Freelancers' Questions: How to avoid UK tax on my foreign income?
Freelancer’s Question: We arrived in the UK last year from abroad and I’ve since been a self-employed freelancer. I don’t want any foreign income I may have to be subject to UK tax but HMRC is asking me to self-assess; do I opt for the ‘remittance’ tax basis now and claim the ‘arising’ basis later?
Expert’s Answer: This being your first year when you complete your tax return, you must mention ‘start date’ of your business and ‘date till you prepared your accounts’ and submit those accounts in supplementary pages of the self-assessment form. You will be liable to pay taxes on all UK income, just like any other resident of the UK would.
I assume your domicile is non-UK. For non-domiciled residents, they have the choice to tax their income on a remittance basis or an arising basis. If you select remittance basis, then you report income you remitted to the UK from abroad. Remittance as a non-domiciled does indeed allow you to avoid UK tax on your foreign income or gains. The latter would only incur UK tax when they are brought to the UK; utilised by you here or enjoyed by you here.
If you choose an arising basis, then you must report your worldwide income. In the case that your global income outside the UK is not more than £2,000, you do not need to report such a level of income on the tax return.
The choice between remittance and arising can be made for each tax year. For example, you can decide to choose the remittance basis tax for year 2015/2016, and then decide to pay tax on an arising basis next year. There is, though, an annual charge for the choice. The charge works out as follows:
|First 7 years of Residence||Nil
|Resident in UK more than 7 years out of past 9 years||£30,000
|Resident in UK for more than 12 years out of past 14 years||£60,000
|Resident in UK for more than 15 years out of past 20 years||£60,000
|Resident in UK for more than 17 years out of past 20 years||£90,000
This being your first year, you would fall in the top category and therefore no charge for taxation on the remittance basis would accrue. It seems you would be better off claiming remittance basis for the first 7 years of residence. Once past the 7-year mark, then it may be worth you comparing paying the £30,000 charge and save tax which may be higher if you’re not remitting the money. This is where planning can be important in exercising your choice.
Lastly, although how to determine status and domiciled status is not what you’re asking about, there is of course a difference between tax resident and domiciled. Residency status determines if you need to pay tax in the UK or not, so if you are both tax resident and domiciled in the UK then you must pay tax on your global income. If you are a UK tax resident but non-domiciled, then you have a choice to pay tax on remittance basis in relation to income outside UK.
The expert was Sumit Agarwal, managing director of contractor accountancy firm DNS Associates
9th October 2016