UK Treasury Fears Non-Dom Tax Changes May Backfire, Reducing Revenue
Officials worry that scrapping non-dom status could lead to wealthy individuals leaving Britain, potentially decreasing tax revenues instead of raising them as initially projected.
UK Treasury officials are expressing concerns that the proposed changes to the non-domiciled (non-dom) tax status might have unintended consequences. The policy, aimed at increasing tax revenue, could potentially lead to a decrease instead, as wealthy individuals consider leaving Britain.
The current non-dom system, which has been in place since 1799, allows individuals to avoid paying tax on overseas income and gains for up to 15 years. This longstanding policy was originally introduced to protect colonial investments and has since become one of the most generous tax regimes globally.
From April 2025, the government plans to replace this system with a less generous residence-based regime, limiting the tax break to four years. This change, first announced by the Conservatives in March 2024, was initially projected to raise approximately £3.2 billion annually, according to the Office for Budget Responsibility (OBR).
However, new estimates expected from the OBR may paint a different picture. Treasury sources have indicated to The Guardian that the policy might not raise any extra tax, potentially leaving a £1 billion hole in the government's spending plans for schools and hospitals.
The uncertainty surrounding the impact of these changes highlights the complex nature of tax policy. The UK's non-dom regime has long been a contentious political issue, criticized for creating a two-tier tax system while simultaneously defended as a means to attract wealthy individuals and investment to the country.
Labour Party leaders had previously earmarked £1 billion from this policy for universal school breakfast clubs and increased hospital and dental appointments. However, these plans may be jeopardized if super-rich individuals opt to limit their time in Britain or relocate entirely.
An Oxford Economics forecast suggests that Britain's non-dom population could decrease by 32% due to these reforms, potentially leading to a £0.9 billion drop in tax revenue by 2029-30. This prediction aligns with concerns that fewer wealthy foreigners will choose to reside in the UK under the new system.
The debate over non-dom status intersects with broader discussions about global wealth inequality and the role of tax policies in attracting international investment. Some countries, such as Portugal and Italy, have introduced similar schemes to compete for global wealth, demonstrating the international nature of this issue.
As of now, approximately 55,000 individuals claim non-dom tax relief in Britain, according to HMRC. The current system only requires non-doms to pay tax on money earned within the UK, exempting overseas earnings from British taxation.
The Chancellor is reportedly inclined to proceed with the tax changes in the upcoming Budget, making a moral case for wealthier individuals to contribute more. However, the potential economic implications of these changes remain a significant concern for Treasury officials.
"Ministers will listen to what the OBR says on tax and will prioritise the raising of greater revenues."
As the debate continues, policymakers must carefully balance the desire for increased tax revenue with the risk of driving away wealthy contributors to the UK economy. The outcome of this policy change could have far-reaching implications for Britain's fiscal landscape and its ability to attract and retain global talent and investment.
