Taxes in the UK

In this article, Foundry Accounting specialists explain the main taxes in the UK. After reading, you can ask questions and learn how to legally reduce your tax liability.

Tax Residency

What is the difference between a resident and a tax resident?

The terms “resident” and “tax resident” are often confused due to their similar wording. Being a UK resident typically refers to immigration status, such as holding a long-term visa, permanent residence, or citizenship. However, having such status does not automatically make you a tax resident.

In the UK, tax residency is determined by the Statutory Residence Test (SRT), which considers factors like the number of days spent in the UK (typically 183 days or more in a tax year) and other ties, such as family, work, or accommodation. You may be a tax resident even if you spend fewer than 183 days in the UK, depending on these criteria.

Do you have to pay tax if you are not a UK tax resident?

UK tax residents must declare and pay tax on their worldwide income. Non-tax residents are only liable for tax on income earned within the UK, such as from UK-based employment, business activities, or investments.

Double Taxation

The UK has double taxation agreements with many countries, ensuring that income is taxed only in the country where it is earned or providing relief if taxed in both. Before paying tax, check whether a treaty exists with the country where your income originates.

Special Tax Regime

What is domicile?

Domicile is a legal concept referring to your permanent home country, often determined by birth, choice, or long-term ties. It differs from tax residency or citizenship. You can be a tax resident or citizen of multiple countries but have only one domicile. In UK tax law, domicile affects tax liability, particularly for non-domiciled individuals.

Non-domiciled residents may use the remittance basis, a special tax regime for taxing foreign income and gains.

How does the remittance basis work?

Under the remittance basis, non-domiciled UK tax residents pay tax only on UK income and foreign income or gains brought into (remitted to) the UK. Foreign income or gains not remitted to the UK are not taxed. This can be beneficial if you have significant overseas income, such as from property or investments, and wish to keep it outside the UK.

However, choosing the remittance basis means forfeiting the personal allowance (£12,570 for 2024/25, tax-free income for most residents). You must also comply with strict rules to avoid inadvertently remitting foreign income.

How much does the remittance basis cost?

The remittance basis is free for the first 7 years of UK tax residency (if you are a tax resident for 7 out of the previous 9 tax years). After this:

·        From year 8, a £30,000 annual charge applies if you remain a UK tax resident and choose the remittance basis.

·        From year 13 (if a tax resident for at least 12 of the previous 14 tax years), the charge increases to £60,000 annually.

Who cannot use the remittance basis?

Individuals with a UK domicile cannot use the remittance basis. Additionally, if you have been a UK tax resident for 15 of the previous 20 tax years, you are deemed UK-domiciled and lose access to the remittance basis. In this case, you must pay tax on your worldwide income and gains, including inheritance tax on worldwide assets.

How to retain the ability to use the remittance basis?

To maintain non-domiciled status and access to the remittance basis, you must cease being a UK tax resident for at least 6 full tax years. This may involve limiting your time in the UK (e.g., to 45 days or fewer per tax year, depending on your circumstances) and reducing ties to the UK, such as family or property connections. Consult a tax professional for guidance on the Statutory Residence Test criteria.

Temporary Non-Resident Status

If you have been a UK tax resident for 4 or more of the previous 7 tax years and then leave the UK, you may be classified as a temporary non-resident for up to 5 years. During this period, certain income or gains (e.g., capital gains) earned while abroad may be taxed if you return to the UK. Specific rules apply, so seek professional advice.

Ask a Foundry Accounting specialist for personalised guidance on reducing your tax liability legally.