How does UK tax residency work, and do I need to pay tax on overseas income?
- TBA
- Oct 4, 2024
- 4 min read
Updated: Feb 25
We often encounter clients who are confused about their tax obligations, particularly when it comes to income earned overseas. Many people find themselves asking, “As a UK resident, do I have to pay tax on my overseas income?” or “Do I only need to pay tax if the money is brought into the UK?”
Today, we’re going to clarify how UK tax residency works and address some of these common questions. Understanding your tax obligations when it comes to overseas income is crucial, especially if you are moving between countries or earning money abroad.
1. Global taxation basis vs remittance basis
There are two primary methods by which overseas income is taxed in the UK: global taxation and the remittance basis.
Global taxation simply means that you are required to declare and pay tax in the UK on your worldwide income, which includes any earnings and capital gains, regardless of where that income was generated. In other words, if you are subject to global taxation, all your income – whether earned in the UK or abroad – is taxable in the UK.
The Remittance basis, on the other hand, means you only need to declare and pay UK tax on overseas income when it is transferred into the UK. This method allows you to keep your foreign income abroad without having to pay tax on it, provided the money stays outside the UK. However, once that income is remitted, or brought into the UK, it becomes taxable.
But how do you know which taxation method applies to you?
The answer depends on your UK tax residency status, which is determined by a set of rules enforced by HMRC.
2. Understanding tax residency in the UK
In the UK, being classed as a tax resident usually refers to an individual who spends a significant amount of time in the country. The standard rule for tax residency is that if you have lived in the UK for at least 183 days in a tax year, you are considered a tax resident. However, it’s not just about how many days you’ve been physically present. There are other factors, such as where your main home is located, whether your family lives in the UK, and whether you have work ties in the country.
In addition to tax residency, there is another classification called domicile. Your domicile refers to the country you consider your permanent home, and this is often linked to your family ties or where your long-term home is located. A person may be a tax resident of the UK without being domiciled there, which brings about different tax rules.
For individuals who are UK tax residents but are not domiciled in the UK, you have the option to choose between the global taxation and the remittance basis. If you opt for the remittance basis, you will not have to pay UK tax on your foreign income, provided it stays outside the UK.
However, it is vital to notify HMRC if you choose the remittance basis, as failing to do so can result in fines and possible investigations.
3. Key points to consider about overseas income
There are several key points to bear in mind when dealing with overseas income and UK tax residency:
Foreign income under £2,000: If your overseas income is less than £2,000 in a tax year and you are a UK tax resident, you don’t need to declare it or pay tax on it, even if you bring the money into the UK.
Living in the UK for fewer than 7 years: If you have been living in the UK for fewer than 7 years, you can elect to use the remittance basis without being required to pay the remittance basis charge. However, after this period, should you choose to remain on the remittance basis, you will need to pay an annual charge.
Remittance basis charge (RBC): The RBC is payable by individuals who have been UK tax residents for a longer period of time and continue to use the remittance basis. If you have been a UK tax resident for at least 7 out of the last 9 tax years, you will need to pay an RBC of £30,000 per year. If you’ve been a UK tax resident for at least 12 out of the last 14 years, this charge increases to £60,000 per year.
UK domiciled residents: If you are domiciled in the UK, you are required to follow the global taxation rules, meaning you must declare and pay tax on your worldwide income. However, UK domiciled residents can benefit from various personal allowances, which help reduce their overall tax liability.
Becoming domiciled: Once you have been a UK tax resident for 15 out of the last 20 tax years, you will automatically be treated as UK domiciled for tax purposes. This means that global taxation applies to you, even if you were not domiciled in the UK initially.
4. Some advice from TB Accountants
Deciding how to declare and pay tax on overseas income is not always straightforward. It largely depends on your unique circumstances, including your income, where it’s earned, and your tax residency status.
We at TB Accountants always recommend seeking professional advice when considering the implications of the global taxation and remittance basis systems. Navigating these rules can be complex, and it’s important to ensure that you’re fully compliant with UK tax law while also taking advantage of any reliefs or exemptions that may apply to you.
Furthermore, be aware that the UK tax authorities have recently introduced new changes to the rules surrounding overseas income and tax residency.
These changes are set to take effect from April 2025, and it’s crucial to stay informed about how these updates may impact your financial situation. It is also possible that the new Labour government may announce further changes before this date.
We will be sharing further information on these changes in due course, so be sure to stay connected with us for the latest insights and advice on this evolving topic.