Each year, thousands of professionals make the decision to relocate and work abroad. This could be for a variety of reasons, from career progression to the desire to broaden one’s cultural horizons. But while becoming an expat has the potential to better both your personal and professional life, it isn’t a decision to be made lightly. Here is a guide to taxes for expats.
Emigration requires a considerable amount of planning, meaning that anyone hoping to live and work abroad in the future must be prepared to conduct some in-depth research. You will need to have a comprehensive understanding of visa restrictions, any additional qualifications or licences you may require in order to work, and how you will pay your taxes.
Understanding your tax situation
Before beginning to untangle what becoming an expat means for your tax situation, it’s important to spend some time organising your finances and gathering any relevant documents and paperwork. Start by compiling any payslips, invoices and expense receipts from the last couple of tax years.
Sage business accountancy software can help you to keep accurate, consistent records that will help you to complete your tax return no matter what country you’re living in. This is especially crucial if you’re a freelancer or are planning on starting your own small business. However, it is also useful for anyone with income related to a rental property or investments.
If you are moving abroad part-way through a tax year, you will need to have detailed records of your earnings to avoid paying the incorrect amount of tax or paying tax in the wrong country.
What country do expats pay taxes in?
The biggest point of confusion for expats is typically understanding which country they need to pay their taxes in. Different countries have different tax laws, so more often than not, it’s not simply a case of paying your taxes in the place you live. Pay attention to the following factors when figuring out whether you need to pay tax in the UK or the country you’re moving to:
In many countries, including the UK, you will be required to pay tax on your income if you are considered a resident of that country. Residency is dependent on a number of factors and won’t always apply to you just because you are currently living in a country. In the UK, you are considered a resident when:
- You are in the UK for a minimum of 183 days during the tax year
- Your only home is in the UK and you spent at least 30 days in it during the tax year
- Your home was available for your personal use for 91 days during the tax year
If you meet the criteria above, it’s likely that you will owe tax to HMRC. But what happens when you are also considered a resident in the country you move to? Because other countries have different residency criteria, it’s possible to qualify as a resident of more than one place simultaneously.
Fortunately, the UK has double tax treaties with a number of countries, which means you won’t need to pay twice as much tax on the income you earn. If the country you’re emigrating to doesn’t have a tax treaty with the UK, you may be able to apply for unilateral relief to avoid paying tax in two places. However, if your new home country has no income tax or has a very low tax rate, double taxation becomes less of an issue.
People moving out of the UK to become an expat abroad on a long-term or permanent basis may still be considered residents of the UK, but will no longer have domicile there. Domicile refers to the country where you consider your home to be, so if you have no plans to return to the UK from your new location, you may be subject to different tax rules than regular UK residents.
Non-domiciled residents of the UK may be exempt from paying tax on their foreign income if:
- Their foreign income amounts to less than £2000 during the tax year
- Their foreign income does not enter the UK and is not held or transferred to a UK bank account
If you do not meet these conditions, you will likely have to complete a tax return or claim the remittance basis. The remittance basis usually means that you will only have to pay tax on income that is brought into the UK, but you will lose your tax-free allowances and may also have to pay an annual charge.Source of income
If the source of your income is within the UK, you will still have to pay tax there even if you are no longer a resident. This usually refers to income from properties, partnerships or investments, but it can also relate to any employment income related to duties in the UK.
However, some earnings may come under what is known as disregarded income. This applies to income from interest on savings, dividends, or trusts, but excludes property income and earnings from investments that are linked to a trade, independent organisation or partnership.
It’s important to remember that, if your UK income is less than your yearly personal allowance of £12,570, you will not have to pay tax on your earnings in most circumstances. Therefore, if you’re moving abroad at the start of the tax year when your earnings are minimal, or if your income from properties only amounts to a small sum, you may not need to submit a UK tax return.
What should expats do before leaving the UK?
Before leaving the UK, expats must inform HMRC of their decision to move abroad, especially if they plan to be away for more than one tax year. If you don’t normally complete a self-assessment tax form, then you will need to complete form P85 and submit it to HMRC.
It can be difficult to ascertain whether certain residency rules and tax exceptions apply to your situation. If you have multiple streams of income, are moving to a country without a double tax treaty with the UK, or will need to split your taxable income between two countries in the same tax year, it can be a good idea to consult a financial advisor or tax professional.