While the UK is among the world’s most popular destinations for expat talent to develop their careers, the income tax situation is complicated.
There’s no doubt that cross-border taxation can be a complex area in finance and law but it’s something expats will need to deal with.
For those expats moving to the UK, there are various tax compliance obligations they must meet, as well as social security and tax filing rules.It’s also important that the expat takes advantage of all potential tax reliefs available to them and it is highly recommended they seek specialist tax advice as soon as possible after arriving.
Most expats will be working for an employer that probably pays them under PAYE – Pay As You Earn – which means their income tax is deducted at source and paid to HM Revenue and Customs (HMRC). Expats will also see from their pay slips that their National Insurance Contributions (NICs) have been deducted too.
Double taxation treaties
Deducting tax from pay cheques will create issues for some people, particularly US expats, who will also have their tax obligations under the US tax code. However, the UK has many ‘double taxation’ treaties in place so expats shouldn’t be paying tax twice on their earnings.
The UK’s tax system is a progressive one which offers everyone a personal tax allowance, which is the amount they can earn without paying tax.
For the year 2017/18, this amount is £11,500 and the basic tax rate is 20% for earnings between this figure and £33,500.
For expats earning more than £33,500, they will be subject to additional income tax at the higher rate of 40%, with the top ceiling for this rate being £150,000.
Expats who earn more than £150,000 will be moved onto the ‘additional rate’ of 45%.
The Scottish Parliament has the power to set its own income tax rates and bands.
Some expats may find that they are not entitled to the UK’s personal tax allowance. This is dependent on their country of residence or their nationality – and whether they are considered by HMRC to be non-resident for tax purposes.
This is a tricky area of tax law and there is specific anti-avoidance legislation in play, so effectively if the expat leaves the country in the hope of avoiding a UK tax bill, they will be subject to income tax requirements when they return.
Filing your taxes
Some expats may also be required to file a tax return and they must do this by 31 October if it’s going to be a paper return or 31 January if the expat is filing online. One word of warning: HMRC does not offer filing extensions (unlike the US tax authorities) and will instead impose penalties plus interest for non-filing.
An expat who fails to meet this deadline will be hit with a £100 penalty and if they still fail to file they could face a total penalty for late filing of £2,580.
To file online they will need to have their unique taxpayer reference number, known as the UTR, and this is issued by HMRC when they begin working in the UK.
It’s also important to appreciate that married people are treated separately for tax purposes in the UK. Each spouse is responsible for completing their own tax return and dealing with their own tax liabilities.
Expats also need to appreciate that there are no specific financial thresholds in the UK for them to file a tax return. Should HMRC ask them to file a return, then they will need to comply.
Most expats will need to file a self-assessment tax return, though for those who pay tax under the PAYE system, HMRC may decide that they may not be required to file a return.
Expats who have other sources of income, such as making profits from selling shares, enjoying a rental property income or earning income from outside of the UK while living in the country will need to declare this income to the tax authorities.
UK residency for the purpose of taxation
Expats who are required to file a self-assessment tax return should appreciate that they only need to report their worldwide income if they are considered to be UK resident for tax purposes.
Being considered as a UK resident for the purpose of tax could have a big impact on many expats so they need to answer the following questions:
• Do you spend 183 days or more in the UK?
• Is your only home in the UK (whether it is owned or rented) and have you lived in it for at least 91 consecutive days?
If so, then you are considered to be a UK resident for tax purposes and will need to tell HMRC about your worldwide income including salaries, rental income, pension and investment returns.
As with many tax regimes around the world, the UK system changes on a regular basis, though the new regulations generally come in when a new tax year begins in early April.
Expats, who are referred to as non-UK domiciles, will be subject to the same regulations as UK citizens which means they also get to enjoy making tax efficient investments in pensions and ISAs (Individual Savings Account) during their stay in the country.
The expat can hold onto their investments after leaving the UK, though the tax advantages may be restricted when doing so.
As mentioned previously, the income tax situation for expats in the UK can be complicated and, for instance, should the expat be given shares as part of their employment then this will be considered to be taxable income.
Also, should the expat be given a termination payment when they leave the UK by their employer, then this is also considered to be income and will be taxed accordingly.
The rules for self-employed expats working in UK are the same for those in employment and they will probably need to file a tax return but for all expats, particularly for those earning higher incomes, it would be sound advice to seek professional help when it comes to working in the UK to ensure they are not pay more tax than they need to.
Further information
• UK government advice for those heading to the UK and the tax rules.
• Accountants KPMG offer a detailed explanation of the UK’s income tax rules for expats.