The UK and Crown Dependencies: Understanding the tax difference The UK and Crown Dependencies: Understanding the tax difference

The UK and Crown Dependencies: Understanding the tax difference
16 Nov 2017

Depending on where employers are located in the British Isles, they could be subject to quite different fiscal rules for both income tax and social insurance. Nowhere is this more true than in the Crown Dependencies of the Isle of Man and the Bailiwicks of Guernsey and Jersey, which are To explain: England, Northern Ireland and Wales have a common taxation policy and are affectionately referred to by Her Majesty’s Revenue and Customs as ‘the rest of the UK’. Scotland, on the other hand, has its own tax-raising capabilities and Wales is expected to follow suit in future. National Insurance contributions (NICs) are the same across the UK though.

The Crown Dependencies of the Isle of Man and the Bailiwicks of Guernsey and Jersey, on the other hand, have their own tax and social insurance laws, which are detailed below.

The UK operates the ancient New Year’s Day of 6 April as the beginning of its tax year as does The Isle of Man. But the Channel Islands of Guernsey and Jersey have a January 1 start for both tax and social insurance (SI).

Here is a table to show how tax and SI rates differ across the British Isles:

UK v Crown Dependencies - Comparative tax rates at a glance

 

Standard tax

rate

Higher

tax rate

Additional

tax rate

Primary

NICs (EEs)

Secondary

NICs (ERs)

Isle of Man

10%

20%

N/A

11%

12.8%

Guernsey

20%

20%

N/A

6.6%

6.6%

Jersey

N/A 21% being

the default rate

 

 N/A

N/A

6%

6.5%

Scotland

20%

40%

45%

12%

13.8%

Rest of UK

20%

40%

45%

12%

13.8%

 

England, Wales and Northern Ireland

These UK nations all operate Pay-As-You-Earn (PAYE) on a uniform tax and NICs basis. When the Chancellor of the Exchequer speaks in Westminster, he sets the rates for all of them.

Scotland

The devolved Scottish Parliament now has an obligation to set a Scottish Rate of Income Tax. The UK parliament sets a UK-wide rate, which is reduced by 10 percentage points for Scottish resident taxpayers. The Scottish Parliament then sets its own rates of income tax and its own tax bands.

Isle of Man

The Isle of Man has outsourced the administration of NICs to the UK government via its NICs Office in Newcastle-upon- Tyne in England. It does not apply the additional 1% contribution to the National Health Service that is required elsewhere though.

The Isle of Man’s tax year starts at the same as the UK’s, but it does not operate PAYE income tax. Instead it uses an Income Tax Instalment Payment (ITIP) system. Employers are obliged to deduct the requisite sum each payday and these sums are credited to the appropriate employee, before being set off against the income tax payable on the assessment provided.

Tax codes are issued using a T6 form, which indicate the Free Pay and Tax Tables that should be applied, always on a non-cumulative basis. Tax code formats, which are very similar to the rest of the UK, comprise:

• NT = No tax;
• SB = Tax to be deducted at 10%;
• HR = Tax to be deducted at the higher rate of 20%;
• 1-4 numeric, followed by suffix F, L, M, S or W;
• 1-4 numeric, followed by suffix N (with all tax applied at the higher 20% rate).

You can work out what the amount of free pay is by using this calculation:

((Tax code numeric x 10) + 9)/Number of periods in the tax year.

NICs are applied in a very similar fashion to the rest of the UK mainland.

Guernsey

Guernsey’s fiscal year starts on 1 January and it operates income tax using an Employees’ Tax Instalment (ETI) scheme.

Two sets of tax codes are issued via a coding notice, one on a weekly basis and the other on a monthly one. In the absence of a valid coding notice, the emergency code ‘0’ is used. At the end of each tax year, unless a new coding notice has been issued, all tax codes revert to ‘0’.

In special circumstances, the Guernsey authorities issue ‘Direction Notices’, which alter or override the standard ETI codes and calculations. For example:

• A = Cease tax deductions but continue to record gross pay;
• B = Refund this quarter’s tax;
• C = Refund an amount from the tax you have deducted this quarter, and so on with the additional instruction types D, E, F & G. Just to complicate matters further, a Direction Notice may use combinations of letters such as A and B or A and C.

Once a staff member leaves their employer, any additional payment is always taxed at ETI Code ‘0’, and any Direction Notice should be ignored.

Guernsey does not operate NICs. Instead it has SI, to which employees and employers must contribute at a rate of 6.6% when earnings are between the Lower Earnings Limit (LEL) and the highest level of earnings referred to as the Upper Earnings Limit.

Deductions are made at either the full percentage rate (for those under pension age) or as employer-only contributions (for employees who have reached pension age) depending on their registration card.

“Guernsey’s fiscal year starts on 1 January and it operates income tax using an Employees’ Tax Instalment scheme.”

Jersey

Prior to 1 January 2006, employers did not collect income tax. The Jersey authorities were clear that their new ‘Income Tax Instalment Scheme’ (ITIS) was not PAYE-based as they said that a ‘PAYE system is very complex’. ITIS is meant to make it simple for employers to deduct tax from earnings.

Employers are notified of an effective deduction rate that must be applied as a whole number percentage to any employment-related payments. If an employee fails to register with the Income Tax Office, employers are expected to deduct ITIS as an amount withheld at a default rate of 21% each payday.

SI Earnings Related Contributions (ERC) are calculated on a monthly basis (even for employees who are paid weekly) and the payments for that month are accumulated. There are two types of contribution:

• Primary Class One contributions from employees based on a 6% payment up to a given monthly earnings ceiling;
• Secondary Class One contributions from employers based on a 6.5% payment up to a monthly earnings ceiling, with an additional 2% payment made on the earnings above.

Instead of NI letters, Insurance Registration cards are issued to employees. These comprise either:

• FR1 = Full Liability; or
• XR1 = Exempt Liability – Secondary contributions only.

Conclusion

Although the Crown Dependencies are generally considered to be part of the UK, it is important to bear in mind that their tax and SI laws are actually significantly different.

 

Simon Parsons has contributed greatly to SD Worx’s payroll expertise since 1984. Besides being influential in the development of the company’s payroll services, he is also involved in a number of HMRC and government consultative groups and committees.

A fellow of the Chartered Institute of Payroll Professionals and one of the original Masters of Science in Payroll Management, Simon is a regular author and speaker on payroll matters. He is also chair of both IReeN, the electronic exchange with government user network, and the BCS’ (the Chartered Institute for IT) Payroll Group.

Depending on where employers are located in the British Isles, they could be subject to quite different fiscal rules for both income tax and social insurance. Nowhere is this more true than in the Crown Dependencies of the Isle of Man and the Bailiwicks of Guernsey and Jersey, which are To explain: England, Northern Ireland and Wales have a common taxation policy and are affectionately referred to by Her Majesty’s Revenue and Customs as ‘the rest of the UK’. Scotland, on the other hand, has its own tax-raising capabilities and Wales is expected to follow suit in future. National Insurance contributions (NICs) are the same across the UK though.

The Crown Dependencies of the Isle of Man and the Bailiwicks of Guernsey and Jersey, on the other hand, have their own tax and social insurance laws, which are detailed below.

The UK operates the ancient New Year’s Day of 6 April as the beginning of its tax year as does The Isle of Man. But the Channel Islands of Guernsey and Jersey have a January 1 start for both tax and social insurance (SI).

Here is a table to show how tax and SI rates differ across the British Isles:

UK v Crown Dependencies - Comparative tax rates at a glance

 

Standard tax

rate

Higher

tax rate

Additional

tax rate

Primary

NICs (EEs)

Secondary

NICs (ERs)

Isle of Man

10%

20%

N/A

11%

12.8%

Guernsey

20%

20%

N/A

6.6%

6.6%

Jersey

N/A 21% being

the default rate

 

 N/A

N/A

6%

6.5%

Scotland

20%

40%

45%

12%

13.8%

Rest of UK

20%

40%

45%

12%

13.8%

 

England, Wales and Northern Ireland

These UK nations all operate Pay-As-You-Earn (PAYE) on a uniform tax and NICs basis. When the Chancellor of the Exchequer speaks in Westminster, he sets the rates for all of them.

Scotland

The devolved Scottish Parliament now has an obligation to set a Scottish Rate of Income Tax. The UK parliament sets a UK-wide rate, which is reduced by 10 percentage points for Scottish resident taxpayers. The Scottish Parliament then sets its own rates of income tax and its own tax bands.

Isle of Man

The Isle of Man has outsourced the administration of NICs to the UK government via its NICs Office in Newcastle-upon- Tyne in England. It does not apply the additional 1% contribution to the National Health Service that is required elsewhere though.

The Isle of Man’s tax year starts at the same as the UK’s, but it does not operate PAYE income tax. Instead it uses an Income Tax Instalment Payment (ITIP) system. Employers are obliged to deduct the requisite sum each payday and these sums are credited to the appropriate employee, before being set off against the income tax payable on the assessment provided.

Tax codes are issued using a T6 form, which indicate the Free Pay and Tax Tables that should be applied, always on a non-cumulative basis. Tax code formats, which are very similar to the rest of the UK, comprise:

• NT = No tax;
• SB = Tax to be deducted at 10%;
• HR = Tax to be deducted at the higher rate of 20%;
• 1-4 numeric, followed by suffix F, L, M, S or W;
• 1-4 numeric, followed by suffix N (with all tax applied at the higher 20% rate).

You can work out what the amount of free pay is by using this calculation:

((Tax code numeric x 10) + 9)/Number of periods in the tax year.

NICs are applied in a very similar fashion to the rest of the UK mainland.

Guernsey

Guernsey’s fiscal year starts on 1 January and it operates income tax using an Employees’ Tax Instalment (ETI) scheme.

Two sets of tax codes are issued via a coding notice, one on a weekly basis and the other on a monthly one. In the absence of a valid coding notice, the emergency code ‘0’ is used. At the end of each tax year, unless a new coding notice has been issued, all tax codes revert to ‘0’.

In special circumstances, the Guernsey authorities issue ‘Direction Notices’, which alter or override the standard ETI codes and calculations. For example:

• A = Cease tax deductions but continue to record gross pay;
• B = Refund this quarter’s tax;
• C = Refund an amount from the tax you have deducted this quarter, and so on with the additional instruction types D, E, F & G. Just to complicate matters further, a Direction Notice may use combinations of letters such as A and B or A and C.

Once a staff member leaves their employer, any additional payment is always taxed at ETI Code ‘0’, and any Direction Notice should be ignored.

Guernsey does not operate NICs. Instead it has SI, to which employees and employers must contribute at a rate of 6.6% when earnings are between the Lower Earnings Limit (LEL) and the highest level of earnings referred to as the Upper Earnings Limit.

Deductions are made at either the full percentage rate (for those under pension age) or as employer-only contributions (for employees who have reached pension age) depending on their registration card.

“Guernsey’s fiscal year starts on 1 January and it operates income tax using an Employees’ Tax Instalment scheme.”

Jersey

Prior to 1 January 2006, employers did not collect income tax. The Jersey authorities were clear that their new ‘Income Tax Instalment Scheme’ (ITIS) was not PAYE-based as they said that a ‘PAYE system is very complex’. ITIS is meant to make it simple for employers to deduct tax from earnings.

Employers are notified of an effective deduction rate that must be applied as a whole number percentage to any employment-related payments. If an employee fails to register with the Income Tax Office, employers are expected to deduct ITIS as an amount withheld at a default rate of 21% each payday.

SI Earnings Related Contributions (ERC) are calculated on a monthly basis (even for employees who are paid weekly) and the payments for that month are accumulated. There are two types of contribution:

• Primary Class One contributions from employees based on a 6% payment up to a given monthly earnings ceiling;
• Secondary Class One contributions from employers based on a 6.5% payment up to a monthly earnings ceiling, with an additional 2% payment made on the earnings above.

Instead of NI letters, Insurance Registration cards are issued to employees. These comprise either:

• FR1 = Full Liability; or
• XR1 = Exempt Liability – Secondary contributions only.

Conclusion

Although the Crown Dependencies are generally considered to be part of the UK, it is important to bear in mind that their tax and SI laws are actually significantly different.

 

Simon Parsons has contributed greatly to SD Worx’s payroll expertise since 1984. Besides being influential in the development of the company’s payroll services, he is also involved in a number of HMRC and government consultative groups and committees.

A fellow of the Chartered Institute of Payroll Professionals and one of the original Masters of Science in Payroll Management, Simon is a regular author and speaker on payroll matters. He is also chair of both IReeN, the electronic exchange with government user network, and the BCS’ (the Chartered Institute for IT) Payroll Group.

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