NHR - what constitutes paying tax: National Insurance vs Income Tax – Red Tape / Business – Expats Portugal Community Forum
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NHR - what constitutes paying tax: National Insurance vs Income Tax

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(@christiaan)
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I'm registered with the NHR scheme and earn income from my company based in the UK as salary and dividends. I didn't pay any tax in the UK last year and therefore received an unexpected tax bill in Portugal, because I didn't understand that I actually need to pay some tax in the UK or PT.

My question is: does this need to be Income Tax, or is it enough to pay only National Insurance in the UK to be considered to be paying tax in the UK?

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(@x-camone)
Joined: 12 years ago

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Posted by: @christiaan

I'm registered with the NHR scheme and earn income from my company based in the UK as salary and dividends. I didn't pay any tax in the UK last year and therefore received an unexpected tax bill in Portugal, because I didn't understand that I actually need to pay some tax in the UK or PT.

My highlights.

This doesn't sound quite right to me. The waiving of PT tax occurs on income which qualifies because it may be taxed in the source country, as opposed to its being dependent on tax actually having been paid there. So NHR beneficiaries can actually receive all of their income free of tax in either country, although very possibly not if some of that income is salary.

My guess, though, is that unless your company is a "proper business" (for want of a better or more accurate term), eg with physical premises in the UK and / or other shareholders, it may be deemed that as you manage and control it from Portugal and do all of the work from here, the income isn't foreign-sourced and is therefore subject to tax at normal PT rates. If that is the case, I don't think volunteering to pay some UK tax on the income is going to change the attitude of the PT tax authority to it.

Apologies if I'm being too presumptuous in any of the above.

 

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(@christiaan)
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Posted by: @x-camone

This doesn't sound quite right to me. The waiving of PT tax occurs on income which qualifies because it may be taxed in the source country, as opposed to its being dependent on tax actually having been paid there. So NHR beneficiaries can actually receive all of their income free of tax in either country, although very possibly not if some of that income is salary.

My guess, though, is that unless your company is a "proper business" (for want of a better or more accurate term), eg with physical premises in the UK and / or other shareholders, it may be deemed that as you manage and control it from Portugal and do all of the work from here, the income isn't foreign-sourced and is therefore subject to tax at normal PT rates. If that is the case, I don't think volunteering to pay some UK tax on the income is going to change the attitude of the PT tax authority to it.

Apologies if I'm being too presumptuous in any of the above.

Yes, it's a proper business with UK address. I have a business partner based there and he is Director. We're both shareholders.

We paid ourselves sufficient salary to count as a qualifying year for NI state pension + the rest in dividends.

But then my Portuguese accountant who submitted my Portuguese tax return for me told me (very belatedly) that I need to pay tax in Portugal

This was the wording:

Are you going to pay any taxes in the UK regarding the period of 20-21 or 21-22? As you didn’t withhold any taxes, you will need to pay them in Portugal. If so, how much will that be?

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(@x-camone)
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@christiaan OK - having just skimmed through the actual law, I can see that you were correct in your opening post. Earned income from abroad can only be exempt from PT tax under NHR if taxed in the source country. Apologies for my adding to the confusion.

I'm still not clear on the matter of whether it's completely optional for you as to where you pay the tax, though. Paying tax in the UK as opposed to PT would come down to satisfying all the conditions in the DTA with regard to the nature of the business, the premises and where the work is performed etc. I wouldn't have thought it leaves a lot of scope for opting one way or the other.

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Ask our Expat Consultant
(@thomasribatejo)
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Joined: 5 years ago

National Insurance is not tax (however it may feel!), it is the equivalent of Segurança Social here. The two systems are inherently separate, and run by separate authorities in Portugal. HMRC operates both things in the UK, although in completely separate parts of their business.

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(@itexpert7)
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Joined: 2 years ago

National insurance is tax, I was told that by HMRC. Just another income for the government.

Anyway, you said something interesting, that you got paid "salary and dividends". I stopped my salary before even becoming tax resident in Portugal.
Because my understanding is that for salary you will pay full tax in Portugal as you are tax resident. Foreign dividends under NHR in a country with suitable tax treaty is 0% tax.

Is that then what you paid Portuguese tax, on your UK salary?

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Ask our Expat Consultant
(@thomasribatejo)
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Posted by: @itexpert7

National insurance is tax, I was told that by HMRC

NI is effectively a tax on earnings, however it is not income tax, and the two systems are inherently separate, both in the UK and in PT; and not subject to the same systems, legislation, and bilateral agreements.  It is therefore best to completely separate how you consider the two things.  Sorting one, or paying one, does not cover off the other.

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