject to tax in Poland. This means the tax has to be calculated at Polish rates, and the difference between that result and the tax paid abroad has to be paid into the state budget.

To even out the difference between the two methods, the abolition relief was introduced. Its purpose is to protect against double taxation, and thanks to it, in practice, companies and private individuals did not have to pay tax both in the UK and in Poland.

The abolition relief - an example before and after the limit change

The best way to understand how the mechanism works and the effects of capping the limit is to look at how the abolition relief operates in this situation, step by step. The limit currently stands at 8,000 zloty a year, which means the maximum tax deduction comes to 1,360 zloty. Anyone earning a regular income in the United Kingdom can therefore consider the relief effectively abolished, since the consequences of keeping it will be negligible.

Let’s assume that someone working as a director of a Ltd company, whose income comes from their professional activity in the UK, earned on average around 60,000 zloty in 2020. Under the old settlement rules, it would have been enough to pay insurance contributions on that salary - Employee NIC and Employer NIC - of around 4,500 zloty. However, with the new rules coming in from 2021, this year they can expect the same contribution costs plus around 8,000 zloty of income tax in Poland. The difference is considerable and will hit the pockets of Poles working professionally in the United Kingdom while remaining tax residents of their home country.

It can therefore be expected that a large share of the Polish community, particularly those who have spent many years of their professional lives in the UK, will want to change their tax residence. Unfortunately, this procedure is very complicated and made harder by the local tax authorities, and the whole situation is not helped by Brexit, which is likely to change the conditions for applying for residence.

The effects of the abolition relief limit on directors of Ltd companies in the United Kingdom

A UK Ltd company will not suffer directly from the abolition of the abolition relief. Its director, however, will feel the change clearly 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 in this case almost eight times higher, standing at around 60,000 zloty (depending on the pound’s exchange rate). Poles earning below this amount will pay no tax in the UK, but will be forced to hand over 18% 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 thresholds free of insurance contributions. The company will still be able to cover business expenses, finance the director’s business travel, and reimburse mileage.

Summary

Capping, and in practice abolishing, the abolition relief is a direct blow to the wallets of Poles working hard and running honest businesses in the United Kingdom. Many people object to this move, but it is doubtful that the Polish government will back down from its decision.