Even if you leave the UK and move abroad, you may still be liable to UK income tax. It is therefore important to understand if and when any UK tax liability arises, and how this may affect you.
The following guide looks at income tax for expats, and what you need to know about UK income tax if you are living abroad.
Income Tax for Expats : Why is my residence status important?
UK residents normally pay UK tax on all their income, whether it is from the UK or anywhere else in the world, although there are special rules for UK residents who are non-domiciled in the UK, ie; whose permanent home is abroad.
As a non-resident you will only be liable to pay UK income tax on income arising in the UK, and not on any foreign income.
Income can include things like profits from a trade or vocation carried on in the UK, your share of profits from a UK partnership, UK pension income, any rental income on UK property, or interest on savings held in the UK.
For income tax purposes, your status will be determined using what’s known as the ‘statutory residence test’. This comprises three components: the automatic UK test, the automatic overseas test and the sufficient ties test.
Income Tax for Expats : What is the automatic UK test?
For many expats, living outside the UK all year round, determining your residence status will be relatively easy.
For those of you splitting your time between a home in the UK and a home abroad, whether you are classed as resident or non-resident will depend on how many days you spend in the UK during any given tax year.
Under the statutory residence test you will be automatically classed as UK resident if either of the following apply:
- You have spent 183 or more days in the UK in the tax year, or
- Your only or main home is in the UK and you have spent at least 30 days there during the tax year. You must have owned, rented or lived in that home for at least 91 days in total.
Calculating how many days you are deemed to have spent in the UK can become complicated and advice should be sought in the event of any uncertainty.
Income Tax for Expats : What is the automatic overseas test?
You will be automatically classed as non-UK resident if either:
- You were resident in the UK for 1 or more of the 3 tax years preceding the tax year, and you have spent fewer than 16 days in the UK in the tax year.
- You haven’t been resident in the UK for any of the 3 tax years preceding the tax year, and you have spent fewer than 46 days in the UK in the tax year.
- You have worked abroad full-time over the course of the tax year and have spent fewer than 91 days in the UK, of which no more than 30 were spent working.
Again, calculating whether or not you are classed as working overseas full-time can be complex, and professional advice should be sought.
Income Tax for Expats : What is the sufficient ties test?
If you do not meet any of the automatic UK or overseas tests, you will need to use what’s known as the ‘sufficient ties test’ to determine your UK residence status for any given tax year.
This will require you to consider your connections or ‘ties’ to the UK, and whether these, taken together with the number of days you have spent in the UK, are sufficient for you to be considered UK resident.
This will include, for example, family, accommodation and work ties.
Income Tax for Expats: What is split year treatment?
If you move between the UK and overseas during the course of a tax year, your tax liability may be split into two separate parts, ie; resident and non-resident.
Subject to meeting the relevant criteria, this means that you will be liable to income tax as a UK resident for the time you were living in the UK and vice versa. This is known as ‘split-year treatment’.
Note that your residence status can easily change from one tax year to the next. You should therefore always check your status if your situation changes, or seek professional advice, for example, if you spend more or less time in the UK.
Income Tax for Expats: What is my personal allowance?
Typically, UK income tax payers are eligible for a personal allowance on their income tax. This means that tax is only paid on any income above that threshold.
You will be entitled to a personal allowance of tax-free UK income each year if you are a British or EEA citizen. You might also be entitled to the personal allowance if it is included in any double-taxation agreement between the UK and the country in which you live.
The personal allowance currently stands at £11,850 for the tax year 2018/19, and is due to increase to £12,500 for the year 2019/20.
In the event that you are not entitled to any personal allowance, you will be liable to pay tax on all your chargeable income.
Income Tax for Expats: What is the rate of income tax?
Non-UK residents are taxed at the same rates as UK residents. Accordingly, any income over and above the personal allowance will be taxed at the prevailing rate(s) for the relevant tax year.
Subject to whether or not your income exceeds the basic rate threshold, you will either pay tax at the basic and/or higher rate. These currently stand at:
- 20% – for a taxable income bracket of up £34,500
- 40% – for a taxable income bracket between £34,501 and £150,000.
- 45% – for taxable income over £150,000.
The basic rate limit will be increased to £37,500 for 2019 to 2020. As a result, taking into account the increased personal allowance of £12,500, the higher rate threshold for 2019/20 will be £50,000.
Income Tax for Expats: What is a double taxation agreement?
You may be taxed on your UK income by the country in which you are resident, as well as by the UK.
However, if the country in which you are resident has a ‘double-taxation agreement’ with the UK, you can claim relief to avoid being taxed twice.
Where there is a double taxation agreement in place, this will specify which of the two countries you pay tax in, the country in which you apply for relief, and how much tax relief you are entitled to.
Depending on the terms of the agreement, you can apply for either a partial or full relief before you have been taxed, or a refund after you have been taxed.
Income Tax for Expats: How do I declare my income to HMRC?
You will need to submit a self-assessment tax return form to HMRC where you are a UK non-resident but still liable to pay income tax.
However, you do not need to report your income to HMRC if you have already claimed tax relief under a double-taxation agreement.
If you are non-UK resident you will not be able to use HMRC’s online services to submit your self-assessment form, rather you will need to send a hard copy via post, get help from a professional such as a tax adviser, or purchase the relevant software from a commercial supplier.
The deadline for postal submissions is the 31st October, where any delay can result in a financial penalty.
Income Tax for Expats: Will any period of temporary non-residence affect my liability?
If you return to the UK after a period of temporary non-residence, you may still be liable to UK income tax for that period of absence.
In broad terms, you may be regarded as temporarily non-resident if your period of non-residence is for less than 5 years. For these special rules not to apply, your period of non-residence must exceed 5 years.
These rules are designed to prevent individuals from avoiding UK income tax by becoming UK non-resident for a short period.
Income Tax for Expats: Key takeaway
The rules relating to income tax for expats can be complex, not least relating to calculating the number of days you are deemed to have spent in the UK and whether or not you work full time overseas.
Moreover, you may also be liable for tax in the country in which you reside. This is when it can get really complicated, notwithstanding that some relief may be available under a double taxation agreement.
It is therefore always advisable to seek professional advice and assistance from an accountant or other tax specialist.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert legal or other advice should be sought.