It goes without saying that there’s a lot involved with moving abroad. From sorting out an international mortgage to viewing any properties you’ve got your eye on, changing locations to an entirely new country contains many challenges and obstacles at the best of times; and that’s before you even start to consider the tax implications of such a move.
Regardless of the country you’ve got your sights set on living in, you’ve likely already considered the potential tax changes you’re going to be faced with. Sadly, the unfortunate truth is that everything regarding tax becomes much more complicated when multiple countries are involved, not least the issue of income tax.
So, to help you get to grips with the tax entanglements you’re likely to experience with your income once you become an expat, we’ve broken down what income tax is, as well as the rates you could face and their varying thresholds.
What Is Income Tax?
In simple terms, income tax is a form of taxation that is applied directly to your personal income. It is often paid before you receive your salary, meaning most people don’t pay attention to how much this tax affects them.
But this form of tax is not specifically limited to wages and can be applied to any personal income if said income takes you above the tax threshold. As a general rule of thumb, tax on income can be applied to all of the following:
- Self-employment profits
- Bank interest
- Income from rental properties or other investments
For this reason, it can often be beneficial to track just how much income you’re receiving so you can pay the correct level of tax and avoid potential fines.
How Is Income Tax Calculated?
As with most types of tax, income tax in the UK is calculated on a yearly basis. The UK tax year runs from April 6th to April 5th, and all income taxation is calculated on this basis.
As we previously mentioned, the amount of tax owed is taken directly from each of your payslips, assuming you are a PAYE employee. Alternatively, if you’re self-employed, it will be calculated after the tax year has ended.
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 then uses the information in this form to calculate the amount of tax you owe.
Once the information is with HMRC, various deductions may be made from the gross profit of an individual’s yearly wealth – the sum of all income they have accrued during the tax year – in order 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.
What Can Be Deducted From Income Tax?
Acceptable deductions relating to this type of tax may include any of the following expenses:
- Mortgage interest
- Vehicle hire
- Office equipment
- Office Software
- Office Stationery
- The cost of paying contractors
Pension payments and charitable donations may also be deducted for tax purposes, but this is dependent on your personal circumstances. Remember, 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?
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 your 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 increase.
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. After this, 20% is payable on the next £37.500, followed by 40% next £100,000 after that, and 45% being payable on all income above £150,000.
How Much Is UK Income Tax For Expats?
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 can include, but isn’t limited to, any of the following:
- Income from wages
- Overseas pension
On top of this, living in another country does not necessarily automatically make you a resident. However, once the location of tax residency has been determined, an expat will pay income taxation on their main income stream according to the laws and tax systems of that country.
Please note, however, that most income that is 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.
Why Does My Residency Matter?
Although many budding expats assume that moving out of the UK will exempt them from paying income tax in the UK, this 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. As a result, the country of any given expat’s tax residency is where that individual will likely pay the majority of their income taxation.
It is also important to check whether there are any tax treaties between your new country of residence and the UK, as these treaties simplify matters somewhat and are designed to prevent both excessive paperwork and the overpayment of tax.
How Do I Know If I Am A UK Tax Resident?
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, so it’s best to look into these and take any necessary tests to determine where you are a tax resident.
What Is Disregarded Income?
Disregarded income refers to a mechanism that limits any given expat’s tax obligations by disregarding their personal allowance but also deducting certain income from the total taxable amount, such as:
- UK band and building society interest
- UK state pension income
- UK dividends
Once disregarded income has been applied on a separate calculation, whichever tax calculation is lower will be used to determine the total amount of tax owed.
What Happens If I’m A Resident In More Than One Country?
In the event that you’re considered a resident of more than one country, i.e. someone with dual residence, there will likely be something known as a double tax treaty between the two countries in question.
This treaty ensures that you don’t pay full tax twice in a row on the same income. However, you should still seek specialist advice to ensure you’re not improperly taxed.
What Are The Different Income Tax Rates And Thresholds For 2022/2033?
The following are different rates and thresholds used to determine UK income tax:
|Tax band name||Tax band amount||Tax rate|
|Personal allowance||0 – £12,570||0%|
|Basic rate||£12,571 – £50,270||20%|
|Higher rate||£50,271 – £150,000||40%|
|Additional rate||£150,001 and up||45%|
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.
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.
Fortunately, here at Blacktower, we’re experts in helping expats with tax planning abroad. From tackling income tax in Spain to international pensions, get in touch with our team today to see how we can help.
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Disclaimer: The above information was correct at the time of preparation and does not constitute investment advice. You should seek advice from a professional regulated adviser before embarking on any financial planning activity.