Moving abroad contains many challenges and obstacles, one of the main ones being how much the typical expat’s tax affairs will change. Everything regarding tax becomes much more complicated when multiple countries are involved, not least the issue of income tax.
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What is income tax?
Income tax is a direct form of taxation, payable on personal income. Any personal income that an individual has will typically be subjected to income tax, including but not necessarily limited to:
- Self-employment profits
- Bank interest
- Income from rental properties or other investments
How is income tax calculated?
Income tax is calculated yearly. The UK tax year runs from April 6th to April 5th, and all income tax is calculated on this basis.
The amount owed is taken directly from each payslip for PAYE employees, or calculated after the tax year has ended for the self-employed. Every individual who earns income from self-employment must fill in a tax self-assessment form, or have their accountant fill one in for them. The state uses the information in this form to calculate the amount of income tax the individual owes.
Various deductions may be made from the gross profit of the individual (the sum of all income they have accrued during the tax year) to calculate what is known as the net profit, or trading profit. It is this figure that is used to calculate the amount of tax owed. Acceptable deductions may include expenses such as rent, mortgage interest, vehicle hire, office equipment, software, stationary, the cost of paying contractors etc. Pension payments and charitable donations may also be deducted. It’s important to check with your accountant as to whether any specific expense may or may not be considered a valid expense for the purposes of tax, as the rules vary massively depending on category and circumstance.
How much is income tax?
As a UK national living as an expat in a foreign country, you may be liable to pay UK income tax on your foreign income. This could include income from wages, investments, rent, or overseas pensions. If you have made a permanent home abroad, making you a 'non-dom' in the UK, you may not have to pay tax in the UK on your foreign income.
In most countries, income tax is only levied on income above a certain defined threshold for each tax year—in the UK this is known as the Personal Allowance. Any income above this threshold will be subject to tax at varying rates depending on the amount earned, with tax rates typically rising as income levels go up. It is important to note that any given tax band only comes into effect for income that falls within that band: in the UK, for example, zero tax is payable for the first £12,500 of income, 20 per cent tax is payable on the next £37.500, 40 per cent is payable on the next £100,000, and 45 per cent (the highest income tax bracket in the UK) is payable on all income above £150,000.
What are the different income tax thresholds and rates?
In the UK, the different income tax rates and thresholds are as follows:
|Tax band name||Tax band amount||Tax rate|
|Personal allowance||0 - £12,500||0%|
|Basic rate||£12,501 - £50,000||20%|
|Higher rate||£50,001 - £150,000||40%|
|Additional rate||£150,001 and up||45%|
How much is income tax for expats?
Although many budding expats assume that moving out of the UK will exempt them from paying UK income tax, that is not necessarily the case. As an expat, your UK income tax obligations will be primarily determined by which country you are classed as a ‘tax resident’ in. The country of any given expat’s tax residency is where that individual will likely pay the majority of their income tax.
The UK has a mechanism called the Statutory Residence Test that determines the tax status of those living in the UK; other countries all have their own individual systems and rules regarding the establishment of tax residency. It is important to note that living abroad does not automatically mean that you will be considered a tax resident in the country you have moved to: you may still be considered a tax resident of the UK.
It is also important to check whether there are any tax treaties between your new country of residence and the UK: these treaties simplify matters somewhat and are designed to prevent both excessive paperwork and the overpayment of tax.
Once the location of tax residency has been determined, an expat will pay income tax on their main income according to the laws and tax systems of that country. Please note, however, that most income considered to have been earned in a different tax jurisdiction (such as income from rental property back in the UK) will be taxed in that jurisdiction. This can potentially result in multiple tax returns needing to be filed in different countries.
There is also what is known as ‘disregarded income’. This is a mechanism that limits any given expat’s tax obligation by disregarding the Personal Allowance but also deducting certain income (such as UK bank and building society interest, UK State Pension income and UK dividends) from the taxable total. Whichever tax calculation is lower will be used to determine the total amount of income tax owed.
As you can see, the complexities of income tax for an expat have the potential to be quite overwhelming, and it’s easy to make honest mistakes that end up costing both time and money in the long run. If you’re at all unsure about anything regarding your income tax obligations as an expat then you should get in touch with a qualified accountant specialising in expat tax affairs. They will be able to talk you through all the ins and outs and ensure that you don’t pay a penny more tax than is needed.
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