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Individuals with an address in Wales will be receiving letters this week from the Tax Office about their Welsh residence status. This will affect their potential liability from next year to pay Welsh rates of income tax on a band of their income. Welsh taxpayer status will apply for a whole tax year (you can't be a Welsh taxpayer for part of a year).
The following note sets out some further background information to help you decide whether you are correctly regarded as a Welsh taxpayer, and what are the implications of this.
How is Welsh residence determined?
There are a number of tests to determine Welsh residence status. If, in the course of a tax year, an individual is UK resident for tax purposes, they will be a Welsh taxpayer for that tax year if they satisfy any of three tests:
• They are a Welsh parliamentarian
• They have a "close connection" to Wales through either:
- Having only a single "place of residence", which is in Wales; or
- Where they have more than one "place of residence", having their "main place of residence" in Wales for at least as much of the tax year as it has been in each other part of the UK
• Where no "close connection" to Wales or any other part of the UK exists (either through it not being possible to identify any place of residence, or a main residence) - through day counting.
In the vast majority of cases the key aspect of the test for Welsh taxpayer status rests on establishing an individual's "place of residence". This term is not defined by the legislation so must be given its ordinary meaning as the dwelling in which that person habitually lives as his or her home. As such, according to guidance on the HMRC website, it should be regarded as having similarities to the concept of "home" within the UK Statutory Residence Test.
What if I have more than one home?
The guidance continues to explain that where an individual has two or more "places of residence" in different parts of the UK in a tax year, Welsh taxpayer status will depend on whether a "close connection" with Wales or with another part of the UK exists. Central to that test is establishing an individual's "main place of residence".
A "main place of residence" is not necessarily the residence where the individual spends the majority of their time, although it commonly might be. A "main place of residence" is the "place of residence" with which the individual can be said to have the greatest degree of connection.
Whether a place constitutes a "main place of residence" is a matter of fact and all of the facts and circumstances of the particular case must be considered. The HMRC guidance states specifically that an individual's election of ‘main residence' for Capital Gains Tax (CGT) purposes will not determine ‘main place of residence' for Welsh taxpayer status purposes.
The following factors may be useful in establishing whether a place constitutes a "main place of residence" for a given tax year, but the relevance of each point will vary from individual to individual.
• If the individual is married, in a civil partnership or a long-term relationship, where does the family spend its time?
• If the individual has children, where do they go to school?
• The location of social, non-work activity e.g. club membership and participation, hobbies etc.
• How is each residence furnished?
• Where are the majority of the individual's possessions kept?
• Where is the individual registered with a doctor, dentist and optician?
• Which address is used for correspondence, for example from banks and building societies, credit cards?
• At which address is the individual's car registered and insured?
• Which address is the main residence for council tax?
• At which residence is the individual registered to vote?
Further guidance on Welsh residence may be found on the HMRC website at
Implications of Welsh income tax
From 6 April 2019, some of the income tax paid by people living in Wales will directly fund Welsh public services.
If you live in Wales, HMRC will continue to collect your income tax as usual. However, for the first time, a proportion of that income tax will be transferred straight to the Welsh Government, to be spent on public services in Wales.
This is a change from the current system, where all income tax from Wales is paid to the UK government to fund spending across the UK.
The process for setting Welsh rates of income tax
From April 2019, the UK government will reduce each of the 3 rates of income tax - basic, higher and additional rate - paid by Welsh taxpayers by 10p. Each year, the Welsh Government will then decide the 3 Welsh rates of income tax, which will be added to the reduced UK rates. The combination of reduced UK rates plus the Welsh rates will determine the overall rate of income tax paid by Welsh taxpayers.
The Welsh Government proposes to set the first Welsh rates of income tax at 10p: this means the rates of income tax paid by Welsh taxpayers will continue to be the same as those paid by English and Northern Irish taxpayers.
Administration of Welsh income tax from April 2019
The tax at Welsh rates will be administered by HMRC as part of the UK income tax system, so there will be no difference in reporting procedures for individuals, either through existing PAYE or self-assessment systems.Employees who are Welsh taxpayers will receive a tax code prefixed by a "C". Tax codes will be issued as part of the annual coding routines to employers so the correct rate of income tax can be deducted, based on the individual's taxpayer status. Employers/pension providers will not be expected to judge/decide an individual's Welsh taxpayer status.
What will stay the same?
Income tax will still be collected by HMRC for Welsh taxpayers.
The personal allowance - the amount people can earn before they start paying tax - will continue to be the same as it is in England, Northern Ireland Scotland.
The point at which people start to pay the higher and additional rates of income tax will stay the same as in England and Northern Ireland.
Responsibility for taxing income from savings and dividends will remain with the UK government.
For further information, please contact your usual adviser at Watts Gregory.