I know the title of this week’s blog is not particularly inspiring, but for British people working abroad, this is actually quite a big issue.  There’s a lot of confusion about what rights and obligations we have, and how we go about making sure we don’t pay tax we don’t need to.  Recently I’ve had a number of enquiries from people needing advice, so I thought it would be sensible to get this issue out into the open.  In following months we’ll also have a look at National Insurance, pension contributions, renting out property, and Gift Aid on donations.

First, the usual disclaimers.  Each situation is different, based on your own personal circumstances, where you’re working, and which sending agency you work with, if any.  Don’t base any case you have with Her Majesty’s Revenue and Customs (HMRC) on the information you find here, which is for guidance only.  If you can’t find the information you need online, contact HMRC direct or seek guidance from a professional adviser.

The standard position on UK income tax is that the British government taxes its residents on their global income, but nonresidents on their UK income only.  So residency is a key issue and there are three definitions.  They are: residence (where you think of as ‘home’), ordinary residence (where you usually live) and domicile (where you originate from or have settled permanently).  They may all be the same country, or three different ones!  This is a complex issue and you can read more about it at http://www.hmrc.gov.uk/international/residence.htm.  Generally, it is worth working out what your residency and domicile status is, as it affects the way in which you pay tax.

As a rule of thumb, you will be eligible to be considered non-resident in Britain by HMRC if: 

  • you have left the UK for continuous full-time employment abroad, and you expect this to last for at least one UK tax year;
  • or, in any other case, if you have been or expect to be living abroad for more than three years and spend fewer than 91 nights in the UK in each year.
With effect from 6th April 2013, this situation has been made more complicated by the introduction of the Statutory Residence Test, particularly if you return to the UK regularly or come for periods of several months.  Rather than explain this here, we’ve done a completely new blog about it – click here for more information.

Becoming officially non-resident doesn’t happen automatically: you have to inform HMRC that you are non-resident by completing form P85.   Completing this form is good house-keeping and as a general rule it is always worth keeping HMRC aware of changes in your address or forwarding address.  Non-residence does not exempt you from UK tax, as many people wrongly believe; it simply means that you don’t pay tax on any income you receive abroad.  If you receive income from a house in the UK you rent out, for example, this may still be liable to UK tax.  Though you might not end up paying over any tax as you will still be eligible for the personal tax-exempt earnings allowance (£7475 in 2011/12 going up to £8105 in 2012/13).  You should still, however, file a tax return.

Whether your income is UK income or overseas income may also be a cause of confusion.  In reality, whether you are subject to income tax on your earnings depends on where you do your job, and how much of it (if any) you do in the UK. It doesn’t really matter where your earnings are paid and there is nothing to fear from having salary paid into the UK if that makes life easier for you.

It should also be mentioned that UK mission workers are usually liable to tax on the income they receive for the purpose of carrying out their vocation, whether it is a donation or not.  However gifts that are specifically donated for a project (e.g. for building work), personal gifts for medical treatment or wedding gifts, and personal gifts from family or friends for birthdays etc are not taxable as they are not considered income (for more information see http://www.hmrc.gov.uk/manuals/bimmanual/BIM62101.htm).

Another mistake British citizens abroad often make is to assume that they’re exempt from local tax.  Other countries tax their residents in the same way as UK does – if you live there, you pay for the services the government provides, whether you’re a national or not.  This can leave mission workers vulnerable to quite high tax bills, as their income is frequently higher than that of the nationals they work with.  While some countries may waive tax on people they see as bringing foreign money into the country, like development workers, when times are tough, they may change their minds and claim several years’ back tax from you at a higher percentage than you would have paid in the UK, so make sure you know what the local tax arrangements are.  One way of avoiding this is to work in a country which has a Double Taxation Agreement with the UK, which means that income taxed in one country is not taxed in the other.  See http://www.hmrc.gov.uk/international/dta-intro.htm#7 for more details.

And don’t forget, you will probably need to complete a UK tax return, which you can now do online.  There are increasingly harsh penalties for failing to file this on time and for paying your tax late, so make sure you do it well ahead of the deadlines as the HMRC website can occasionally crash under the weight of traffic caused by people doing it at the eleventh hour!

Syzygy would like to acknowledge the help of our resident tax expert, Martin, in creating this blog.