Will overseas remote working affect my tax and residency position?

Will overseas remote working affect my tax and residency position?

Over the last few years, many employees and business owners have been working from home. For some, the advantages of working from home have been significant and with more businesses open to flexible working, some employees are taking remote working to the next level by working abroad permanently or for extended periods of time.

Overseas remote working if your employer allows it may seem simple, but as an employee you need to know if overseas remote working will affect your tax residency position, your UK income tax and your National Insurance Contributions.

In this blog, we explore all you need to know about overseas remote working arrangements and the impact it may have on you as a UK tax resident, your UK income tax, national insurance contributions and host country income tax.

If you need help and advice on overseas working, contact our tax team in Wirral, Chester, or Liverpool.

How does tax work if I work remotely for a UK employer in another country?

Before you decide to work overseas, you should check the position of your UK employer. Many UK employers, have very strict guidelines about overseas working to avoid complex tax issues for their payroll.

However, if your employer is happy for you to work abroad, then your flights, visas and accommodation will likely be top of the to do list, but working our your ongoing tax position should also feature high on your list.

Working overseas can trigger all sorts of tax, social security and other legal consequences for both you as a UK employee and your employer. All these need to be considered separately.

The legality and tax position of an employee in an overseas working arrangement depends on a lot of factors such as the local tax laws in the country you plan to work from, how long you plan on staying there and whether the overseas country you are working from has a double tax treaty with the UK.

An individual’s UK residency status is determined by the Statutory Residence Test which effectively determines the individual’s residency position based on the number of days spent in the UK with their ties to the UK.

If you are UK resident, you will be taxed on your worldwide income (unless you are not domiciled in the UK and make a claim for remittance basis). If you are not resident in the UK, you are generally only taxed on your UK income and certain UK gains.

What is the Statutory Residence Test?

There are a number of automatic tests which are considered first and if one of these tests are met then you are definitively classed as either a UK resident or a non-UK resident. The first three tests are simple day counts.

First automatic UK test – if you have had 183 or more days in the UK during the tax year, than you are a UK resident for tax purposes and there is no need to go through the rest of the tests.

First automatic overseas test – if you were resident in the UK in any of the previous three tax years and you spend less than 16 days in the UK during the current tax year, than you will be considered to be not resident in the UK.

Second automatic overseas test – if you were not resident in the UK in any of the previous three tax years and you spend less than 46 days in the UK during the current tax year, then you will be considered to be not resident in the UK.

The third automatic overseas test; and the second and third automatic overseas and UK tests are more complex as these take into account factors such as your full-time work, your home and your UK days of presence.

If you fail to meet any of the automatic tests, then the sufficient ties tests will be applied. These consider your ties with the UK along with your UK days of presence.

You will note that the statutory residence test heavily relies on day counting and therefore it is vital that good records are maintained.

Are you moving to or from the UK part way through a tax year?

If you came to or left the UK part way through a tax year, then you may qualify for split year treatment. Split year effectively splits the tax year into two parts, one as a non-resident individual and one as a UK resident individual, which can be particularly advantageous from a tax perspective.

What impact will the Double Tax Treaty have?

Your residency position is only the starting point, you will also need to consider the local tax laws and whether the country has a double tax treaty with the UK.

It may be the case that more than one jurisdiction looks to tax the same income. If there is a double tax treaty between the jurisdictions, this can provide relief from double taxation.

Check here for countries that the UK have double tax agreements with.

Does my domicile status affect my tax?

A non-domicile status in the UK means that that a remittance basis claim can be made. This means that any overseas income and gains can be excluded from UK taxation on the basis that these are not brought into the UK. There are advantages and disadvantages to a remittance basis claim and professional advice should be sought, particularly as these rules are to change following the March 2024 Budget

Note that your residency position is different to your domicile which is a legal concept.

What happens about income tax when working abroad?

Understanding your personal tax obligations when you opt to work abroad are crucial. You should understand these before you leave the country. For income tax purposes, if you physically carry out duties overseas then, subject to protection under a double taxation agreement, usually the country in which you are working will seek to deduct income tax from the income you receive for those duties.

Even if the duties you carry out are for a UK employer, under a UK contract and receive your pay into a UK bank account the country you work in may want to tax you too. This is all subject to whether a double taxation agreement is in place and the rules of the country concerned.

While residing in another country, you could still be liable for UK taxes on your worldwide income if you retain your UK tax residency status. The UK taxation system generally applies to all income earned by its residents, regardless of location.

Reporting foreign income

If you need to pay tax, you usually report your foreign income in a Self Assessment tax return. But there’s some foreign income that’s taxed differently.

If your income is taxed in more than one country

You may be able to claim tax relief if you’re taxed in more than one country.

If you’ve not yet paid tax on the foreign income, you may need to apply for a certificate of residence to prove you’re eligible for relief.

If you're taxed twice

You may be taxed on your UK income by the country where you’re resident and by the UK.

You may not have to pay twice if the country you’re resident in has a ‘double-taxation agreement’ with the UK. Depending on the agreement, you can apply for either:

• partial or full relief before you’ve been taxed
• a refund after you’ve been taxed

Each double-taxation agreement sets out:

• the country you pay tax in
• the country you apply for relief in
• how much tax relief you get

If the tax rates in the 2 countries are different, you’ll pay the higher rate of tax. The tax year may start on different days in different countries.

What happens to my employee national insurance contributions?

Social security is a completely separate area from income tax in all countries.

Your obligation to contribute to the UK National Insurance system while working abroad depends on two key factors:

Your Work Location: Whether you'll continue paying National Insurance depends on the country you're working in. There may be reciprocal agreements in place between the UK and your new country of residence that affect your contributions.

Work Duration: The length of your overseas work assignment also plays a role. Short-term assignments might not trigger National Insurance contributions in the UK.

If the country you’re working in does not have a social security agreement with the UK, you may need to pay social security contributions there. If you are liable to social security overseas, then it is likely that your employer may also be liable for employer’s social security in that country. Your employer may also have withholding obligations as a result.

If there is a social security agreement in place between the tax authorities of countries, this agreement may be bilateral (between two countries) or multilateral (between several countries). EEA countries and Switzerland, for example, have a multilateral social security agreement.

If the country you’re working in has a social security agreement with the UK, you’ll usually pay into UK National Insurance. You may need to get a certificate showing you’re exempt from paying social security in the country you’re in.

Other reasons you might need to pay National Insurance in the UK

You will need to pay National Insurance in the UK for the first 52 weeks of working abroad if you meet all of the following conditions:

• you’re working abroad temporarily
• your employer has a place of business in the UK
• you’re ordinarily resident in the UK
• you were living in the UK immediately before starting work abroad

Your employer is responsible for deducting your National Insurance from your earnings.

Paying voluntary National Insurance contributions whilst working in an overseas country

Even if you are not liable to pay National insurance here in the UK, you may opt to continuing paying it as there are many benefits to paying UK National Insurance longer term. You can opt to pay voluntary National Insurance contributions in the UK while you’re working abroad.

Check if you’re eligible to pay voluntary National Insurance contributions while abroad.

The benefits of continuing to pay UK National Insurance is that it will help to protect:

• your benefit entitlement
• your State Pension whether you choose to return to the UK or stay living abroad

NOTE: Voluntary UK National Insurance contributions do not cover your health insurance in the country where you live. You will need to be fully aware of your requirements for health insurance in the country in which you are working.

How can Haines Watts help with your personal tax?

Determining your residency position can be complex if you are a UK employee looking to work abroad. Working overseas may affect your personal tax such as income tax and National Insurance.

This blog only touches on some of the considerations, and it is important that professional advice is taken. It is important as a business owner or employee that you understand your own residency status if you are intending to work overseas.

If you have employees that want to work overseas, clear rules should be set to ensure that any overseas compliance, social security, HR and payroll obligations are met. Those who own a business via a company should take tax advice both personally and for the company ahead of taking on any overseas work.

Considering overseas work? Our tax team can help you navigate the complexities of international income and National Insurance obligations. Contact us today.

Frequently asked questions about working abroad and the tax implications

How long can I work outside the UK without tax implications?

Tax and social security payments will depend on each countries tax laws. However, generally, if you have had 183 or more days in the UK during the tax year, than you are a UK resident for tax purposes and there is no need to go through the rest of the tests.

Where do you pay tax if you work remotely abroad?

Your UK tax position when working in an overseas country depends on a lot of factors such as your personal circumstances, the local tax laws in the country you plan on working from, how long you plan on staying there and whether the overseas country you are working from has a double tax treaty with the UK. Read more details above about statutory residency test.