The Australian tax system is surprisingly different to the UK tax system.
This makes a simple comparison between the two challenging.
Determining, from an individual taxpayer perspective, which country has higher taxes, isn’t straightforward. Both countries apply progressive rates of tax, as well as a range of potential adjustments and offsets.
Income taxes are lower in the UK due to the progressive rates of tax applying at higher levels of taxable income, but as the UK also has much higher medical contribution taxes than Australia, the UK taxpayer may end up with a higher overall tax burden.
In Australia, income tax is assessed on the taxable income of a taxpayer which is assessable income less allowable deductions while in the UK specific “allowances” may reduce the different types of income before that income is taxed.
Australian resident taxpayers have a standard tax free threshold, regardless of the type of income or income level, while UK taxpayers have access to different allowances (tax free amounts) that can vary based on income level and the type of income they are earning.
The following table highlights some fundamental differences between the two tax systems:
|UK Tax System
|Progressive rates of tax applied to taxable income.
|Progressive rates of tax applied to taxable income- but different rates apply to capital gains and different types of income have allowances deducted before taxes are assessed.
|Tax Free component
|Standard tax free threshold applies to all taxpayers on the first $18,200 of their income, regardless of the source of this income.
|A personal allowance is deducted from the taxpayer’s income before tax is assessed. This allowance is increased for married taxpayers and blind taxpayers, but is reduced for high income earners. Additional allowances are separately applied to different types of income, such as capital gains and investment income.
|Flat rate of medicare levy applies to all taxpayers unless they are exempt.
|Variable rate of health insurance taxes applies, depending on income type and amount of income. This is paid by both the employer and the employee.
|Personal benefits provided by an employer
|Personal benefits are taxed to the employer as fringe benefits. There are a range of concessions and exemptions that may be applied.
|Personal benefits are taxed to the employee, at the value of the benefit. There are some benefits that are exempt.
|An individual who resides in Australia, or an Australian citizen who doesn’t setup a permanent home outside of Australia
|Physically present in the UK for a specified period of time during the tax year
|Individual Taxpayer’s Tax year
|1 July to 30 June
|6 April to 5 April
|PAYGW (Pay As You Go Withholding) means employers withhold some of an employee’s wage to be paid to the tax office. This helps cover the individual taxpayer’s annual tax assessment. Any excess PAYGW becomes a tax refund.
|PAYE (Pay As You Earn) is similar to Australia’s PAYGW system. When too much PAYE has been withheld then an individual can apply for a tax rebate (tax refund) for the excess.
|Who is Required to Lodge a Tax Return
|All Australian residents and any non-residents with any Australian sourced income are required to lodge a tax return (some exclusions apply for residents who earn under the tax free threshold and have no PAYGW to claim, and for non-residents who only earn certain types of income, such as interest income covered by PAYGW under the DTA).
|Most employees’ taxes are covered by their company’s payroll system, meaning they don’t need to lodge a tax return. Tax returns may need to be lodged where:
– Income other than employment income is earned (above the allowance)
– Foreign income was earned
– You are a higher rate taxpayer (annual income over 100,000 pounds)
– You need to claim a tax rebate for excess PAYE
Australian residency is generally dependent on whether an individual actually resides in Australia, however Australian citizens may continue to be Australian tax residents while temporarily residing overseas. There are a number of tests that can be used to help determine residency.
UK residency is based on the number of days an individual is physically present in the UK during the tax year. For more complex situations that do not meet the automatic test, other factors may apply.
Both Australia and the UK apply progressive rates of tax ranging from 0% to 45%.
However, while Australia has a standard initial tax free threshold for all taxpayers, the UK utilises a system of allowances that taxpayers deduct from their income before tax is assessed. The amount of allowance changes depending on a range of factors, and different allowances are applied for different types of income, such as employment income, investment income and capital gains.
Australians pay a flat rate of medicare (2%), unless they are exempt. High tax payers pay an additional medicare levy surcharge of up to 1.5%, unless they pay for private hospital health insurance.
In the UK both the employer and the employee are required to pay a contribution towards national health insurance, at rates varying from 0% up to 13.8%.
Both Australian and the UK impose a capital gains tax.
In Australia capital gains are simply added to an individual taxpayer’s assessable income and taxed at the marginal rate at which the income falls. Assets that have been owned for more than 1 year can be discounted by 50% before being included as assessable income. Other exemptions may also be applied to reduce or rollover capital gains.
The UK tax system gives taxpayers an annual allowance for capital gains. Any capital gains up to the allowance each year are tax free. Like Australia, there are also other exemptions that may be applied to reduce or rollover certain capital gains.
In the UK, capital gains are taxed at a different rate to other income, and residential property is taxed at different rates to other assets. Higher/additional rate taxpayers pay 28% on residential property and 20% on other chargeable assets. Basic rate taxpayers will pay either 10% or 20% on capital gains, unless it is on residential property, in which case the rate is either 18% or 28% (depending on the size of the gain and the taxable income of the taxpayer.
Both countries have an exemption for the sale of an individuals’ main residence.
Australia does not have an inheritance tax.
Neither inheritances nor deceased estates attract any specific form of tax. Any property or investments that are inherited will attract taxes in the same way as any property or investments that were acquired personally and subsequently sold. (There are some provisions for inheriting a main residence that allow the main residence exemption to be carried over).
The UK has a standard inheritance tax rate of 40% above the tax free threshold (the standard tax free threshold is currently 325,000 pounds).
Where everything is left to a spouse, civil partner, charity or community amateur sports club, there is normally no inheritance tax to pay. When your home is given to your children (including adopted, step, and foster children), the threshold can increase to 500,000 pounds.
If an individual who is married (or in a civil partnership) passes away with an estate that is worth less than their threshold, then the unused portion of their threshold can be added to their partner’s threshold for when they die.
The inheritance tax may be reduced to 36% on certain assets if at least 10% of the net value of the estate is left to charity in the will. There are some other reliefs and exemptions to help reduce inheritance taxes on gifts donated prior to death, business relief, and agricultural relief.
Australian and UK Tax Systems
Each tax system has a range of complexities that are unique to the respective country.
In some ways the basic Australian tax return is more straightforward for the individual taxpayer.
On the other hand, the UK system’s use of deductible allowances for different types of income, provides for a range of tax planning avenues that are not available to Australians.
Since the tax systems between each country are so different, and residency changes can trigger complex tax issues, it is important to seek expert advice in both countries when making a move between Australia and the UK.