Packing up your life in the UK and moving abroad for work is a huge life decision. Moving back to the UK is no different.
According to the United Nations, just over 4.5 million British citizens are living outside of the UK. If you’re one of those who are thinking of returning to the UK, you’ll want to have your financial affairs in order. Being prepared will make your move back to the UK as smooth as possible.
Tax residency and state pension entitlements can be tricky areas to understand. Returning expats need to be aware of both, so there are no nasty surprises when you arrive back to the UK.
What is tax residency?
Your tax residency refers to the country you are a resident of for tax purposes. Your tax residency will determine what you are taxed on, and in which country tax will be applied.
You will be taxed on worldwide income as a tax resident in the UK. The exception is if your permanent home is abroad. Income that can be taxed includes:
– Wages received while working abroad
– Foreign investments and interest earned from savings
– Rental income from a property located overseas
– Income from pensions held overseas.
You should be aware that if you have worked outside of the UK for less than a full tax year, you remain a UK resident for tax purposes.
Am I a UK tax resident?
HMRC introduced the Statutory Residence Test in April 2013 to clearly define when someone is, and is not, a UK tax resident.
The general rule of thumb is, non-UK residents only pay tax on income from sources based in the UK. Once you become a UK resident, HRMC has the right to tax you on all of your income and gains. This includes wages and other foreign income, although this may not apply if your permanent home is abroad.
Here is a general breakdown of the Statutory Residency Test. It is highly advised that you speak with a financial advisor to determine your tax residency based on your individual circumstances.
If your residence can’t be determined using this test, then a ‘sufficient ties’ test will be used to determine your tax residency. This can be quite complicated and it is recommended that you speak with an expert.
Be aware that you could be classed as a UK resident before you even come back to the UK. If you have been a non-UK resident for less than three years, residency can be triggered if you spend 16 days or more in the UK. After three years this changes to 46 days of a tax year, or 30 days if you stay in a UK property that could be considered your main home.
NI contributions and your state pension
The UK state pension and National Insurance contributions are directly related. The new state pension requires a minimum of 10 years of National Insurance (NI) contributions to qualify. Any years spent working abroad can go towards your qualifying years. This only applies to EU countries or countries that have a Social Security Agreement with the UK.
For example, you have eight qualifying years of NI contributions but then worked in a country for 15 years that has a social security agreement with the UK. The 15 years of contributions you made to that countries state pension will mean you meet the minimum qualifying years for the new state pension because of your time overseas. However, your state pension amount will be based on the NI insurance contributions you made in the UK; in this case, it is eight.
If you worked in a non-EU country or one without an agreement in place with the UK, you might need to make up NI shortfalls.
The UK government website lets you check your NI record, this is a great place to start and get a better idea of any gaps or shortfalls. You can make voluntary contributions if you do have any gaps, and make sure you are entitled to the full amount when you come to retire.
What to do next
Failing to declare and pay the correct tax on income can lead to penalties and even fines.
Before you return to the UK, you need to know when you will be considered a UK tax resident and the implications. The same applies to National Insurance contributions and state pension entitlement.
Tax residency and other information mentioned here can be confusing. For more information and to speak with an expert, contact us using the form below.