Paying Taxes When You Live Abroad
When you first move abroad, the most pressing issue relating to taxes is where you will pay them. Don't assume that, because you have left Britain, you no longer have to worry about paying tax there. In fact, the regulations which govern where you should pay your taxes are rather complex. The good news is that, though governments sometimes have overlapping claims of jurisdiction on you, the existence of double taxation agreements ensures that you should not be taxed twice on the same income. Britain does not have double taxation agreements with all countries - although it does have more of such agreements than any other country in the world.
Tax Residency When Working Abroad
Whether you pay tax to the British authorities or not is determined by your tax residency status. You are deemed tax resident in Britain if you live here for at least 183 days in the tax year (which runs from April 6 to April 5). You can also be deemed tax resident in Britain if you are here for an average of 90 days each year over a 4 year period. This is something to bear in mind if you flit frequently back and forth between countries. If you leave Britain to take up permanent employment abroad, or with the intention of staying abroad for at least 3 years, you will be treated as not resident in Britain from the day you leave.
If you are paying tax abroad but still have certain kinds of income from Britain, for example if you have savings deposits there and you receive interest payments on your savings, you should apply for tax to be waived on your income from Britain. Normally, a financial institution will deduct tax at source on any payments you receive. This can mean that your money is being taxed twice, once in Britain at source, and once in your new country as income. Form R105 allows you to apply to financial institutions to receive interest payments without tax first having been taken off.
To clarify your future tax status with the authorities, you should fill out and return form P85 from HM Revenue before you leave Britain.
Income Tax Abroad
Britain operates under the PAYE (Pay As You Earn) system, meaning that employers do most of the work, deducting the tax you owe from your pay packet. Most British people, therefore, aren't used to handling their own tax affairs. Unfortunately for us, most of the rest of the world does not handle tax in the way we are used to. In fact, in many countries, taxpayers must fill out forms, declaring their own income to the government each year. This is comparable to the British self-assessment system. In Britain, though, it is usually only high-earners and the self-employed who are forced to use self-assessement, so the chances are you won't be familiar with it. The key thing to bear in mind is that you have to set aside some of the income you are earning as you are earning it to pay your tax bill later on. If you spend all of your income, you will eventually up with a huge tax bill which you have no way to pay. In some countries, after living for a year, you will be asked to make advance payments on your tax bill for the current year, based on your declared income of the previous year.
Tax Levels Abroad
Of course, if you're living in a different country long-term, you'll be under a different taxation regime. What you can expect from this varies depending on the country you are in, but, generally speaking, levels of taxation in Britain are slightly below those of the European average, while European countries as a whole tend to have higher taxation levels than most other developed countries.Don't always assume that the structure of taxes abroad will be identical to that in Britain. Although the tax systems in most other developed countries are broadly similar, consisting of progressive income tax, sales or value added tax and corporation tax, in some countries there may be taxes you are not used to or taxes you are familiar with may be applied at levels unheard of in Britain. For example, in France there is a wealth tax, applied to those who have assets above a certain value level; in Germany a tax is applied to property sold within ten years of purchase to discourage property market speculation.
Taxes Abroad - Conclusion
Taxes can be one of the most daunting aspects of working abroad. But some careful research, supplemented by professional advice when needed, should see you overcome any difficulties you might have.
