Every year thousands of people leave Britain for foreign shores. Whether the move is permanent or temporary, there are tax implications and HM Revenue & Customs must be kept in the loop.
You don’t need to tell the taxman if you’re abroad for holidays or even business reasons, but trips longer than a full tax year need to be flagged.
Fill in HMRC’s form P85 either online (you will need a Government Gateway account) or by post. You will need to include parts two and three from the P45 your employer will give you when you leave a job.
HMRC will use the form to calculate if you are owe or are owed a refund for the portion of the tax year you were in the UK.
Self-assessment tax returns cannot be completed online once you leave the UK. Instead you must send it by post, use special software or speak to an accountant. Remember, the deadline is shorter for paper returns – you must file by October 31, compared to January 31 for online returns.
In the UK most pensions offer 25pc entirely tax free, but a lot of countries don’t allow that and they may end up paying a lot more tax in the country they’ve emigrated to
If you have non-resident status (if you spend fewer than 16 days in the UK, for example) you do not pay tax on income generated abroad. However, you may need to pay tax on UK earnings even if you are non-resident, typically on income earned from British property, private pensions or saving accounts.
Britain has “double taxation agreements” with many countries that are popular with expats, which mean you don’t pay tax twice on the same income. The terms of each agreement specify the country you pay tax in or claim relief. If tax rates differ, you pay the higher rate. Note that tax years in other countries do not necessarily mirror the UK’s April-to-April calendar.
Sue Moore, of the Institute of Chartered Accountants, warned that émigrés often get caught out by the tax treatment of pensions.
“What often happens is people move to somewhere like Spain and make withdrawals from a private pension from the UK. HMRC will automatically deduct tax and you will only be able to reclaim the tax if you can prove you have paid tax in Spain – that can cause problems.
“Emigrants also come unstuck when taking the tax-free lump sum from pensions. In the UK most pensions offer 25pc entirely tax-free, but a lot of countries don’t allow that and they may end up paying a lot more tax in the country they’ve emigrated to.”
Ms Moore said individuals in this situation should consider cashing in their pensions while still resident in the UK, before moving abroad.
She also warned that some people risked becoming “frozen pensioners”. A quirk in the rules governing the state pension means some pensioners do not get the annual increases afforded to British retirees. The state pension is currently protected by the “triple lock”, where payments rise each year by 2pc, earnings growth or inflation – whichever is higher.
Yet expats in certain countries – including Canada, Australia and South Africa – do not get increases. Their pensions are fixed at the same level as when they left Britain, meaning recipients’ spending power is reduced dramatically over time.
The Government has maintained the same stance for 70 years, only increasing payments where it is compelled by law or reciprocal agreements to do so. However, agreements appear to be arbitrary. Pensioners in the US, for instance, do get increases, but many in the Commonwealth do not.