Expatriate tax - United Kingdom

Following the UK leaving the EU, freedom of movement from the EU ended 31 December 2020.

From 1 January 2021 a new immigration system was implemented. The new system is points-based system prioritising highly skilled. The new system apples to EU Citizens (except Irish citizens) and non-EU Citizens. Visitors will need a work permit to work in the UK.

Some EU & EEA citizens may qualify for a Frontier Worker permit where they had a pattern of working in the UK prior to 31 December 2020 but did not reside in the UK.

The UK tax year began on 6 April 2023 and runs to 5 April 2024.

For the 2023/24 tax year, the tax return filing date is 31 October 2024 for paper returns and 31 January 2025 for online filing. There are penalties for late filing of a return. .  There’s an immediate £100 penalty if the return is not filed on time with further penalties accruing depending on when the return is filed. 

Interest and tax-based surcharges are due on late paid tax. 

Tax due must be paid by 31 January following the end of the tax year, however, two instalments of 'Payments on Account' may be required in advance in certain circumstances. The first is payable by 31 January within the tax year, along with the filing of the prior year return, and the second by 31 July following the tax year end.

Income tax rates for England, Northern Ireland and Wales

The above basic rate and higher rate thresholds level and Personal Allowance have been fixed to 2025-26 for England, Wales, and Northern Ireland.

Income tax rates for Scotland

For Scotland the Personal Allowance is fixed to 2025-26. 

The personal allowance is phased out by £1 for every £2 in excess of £100,000 so will not be obtained by higher earners. The personal allowance entitlement is also lost for those excluding over £2,000 of non-UK income and gains from UK tax under the remittance basis.

Sample income tax calculation (2021/22)

Tax calculation rates for England, Wales and NI.

Taxation in the UK depends upon your residence and domicile status. 

Non-Residents are typically taxable on UK sourced income only (e.g., personal income arising in the UK and employment income relating to UK workdays). Individuals may also be liable to UK capital gains tax on the disposal of UK residential property only.

UK residents who are also domiciled in the UK are taxable on their worldwide income (personal investment income and employment income). Any capital gains will also be taxable in the UK, subject to the annual exemption of £6,000 (2023/24). This will be further reduced in 2024/25 to £3,000.

Residents who are not domiciled in the UK, pay tax on either their worldwide income (arising basis) or on UK sourced income plus remitted worldwide income (remittance basis). The taxpayer can make the election on their UK tax return.

Remittance Basis taxpayers who have more than £2,000 of non-UK source income are typically not able to claim the personal allowance. Remittance basis taxpayers may also have to pay a £30,000 a year charge to claim this basis after they have been resident in the UK for at least seven of the previous nine tax years. This charge rises to £60,000 a year for individuals who have been resident in the UK for at least twelve of the previous fourteen tax years. Individuals who are resident in the UK for 15 of the previous 20 years are automatically “deemed” to be domiciled in the UK.

Complex rules apply with respect to the remittance basis of taxation and what constitutes remittances.

Also, the remittance basis does not apply to certain types of income/gains. The remittance basis does not apply to chargeable events in relation to life insurance policies. Non-Domiciled UK residents are always taxed on the arising basis in respect of such income. Chargeable events legislation applies to:

•    policies of life insurance,
•    contracts for life annuities, and
•    capital redemption policies.

The UK statutory residence test (SRT) was introduced from 6 April 2013, which sets out detailed rules in legislation for determining whether an individual is a tax resident in the UK.

It applies for income tax, capital gains tax and other taxes such as inheritance tax. It does not apply to National Insurance contributions (social security), which retains its own concept of residence.

The test is divided into three parts, with each part considered in turn, and only if the previous part fails to provide a conclusive answer.

• The automatic overseas test
• The automatic UK tests
• The sufficient UK ties test

The tests consider factors such as the number of days spent in the UK, as well as subjective criteria, such as personal ties to the UK to determine whether an individual is resident or not resident.

If the individual is resident in the UK or they are non-resident with UK duties all employment related income is taxed in the UK. However, there are specific and complex rules for benefits in kind and share schemes (there are deductions and exemptions available):

• expats become taxable for a single day's work in the UK with the exception of 'incidental' workdays and also possible exemption under a double tax treaty between the UK and the country of residence of the expatriate
• there is usually a requirement for tax and social security to be deducted and paid over to the tax authorities, either by the employer, the deemed employer, or the employee themselves
• personal allowances are available in some circumstances, but this is not available to high earners (this is phased out by £1 for every £2 in excess of £100,000) or those excluding over £2,000 from UK tax under the remittance basis
• employment income relating to UK workdays is taxed no matter where or when it is paid. In certain circumstances, employment income relating to non-UK workdays may fall outside of UK taxation.
•  in certain circumstances, employment income relating to non-UK workdays may fall outside the scope of UK taxation.

The source of employment income follows the OECD model treaty which means if the employee is working in the UK; the employment income will be sourced to the UK for that day.

Most benefits in kind are taxable but some are exempt and some subject to scale rates. Company car taxation and car fuel is based on the emissions and list price of the car.

Benefits are taxed on the employee but withholding taxes (PAYE) are usually adjusted to collect the tax on the benefits during the year.

There is some scope for the delivery of benefits in a tax effective way.

The remittance basis enables expatriates who are resident but domiciled outside the UK to potentially exclude income related to non-UK workdays - see overseas workdays relief. The remittance basis may also be applied where the duties of an employment are performed wholly outside the UK. This is an area where anti avoidance legislation has been introduced since April 2014 and advice should be sought accordingly.

Overseas workday relief - allows an individual to exclude the proportion of employment income which arises in respect of work duties performed outside of the UK from UK income tax, provided that this income is paid and permanently retained outside of the UK. This relief is available for the tax year that residence commences and the following two tax years where the remittance basis of taxation is claimed.

Certain rules must be followed in order to claim this relief. In addition, 'Special Mixed Fund' rules have been introduced to simplify the complexity of the rules and as a result special planning is required to ensure that claims are fully compliant.

Temporary workplace relief – expatriates who are regarded as working at a temporary workplace may be able to obtain tax relief on assignment related expenses such as accommodation, utilities, travel and subsistence payments. To qualify for relief an individual must be working away from their normal work location for a period of no longer than 24 months. There are strict record keeping obligations which must be satisfied in order to claim this relief.

Alternatively, an individual may still qualify for temporary workplace relief if they spend 40% of their working time.  In this case, the 24 months restriction does not apply provided the workplace is considered to be a temporary workplace

There are planning points around pensions, accommodation, travel and subsistence expenses and timing of payments.

Relief from double taxation is available under the provisions of the many tax treaties that the UK has with other countries or unilaterally under domestic law. Relief is typically given as a credit against the UK tax.

Deductions are available for certain travel expenses, qualifying relocations costs, pension contributions, charitable donations, professional subscriptions, medical costs when working abroad and business expenses.

Capital gains tax is separately charged on all residents. For 2023/24, the rate is 10% for basic rate taxpayers (18% on residential property and in respect of carried interest) or 20% for higher rate taxpayers (28% on residential property and in respect of carried interest).

An annual exemption may also be available (£6,000 in 2023/24) but this is not available to those excluding over £2,000 from UK tax under the remittance basis.

There are a number of exemptions and reliefs available, such as the main residence exemption for an individual's principle private residence and Business Asset Disposal relief which reduce the tax rate to 10% on up to £1 million of gains in certain circumstances. The rules are complex and specific advice should be sought.
Gains on foreign assets will typically be taxed on the remittance basis for expatriates domiciled outside of the UK.

Individuals who are non-resident in the UK are typically not subject to capital gains tax. Exceptions to this include:

1. Where an individual disposes of a residential property in the UK
2. Individual who disposes of assets, that were held at the when they left the UK, during a period of temporary non-residency.  Temporary non-residents are taxed in the year of return on gains made on such assets.
   
   

 Both of these areas are complex and specific advice should be sought prior to the disposal of any assets.  

The UK charges inheritance tax on some lifetime gifts and on death. The rules are very complex as there are a range of exemptions and reliefs. UK domiciled (and deemed domiciled) are taxed on their worldwide estate.

Non-domiciled expatriates are usually taxed only on assets located in the UK.

For 2023/24, the tax-free dividend allowance is set at £1,000 meaning that dividends received up to this amount are not taxable in the UK. The UK government have also confirmed that the dividend allowance will reduce to £500 per year, from the 2024/25 UK tax year. In excess of the allowance, dividends are taxed at separate rates.

These are currently 8.75% for basic rate, 33.75% for higher rate and 39.35% for additional rate taxpayers.

Other investment income in excess of the personal savings allowance is taxed at an individual’s marginal rate of tax.

The personal savings allowance for 2023/24 is set at £1,000 for 20% taxpayers and £500 for 40% taxpayers. No savings allowance is applicable for additional rate taxpayers (taxable income in excess £125,140 per year).

Expatriates on the remittance basis will only pay tax on foreign source investment income to the extent the income is remitted to the UK. All types of foreign income remitted are taxed at marginal income tax rates.

There are some tax-exempt savings available in the UK. Also, low earners (those who’s other income is less than £17570) may benefit from a savings rate of income tax.

 Currently no local taxes based on income.

Living accommodation is subject to a council tax. This is charged per property regardless of the income of the occupants.

Acquisition of interests in real estate is subject to stamp duty. These vary depending on the region – Stamp Duty Land Tax in England and Northern Ireland, Land and Building Transaction tax in Scotland, Land Transaction tax in Wales.

Tax can apply where a 'non-natural' person holds UK residential property, for example, property held indirectly via a company. This is known Annual Tax on enveloped dwellings (ATED).

The rates for social security, also called National Insurance, vary. From 2021/22, employees pay social security at 12% on income between £8,840 and £50,270, and 2% on any excess. Employers pay 13.8% without a cap.

Shares incentives (except certain approved schemes) are taxed in the UK as employment income. The UK tax treatment of share incentives will depend on the nature of the award and how the award is categorised for UK tax purposes. From 2015, in relation internationally mobile employees, as defined, the legislation broadly taxes the proportion of the chargeable amount based on the proportion of time worked in the UK. Advice should be sought on the UK tax treatment in relation to company share incentives plans of which an individual is a participant.

It should also be noted that Capital Gains may arise on the sale.

There are also reporting requirements at the employer level. If an employer provides employment related securities (ERS), it must submit a return by 6th of July following the end of the tax year declaring certain information. Failure to comply could result in penalties and interest.

There are no wealth taxes other than inheritance tax.

Employers with an annual wage bill in excess of £3million are required to pay an Apprenticeship Levy at a rate of 0.5% of the employer’s annual pay bill (broadly the total amount of wages subject to class 1 national insurance). Expatriates will often remain in home country system social security and are not subject to national insurance thus excluding in determining the levy.

A key area of risk for businesses with international workforces is ensuring compliance with all the relevant tax laws and regulations. It is important that all employees pay the appropriate level of tax, within the correct jurisdiction at the required time. Issues can quickly become a source of stress for employees and provide an unwanted distraction from the commercial objectives of overseas assignments. Effective tax planning and compliance, therefore, form the key pro-active elements of a company’s pre-assignment process.

In terms of assignments involving employees seconded either from the UK to overseas, or from overseas to the UK, employers must ensure that the correct amount of UK income tax, known as ‘Pay as You Earn’ (PAYE), is paid to the UK tax authorities.

A review of the UK payroll should be undertaken to check the following:

• if you send employees overseas from the UK then you have to determine if they should remain taxable on the UK payroll based on their UK residence position and UK work pattern. However, there are options to explore which could be beneficial from a cash flow perspective.
• if you send overseas employees to the UK then you have to determine whether they should be included on the UK payroll or fall under short term business visitors reporting as detailed below. There is a specific payroll regime (modified payroll) for tax equalised assignments to the UK.

Employers are required to check whether employee and employer UK social security contributions have to be made for assignees to and from the UK. It is also essential to have the correct documents in place which confirm where social security contributions are payable. For example, assignees to the UK that are eligible for UK social security contribution exemptions require a certificate of coverage (relating to countries with which the UK hold an agreement) or Form A1 (relating to moves within the EU). Without this document, then strictly speaking, dual social security liabilities could arise.

While there are exemptions to be explored, where there is no social security agreement between the UK and the 2nd country, dual liabilities could arise

Typically, a short-term business visitor (STBV) is an employee who visits the UK for work, but is employed, pay-rolled and lives overseas and not on a formal assignment to the UK. Without prior UK tax authority clearance, employers have a legal obligation to withhold PAYE deductions from such individuals, even if the visit is for just one day.

This heavy administrative burden can be avoided through a STBV agreement, which relaxes PAYE withholding requirements for STBVs to the UK if certain conditions relating to double taxation treaties are met.

STBV agreements can help achieve or maintain a low-risk rating as the UK tax authorities have indicated that they are likely to target international employers with a UK presence, who do not currently have such agreements in place. For those who do not meet the requirement to be included on the STBV report but spend less than 60 days in the UK they can potentially be included under a separate agreement allowing for an annualised payroll. This is called the Appendix 8 and is relevant if tax is due, irrespective of whether the employer is settling the tax on the employee’s behalf.

The filing deadline for both schemes is 31st of May following the end of the tax year.