Taxation of Income received by Non-Residents

Individuals not resident in the UK may still be subject to tax on UK source income, though they will be outside the scope of UK tax on non-UK income.

The good news is that investment income from UK sources is often ‘disregarded income’, meaning there will be no further tax in excess of any tax deducted at source (often there will be none). Rental income does not fall into this category, and this is discussed in more detail below, together with taxation of employment income.

It’s important to consider the rules regarding Temporary non-residence.

UK Source Investment Income

Non-resident individuals who are only in receipt of UK source savings and investment income will not face a tax charge. This is because such income is ‘disregarded income’ for tax purpose, and the amount of tax is limited to the amount of tax, if any, deducted at source.

‘Disregarded income’ includes income from the following sources:

  • Interest from UK banks and building societies
  • Income from UK unit trusts
  • Dividends from UK companies
  • State pension
  • Some income from Life Annuities, depending on how acquired.

If disregarded income forms a non-resident individual’s only income source, a return is not normally required.

UK Source Rental Income

UK rental property income is not ‘disregarded income’. Therefore any net profit is subject to UK tax. By default, the tenant or the letting agent should deduct tax at source (normally at 20%). Many landlords, or their lettings agent, will instead complete a Non-resident Landlord (NRL1) application form. This allows the rent to be paid without tax being deducted. In either case, the landlord will normally need to file a tax return each year.

Where there is a net profit, it’s important to check whether the individual is eligible for a UK personal allowance. For 2020/21 the personal allowance is £12,500. If an individual is eligible for the personal allowance, the income below that amount will not be subject to tax, with only the amount over the amount being taxable. The personal allowance is given to non-residents on the basis of nationality and/or country of residence. See Individuals Entitled to the UK Personal Allowance.

Example 1

Tim grew up in the UK and holds a UK passport. He now lives in the US and has not been resident in the UK for many years. However, he still owns a UK property, which he rents out. His net rental profit is £18,000 for 2019/20.

Tim is eligible for the personal allowance as he has a UK passport.

Tax: £18,000 – £12,500 (personal allowance) = £5,500. Tax at 20% = £1,100.

Example 2

Rose is a Canada national. She lived for a few years in the UK and bought a UK property. She has now moved back to Canada and is no longer resident in the UK. She rents out her UK property for a net rental profit of £10,000 for 2019/20.

Under the tax treaty between Canada and the UK, Rose is eligible to use the personal allowance on the basis that she is both a resident and national of Canada.

She has no tax to pay in the UK because her UK source income is below the personal allowance.

UK Source Employment Income

Days that a non-resident spends working in the UK will result in UK sourced income (unless they can be classified as ‘merely incidental’, which is discussed below). As a consequence, the income relating to those UK workdays is taxable in the UK. However, there will often be a Tax Treaty in place between the UK and the individual’s country of residence, and this may result in the income relating to the UK workdays being removed from UK taxation, resulting in no tax to pay in the UK.

This is because Tax Treaties between the UK and other countries will normally contain an ‘Income from Employment’ article. This treaty article often gives full taxation rights to the country where that individual is resident if they meet the following conditions:  

  1. The individual is in the UK for 183 days or fewer in the relevant 12 month period.
  2. The individual does not have a UK employer
  3. A UK entity (e.g. a sister company in the UK) does not ultimately pay the cost of the employment either directly or indirectly, e.g. by recharges.

Example 3

Tobias is resident in the US, and is employed by a US company. He makes a number of trips to London for work. This work does not fit the criteria of being ‘merely incidental’. He therefore examines the Tax Treaty between the US and UK, which states:

Article 14: Income from employment
[……..]
2. […]remuneration derived by a resident of a Contracting State [i.e. United States] in respect of an employment exercised in the other Contracting State [i.e. UK] shall be taxable only in the first-mentioned State [i.e. United States] if:
(a) the recipient is present in the other State [i.e. UK] for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the taxable year or year of assessment concerned;
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State [i.e. UK]; and
(c) the remuneration is not borne by a permanent establishment which the employer has in the other State [i.e. UK]

Tobias’ situation is examined and (a) he is present in the UK not more than 183 days in the period; (b) his employer in the US pays Tobias’ remuneration; and (c) the remuneration is not borne by a UK permanent establishment. Therefore taxation rights are with the US, rather than the UK. This is obviously useful, since Tobias is paid via US payroll, and so no tax adjustments need to be made.

The situation would be different had Tobias been working for a UK entity, or if a UK entity (e.g. a sister company of the US company that employs him) claimed a deduction for his earnings when calculating their taxable profits.

Permanent Establishment

Where an overseas employee performs substantive work in the UK, it is worth considering the rules regarding Permanent Establishment. This is because the presence of overseas employees in the UK could cause there to be a permanent establishment for the company in the UK. Tax treaties between the UK and other countries contain a ‘Permanent Establishment’ article that can be used to determine whether the activities that the employee carries out could result in there being permanent establishment. Where there is no tax treaty between the UK and the other country, the rules default to the UK corporate tax law position, which states that a permanent establishment in the UK arises where an entity:

  • Has a fixed place of business in the UK, or
  • Where there is an agent who is active in the UK on behalf of the company, habitually concluding contracts in the name of the company.

Therefore, where an individual is employed outside the UK but regularly conducts business in the UK it would be worthwhile considering the Permanent Establishment rules in more detail. If there is a Permanent Establishment then the employee’s income in relation to their work in the UK may be expected to come into the scope of UK income tax.

Tax Compliance

Where an individual has UK source income, such as employment income, which is not taxable in the UK as a result of a treaty article (such as above), the individual may need to complete Form HS 304 (‘Claim by a non-UK resident for relief from UK tax under the terms of a Double Taxation Agreement’) as part of their UK tax return, should they be required to file a tax return.

Incidental Duties

Work duties in the UK which are ‘merely incidental’ to duties performed abroad are treated as though those duties were performed abroad and therefore will not constitute UK source income, and consequently will not be taxable.

It’s important to note that HMRC (the UK tax authority) state that if the work performed in the UK is of the same, or similar, importance to the work performed overseas, then it will not be ‘merely incidental’. This means that there are relatively few scenarios where an employee can claim that their work activities in the UK are merely incidental. For some examples provided by HMRC see here.

Calculating the Tax for a Non-Resident Individual

If an individual is only in receipt of ‘disregarded income’, no calculation is needed, as no tax will be due.

On the other hand, if an individual is in receipt of a mixture of ‘disregarded income’ as well as other UK source income (such as rental income) it is possible to calculate the tax due in two ways, with the individual opting for the one resulting in the lower tax liability.

Calculation 1: include all items of disregarded income and deduct the personal allowance (if eligible)

Calculation 2: exclude all items of disregarded income but no deduction of the personal allowance allowed.

Example 4

Derek is resident in Germany and is not resident in the UK. He spends time working in the UK each year. In tax year 2019/20 he was paid via UK payroll £18,000 for his UK work duties. In addition, he received £8,000 of interest income from the UK. Derek has checked, and he is eligible for the personal allowance.

As the calculation below shows, it would be best for Derek to file a tax return under Calculation 1 (i.e. including the disregarded income, and keeping the Personal Allowance).

 Including Disregarded IncomeExcluding Disregarded Income
Employment income18,00018,000
Bank interest  8,000
Total income received26,00018,000
   
minus Personal Allowance(12,500)
Income on which tax due13,50018,000
   
Non-savings income:  
 Basic rate: 20%1,1003,600
Savings income:  
 Nil-rate (first £1,000)0
 Basic rate: 20%1,400
   
Tax liability2,5003,600

Example 5

Sophie is also a UK non-resident who spends time working in the UK. In tax year 2019/20 she was paid via UK payroll £18,000 for her UK work duties. In addition, she received £20,000 of interest income from the UK. Sophie has checked, and she is eligible for the personal allowance.

As the calculation below shows, it would be best for Sophie to file a tax return excluding the disregarded income, even though it means losing the Personal Allowance.

 Including Disregarded IncomeExcluding Disregarded Income
Employment income18,00018,000
Bank interest20,000
Total income received38,00018,000
   
minus Personal Allowance(12,500)
Income on which tax due25,50018,000
   
Non-savings income:  
 Basic rate: 20%1,1003,600
Savings income:  
 Nil-rate (first £1,000)0               
 Basic rate: 20%3,800
   
Tax liability4,9003,600