The tax system in the United Kingdom
Regardless of your residency status, it's important to note that, based on your situation, you may be required to pay taxes in the UK on income and capital gains derived within the country. The average UK citizen pays between 20% and 40% income tax depending on their earnings — which is relatively low compared to other countries in northern Europe, such as France and Denmark. Overall, the British income tax system follows the PAYE system (Pay As You Earn), meaning employers deduct monthly income tax from wages or salaries. Every expat's situation is slightly different, but some general rules apply, which are presented in this article.
UK residence status and tax
If you reside outside the UK, you will be subject to taxation solely on your income earned within the UK, while your foreign income remains exempt from taxation. UK-based income can include earnings from pensions, rental properties, savings interest, or wages.
On the other hand, if you are a UK resident and your permanent home (a domicile) is also in the UK, you pay tax on all your income from the UK and abroad.
It is worth pointing out that if you are a UK resident, but your permanent home is outside the UK, you may not have to pay tax in the UK on income from abroad (e.g., income from selling shares, selling a second home, etc.).
Attention:
An individual cannot have more than one domicile (a permanent home) simultaneously.
Usually, it is straightforward to establish whether you are a UK resident, depending on the number of days you spend in the country during the tax year, running from 6 April to 5 April the following year. For example, you are a UK resident if you spend 183 or more days in the UK in one tax year. However, you are not a UK resident if you work abroad full-time and spend fewer than 91 days in the UK. Formally, your residence status will be determined by the Statutory Residence Test (SRT), which comprises three steps to cover even the most unique cases.
Lastly, one should look into double taxation relief to avoid being taxed on the same income or gains by two or more countries. Double taxation is most common among individuals who have dual residency. However, if the two countries have a double tax treaty, this should be enough to prevent double taxation. Fortunately, most countries have a double taxation treaty with the UK, including but not limited to Australia, Brazil, China, Japan, Mauritius, Mexico, Nigeria, Singapore, South Africa, the UAE, and the US.
Important:
You may be eligible for a split-year treatment if you move to or out of the UK before the end of the tax year. This means you will still pay tax in the UK, but only for income earned there.
Good to know:
International students do not usually pay UK tax on foreign income or gains as long as they are used for course fees or living costs. It is essential to check that your home country is listed on the double-taxation agreement.
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Information about Statutory Residence Test
Income tax rates and tax returns in the UK
UK and non-UK residents are fully taxed on UK employment income regardless of whether their permanent home is within or outside the UK. Employment and investment income from abroad is only taxable for UK residents. According to the UK government, an income of up to £12,570 is not taxable. However, an income between £12,571 and £50,270 is taxed at 20%, and an income between £50,271 and £125,140 is taxed at 40%. Anything above £125,140 is taxed at 45%.
Attention:
Report your income to HMRC through an online or paper self-assessment tax return if you rent out property in the UK, are self-employed in the UK, were a UK resident but now earn a pension from abroad, or have untaxed income.
If you have reasons to believe that you have overpaid tax, you can apply for a refund. People usually overpay taxes when taxes are deducted automatically from their bank accounts and their income has been below their personal allowance. Non-UK residents can claim a tax repayment by filling out an R43 form. If HMRC approves your eligibility for a refund, it will send you a cheque or refund the money to your bank account, provided you have volunteered your bank account details (i.e. account number and sort code). Note that the deadline for tax returns is 31 January of the following year. For example, for the tax year 6 April 2022 to 5 April 2023, the tax return is due 31 January 2024.
Important:
Always inform HMRC of any changes in your status or situation, such as change of employer, marriage or divorce, expatriation, property purchase or sale, etc. If you are leaving the UK, you should submit a P85 form to HMRC or file a UK tax return for the same year of your departure.
In conclusion, if you receive a tax return form (SA100) from HMRC, you should fill it out and return it to HMRC to avoid penalties. However, generally speaking, your tax is calculated based on the PAYE (Pay As You Earn) tax coding, meaning that you don't have to complete the tax return every year as long as your income circumstances don't change. However, an annual tax return may be required for people earning income under the bandwidth of £125,140 or more.
Getting started as a UK resident
First, you must apply for the National Insurance (NI) number to be allowed to work, receive a pension, pay tax, or benefit from public health services in the United Kingdom.
Once you arrive in the UK, it is best to immediately apply for the NI number, which will be issued within a few weeks. Many employers in the UK will not allow you to start working unless you produce evidence that your NI number request is being processed.
Upon finding a job in the UK, your employer will have to apply for a unique tax code in accordance with your income level and situation at the HMRC. To do so, they must provide your personal details, including your NI number. Each tax code contains a letter that defines your fiscal status, for example, “L” for those aged 65 and above, “NT” for non-taxable individuals, etc. The tax collected from your payroll includes social contributions such as national insurance. Each deduction is stated clearly on your payslip. At the end of the fiscal year, your tax return file will be sent to the HMRC.
Tip:
Make sure to have a residential address on standby when applying for the NI number.
Important:
If you are self-employed and earning either from a website or app or in other forms, you must fill in a self-assessment tax return online at the end of the fiscal year. All invoices and receipts must be kept to help carry out this assessment correctly and help reduce your yearly tax bills through business expenses that you can claim.
If you are unsure how to fill your taxes, you should see an accountant who can assist you.
Attention:
When UK employers discuss salaries, they often talk about gross profits, that is, income before tax deductions. Hence, it would be best to consider your monthly net salary before accepting a job offer to meet your living costs.
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