Do you need to pay tax on overseas income? Changes are coming in April 2025!
- TBA
- Jul 24, 2024
- 5 min read
Many people who have moved to the UK will still maintain some form of income abroad.
Under the current rules, if you are a UK tax resident and domiciled in the UK, you must pay taxes on your global income and gains, regardless of where the income is earned.
However, if you apply for non-domiciled (‘non-dom’) status, you can choose to avoid paying taxes on overseas income and capital gains. The non-dom status means that you live in the UK, but your permanent home is in another country.
However, changes will be made from the 6th April 2025 – the current non-dom tax rules will end.
The system of taxation based on domicile will be abolished and replaced with a more direct foreign income and gains system (FIG). So, how will the new FIG system work?
Current non-domicile tax rules
If you move to the UK and meet the HMRC’s criteria for residency (e.g. residing in the UK for 183 days, main residence, family members, and workplace), you are classified as a UK tax resident.
However, if your permanent home (i.e. family base) is abroad, you can claim non-domiciled status.
According to current regulations, your domicile is one of the factors determining your tax status. HMRC considers your domicile to be the country or region where your father intended to reside permanently when you were born.
Under current rules, if you are resident in the UK but have claimed non-domiciled status, you can still voluntarily pay on overseas income and capital gains, or opt to pay on a remittance basis.
If you opt to pay tax on a remittance basis, you do not need to pay taxes on overseas income and capital gains unless the earnings are brought into the UK. You will also generally lose your personal allowance and any capital gains tax allowances.
Additionally, after several tax years, you must pay an annual charge:
£30,000 if you have been a UK tax resident for at least seven of the past nine tax years.
£60,000 if you have been a UK tax resident for at least 12 of the past 14 tax years.
Other regulations such as mixed fund ordering rules also apply.
Changes after April 2025
Earlier this year, the Chancellor announced the abolition of the existing system.
Starting from the 6th April 2025, all rules relating to domiciled status will be abolished and replaced with a new Foreign Income and Gains Tax (FIG) system.
Under the new FIG system, HMRC will primarily base its taxation policies on UK residency. Qualifying taxpayers—within the first four tax years after emigrating to the UK—will not need to pay UK taxes on foreign income and gains and can freely bring these funds into the UK tax-free, including non-resident trust distributions.
Additionally, you will not need to consider mixed funds or ordering rules from the old system, reducing the burden on taxpayers. Note that there is a time limit of four years! After the four-year period, taxpayers must pay UK taxes on global income and capital gains brought into the UK.
As with the current remittance basis, if you choose the new FIG system, you will no longer be eligible for a personal income tax allowance and annual capital gains tax exemption. Under the new rules, if a taxpayer opts for the FIG system, they need not apply annually but should apply within the tax years the system is applicable.
For example, if Mr W applies for the new 4-year FIG system in the first year, but chooses not to apply in the second year, he can still apply in the third and fourth years.
If an individual temporarily leaves the UK within the four-year period, they can apply for the remaining eligible tax years under the FIG system upon their return. For instance, if Mr Z becomes a non-UK resident in the second and third years but returns as a UK resident in the fourth year, he can still use the FIG system in the fourth year.
Are there any transition policies?
For current UK non-domicile residents or those who have already opted for the old policy, the UK government offers several temporary transition measures. Here are some key points:
Temporary Repatriation Facility
Individuals who have opted for the remittance basis can remit foreign income to the UK at a 12% tax rate in the 2025/2026 and 2026/2027 tax years.
Additionally, mixed funds and ordering rules will be relaxed to allow individuals to benefit more easily from the temporary measures. Starting from the 2027/2028 tax year, foreign income remitted to the UK will be taxed at the normal rate.
Eligibility for the FIG System
Individuals who have lived in the UK for less than four years as of April 6, 2025 (and have lived outside the UK for 10 tax years) can use the FIG system for the remaining four years.
Capital Gains Tax Base
If non-UK domiciles have previously applied for the remittance basis for foreign capital gains, HMRC will allow the base value of assets to be reset to April 5, 2019, to reduce capital gains tax.
Partial Taxation for Transition Period
Between April 6, 2025, and April 5, 2026, if taxpayers have switched from the remittance basis to global taxation and do not qualify for the FIG system or transition policy, they will only need to pay UK income tax on 50% of their foreign income for that tax year. From the 2026/2027 tax year, full reporting will resume.
Overseas workday relief policy will remain
Related to the domicile remittance basis is the Overseas Workday Relief (OWR).
If you are a non-domicile and have not been a UK tax resident for the past three years, but your employer requires you to work in the UK for some time, you can use this relief to apply for a tax reduction on income earned abroad for the first three tax years of UK residence (if you opt for the remittance basis).
In other words, income earned abroad that is not remitted to the UK is not subject to UK tax. Any withheld income tax from your salary can be refunded.
The new Overseas Workday Relief (OWR) will be similar to the current relief and will apply to the first three tax years of UK residence. Employees eligible for OWR upon returning to the UK in 2023-24 or 2024-25 should still be able to apply for the full three years of OWR. However, those re-entering from 2025-26 who are not eligible for the FIG system will not be able to apply for OWR.
The new OWR will provide income tax relief whether or not the income is brought back to the UK. However, it will not offer National Insurance Contributions (NIC) relief, so any NIC liability will be determined as usual.
Advice from TB Accountants
Under the current system, those with significant foreign income or gains who do not wish to pay UK taxes often choose the remittance basis to save a considerable amount. However, with the new system, this approach may change.
Additionally, the FIG-related regulations do not currently involve inheritance tax issues. However, there are indications that the UK government is considering simplifying inheritance tax rules to align with the residency-based system. This is still under negotiation. It is certain that the new system will be implemented starting 6th April 2025.
Therefore, those who have moved or are considering moving to the UK should stay updated and plan their taxes accordingly before 2025.
TB Accountants would like to remind everyone that tax calculations are complex. Additionally, the rules set to change next year may still change further if there is a change in government. Given the potential for rapid changes, we recommend seeking professional tax advice.