Taxation of Foreign Residents and Expatriates in the UK

The UK tax system has specific rules for foreign residents and expatriates, addressing income earned both within and outside the country. Understanding these rules is crucial for compliance and effective tax planning. This article outlines the key aspects of taxation for foreign residents and expatriates in the UK, including residency status, tax obligations, and available reliefs.

Determining Residency Status

Statutory Residence Test (SRT)

The UK uses the Statutory Residence Test (SRT) to determine an individual’s tax residency status. The SRT considers three main factors:

• Automatic Overseas Tests: You are automatically non-resident if you spend fewer than 16 days in the UK during the tax year, or fewer than 46 days if you have not been a UK resident in the previous three tax years.
• Automatic UK Tests: You are automatically resident if you spend 183 or more days in the UK during the tax year, have a home in the UK where you spend at least 30 days, or work full-time in the UK for any period of 365 days.
• Sufficient Ties Test: If neither automatic test applies, the Sufficient Ties Test considers ties to the UK, such as family, accommodation, work, and time spent in the UK in previous years.

Tax Obligations for Residents

Worldwide Income

UK residents are taxed on their worldwide income, meaning income earned both in the UK and abroad is subject to UK tax. This includes salaries, pensions, rental income, and investment income.

Foreign Income and Gains

Foreign income and gains must be declared on your UK tax return. Double taxation relief may be available if you have already paid tax on this income in another country. The UK has double taxation agreements with many countries to prevent double taxation.

Tax Obligations for Non-Residents

UK-Sourced Income

Non-residents are generally only taxed on their UK-sourced income. This includes income from employment in the UK, rental income from UK property, and UK pensions.

Non-Resident Landlord Scheme

Non-residents receiving rental income from UK property may be subject to the Non-Resident Landlord Scheme. Under this scheme, letting agents or tenants deduct basic rate tax (20%) from the rent before it is paid to the non-resident landlord. Alternatively, landlords can apply to HMRC to receive the rental income gross and pay tax through self-assessment.

Tax Reliefs and Allowances

Personal Allowance

Most foreign residents and expatriates are entitled to the same personal allowance as UK residents, which is £12,570 for the 2023/24 tax year. This allowance reduces the amount of income subject to tax. However, non-residents may not be eligible for the personal allowance unless they are citizens of the UK or a country within the European Economic Area (EEA), or fall into another specific category.

Double Taxation Relief

The UK has double taxation agreements with many countries, allowing foreign residents and expatriates to claim relief from being taxed twice on the same income. The relief is usually claimed through tax credits or exemptions and must be declared on your UK tax return.

Remittance Basis of Taxation

For foreign residents who are UK residents but non-domiciled, the remittance basis of taxation may be beneficial. Under this basis, only UK-sourced income and foreign income and gains brought into the UK (remitted) are subject to UK tax. However, using the remittance basis means losing the personal allowance and capital gains tax annual exempt amount unless the unremitted foreign income and gains are less than £2,000.

National Insurance Contributions (NICs)

Foreign residents working in the UK are generally required to pay National Insurance Contributions (NICs). The amount and type of NICs depend on the employment status and earnings. There are agreements with some countries to avoid double contributions.

Filing Requirements

Self-Assessment

Foreign residents and expatriates must report their income through the self-assessment system. The tax year runs from April 6 to April 5 of the following year, and tax returns must be filed by October 31 (paper) or January 31 (online) following the end of the tax year.

Reporting Foreign Income

Foreign income must be reported on the foreign section of the self-assessment tax return. Details of any foreign tax paid and claims for double taxation relief should also be included.

Understanding the taxation rules for foreign residents and expatriates in the UK is essential for compliance and effective tax planning. Determining residency status, recognizing tax obligations, and taking advantage of available reliefs can help minimize tax liabilities and avoid potential penalties. Staying informed and seeking professional advice when necessary ensures that foreign residents and expatriates can navigate the UK tax system effectively.