Foreign Service Tax Relief
Have you received a redundancy payment from your UK employer?
Did you spend any of your time classified as not ordinarily resident for tax purposes or working abroad?
If you answered “yes” to both questions, then you may be able to claim tax relief on your termination payment through Foreign Service Relief or Foreign Service Exemption.
What does ‘Foreign Service Tax Relief’ mean?
Most people understandably think that this must only apply to employees of the Foreign Office, but it is nothing to do with this government department at all.
In taxation terms, the definition of Foreign Service Tax Relief differs, depending on which tax years you are referring to.
Am I eligible if I worked in the UK before April 5th 2013?
Up to, and including, the 2012-13 tax year, the arrangements are more inclusive. You are probably eligible for Foreign Service tax relief during this time if you were ‘ordinarily resident for tax purposes while working abroad, or if you were not ordinarily resident for tax purposes while working in the UK. Basically, if you paid income tax in the UK but worked in another country, or were not paying UK income tax (because you lived abroad) but were working here, you could be due Foreign Service Tax Relief.
Does Foreign Service Tax Relief apply to me if I worked in the UK after 5th April 2013?
From April 5th 2013, no period of employment in the UK can be classed as foreign service for any employee. Therefore no tax relief is available on the UK based portion of any termination payments after that date, regardless of your standing with the Tax Office.
Does my residency status affect my eligibility for Foreign Service Tax Relief?
No, These rules apply to all UK employees, regardless of their country of birth or residency.
What if I worked for different employers within the same business group?
If your employers are all under the same business group then this would be seen as one period of continuous employment.
What tax relief options are available?
You can either claim a Foreign Service Exemption, which means your redundancy payment is entirely tax free; or Foreign Service Relief, which is proportional tax relief on part of the termination payout.
Can I claim for Foreign Service Exemption?
In order to receive your redundancy payment tax free, you only need to meet one of the following 3 eligibility criteria:
- Your Foreign Service totals at least 75% of your overall employment period, this can be for any length of time.
- Your Foreign Service period was for a continuous 10 year period at the point of termination and you have worked for that employer for 10 years or more.
- Your employment was for at least 20 years and half of that period was in Foreign Service. This can be any 10 years; it does not have to be the last 10, or a consecutive 10 years.
Does Foreign Service Relief apply to me?
If you do not meet any of the above criteria, you may still be able to secure a partial tax exemption. The taxable amount of your redundancy payment is calculated using the following formula:
Total termination payment X length foreign service ÷ length total service
Example:
Total number of years worked = 6
Years worked abroad = 3
Termination payment = £100,000
Exemption = £30,000 (no tax to pay)
Leaving = £70,000 (£100,000 – £30,000)
Foreign Service Relief = £35,000 (£70,000 x 3 ÷ 6)
Total Taxable = £35,000 (£70,000 – £35,000)
What should I do if I think I can claim Foreign Service Exemption or Relief?
As with all things tax related, each situation is resolved on a case by case basis there is no one answer that can be applied to everyone. Other factors, like double taxation treaties, further complicate your calculations and it can be wise to seek expert counsel from an accountancy expert.
