The impact of the new Foreign Income Gains (FIG) regime on the Overseas Workday Relief (OWR)

The introduction of the Foreign Income and Gains (FIG) regime in the UK officialised during the Autumn Budget and set to take effect from April 6, 2025, brings significant changes to the taxation of non-domiciled individuals, particularly in relation to Overseas Workday Relief (OWR). This new system will have important implications for those claiming OWR status.

Overview of the FIG Regime

The FIG regime will replace the current remittance basis system for non-domiciled individuals. It offers a simplified approach to taxing foreign income and gains for qualifying new residents - those who become UK tax resident after a period of at least 10 consecutive tax years of non-residence. The new system is broadly what the Sunak government had proposed last year and which has now been adopted by the Labour government.

Impact on Overseas Workday Relief

Extended Eligibility Period

Under the new FIG regime, the OWR – which allows someone who has just arrived in the UK to only be taxed on the income that corresponds to work done in the UK – will continue to be available, but with some notable changes:

1. Duration: OWR can now be claimed for up to four tax years, an improvement from the current three-year limit.
2. Eligibility: From April 6, 2025, eligibility for OWR will be based on an employee's residence status and whether they opt to use the new 4-year FIG regime.

Simplified Claiming Process

The FIG regime introduces significant simplifications to the OWR claiming process:

1. Remittance Requirement Removed: There will no longer be a requirement to keep earnings from overseas duties outside the UK. Relief will be provided regardless of whether these earnings are brought into the UK.
2. Bank Account Structuring: The need to structure overseas bank accounts prior to claiming OWR for the first time has been eliminated.

Cap on Relief

While the FIG regime extends the availability of OWR, it also introduces a cap on the amount of relief available. The amount of OWR available in each qualifying tax year will be limited to the lower of 30% of the qualifying employment income or £300,000.

Transitional Rules

For employees currently claiming OWR or those who become UK resident before April 6, 2025, there are important transitional rules to consider:

1. Current OWR Claimants: Employees who are eligible for OWR in 2023-24 or 2024-25 for their first year since returning to the UK should still be able to claim OWR for the full three years, even if they don't qualify for FIG. They will not be subject to the financial limits. If they qualify for FIG, they can claim an extra year.
2. New Residents from 2025-26: Those re-entering the UK from 2025-26 will not be able to claim OWR if they are not eligible for the FIG regime.
3. Partial FIG Eligibility: Individuals who, on April 6, 2025, have been UK tax resident for less than four tax years (following 10 consecutive years of non-residence) will be able to utilise the FIG regime, including OWR, for the remainder of the four-year period.
4. Utilisation of the TRF reduced rates: It will be possible to designate untaxed OWR income under the Temporary Repatriation Facility (TRF) and remit this income to the UK at the TRF reduced rates (see our other article on the subject).

Implications for Employees and Employers

1. Tax Planning: The extended OWR period and simplified rules may make the UK more attractive for international assignments.
2. Reporting Requirements: Employees claiming OWR under the FIG regime will need to quantify and report their foreign income and gains within their self-assessment tax returns.
3. Loss of Allowances: Claiming OWR requires opting for the FIG regime and therefore results in the loss of the income tax personal allowance and CGT annual exempt amount for the tax year in question.
4. National Insurance Contributions: As with the current system, OWR will not provide relief from National Insurance contributions.

Conclusion

The introduction of the FIG regime brings both opportunities and challenges for those eligible for OWR. While it extends the period of eligibility and simplifies the claiming process, it also introduces caps on relief that did not exist before. Employees and employers should carefully consider these changes when planning international assignments and structuring compensation packages. As the implementation date approaches, it will be crucial to stay informed about any further guidance or modifications to these rules.