How Do Double Taxation Agreements Affect Non-UK Residents With UK Income?

This article is all about double taxation in the UK. We will look at what they are, how they work, and the benefits they provide for expats.

What is a Double Tax Agreement?

Double tax agreements, also known as double tax treaties, or DTAs for short, are agreements in place between two countries.

As the name suggests, one of their key functions is to help people avoid being taxed twice on the same income. They also protect against attempts to avoid tax.

DTAs cover various types of income, such as:

• Income from employment
• Business profits
• Investment income, including dividends and interest
• Capital gains
• Pensions and other types of retirement income

Examples of How Double Tax Treaties May Apply in the UK

A British Resident Earning Income from Overseas

• If a taxpayer is a UK resident, they are subject to taxation against their worldwide income and assets.

• If a taxpayer is employed in a country that does not have a DTA with the UK, they may be subject to tax on their foreign income in both countries without any way to offset the tax paid at source against the liability in Britain.

• If a taxpayer is employed in a country that does have a DTA, the taxpayer would usually be able to claim back the income tax already paid overseas, declaring this on their self-assessment tax return.

A UK Expat Living Overseas With British Assets or Income

In this opposite scenario, the taxpayer has relocated abroad but still has income originating from the UK or owns British assets such as property. The normal process would be for the taxpayer to submit a tax return to HMRC, but only include income or earnings that arise within the UK.

Because the taxpayer is a tax resident in another country, their worldwide income and assets are taxable in that location rather than in Britain. From there, they would need to claim against the DTA and provide evidence of the tax paid to the UK tax office in order to claim a reduction in their tax obligations.

How Does a Double Taxation in the UK Work?

All double tax agreements are different. However, their primary purpose is to define which country has taxing rights. For UK double tax agreements, this means establishing your tax residency status.

Your domicile status and the statutory residence test (SRT) are considered to determine UK tax residency.

For those with dual residents, meaning they are registered in two countries for tax purposes, a ‘tie-breaker test’ determines which country has taxing rights.

Once this is established, an individual may claim tax relief from HMRC or the tax authority for their country of residence. This relief is typically in the form of a tax credit or exemption.

Be aware that from April 2025, your domicile status and how it applies to UK tax liability will change. It will be replaced by a new system based on tax residence.

What Countries Does the UK Have Double Tax Agreements With?

Most countries have double tax agreements. In fact, there are over 3,000 DTAs globally, and the UK has agreements with roughly 120 countries, making it the largest network of treaties of any country.

Some of the countries the UK has agreements in place with are:

• The USA
• Switzerland
• Hong Kong
• Malaysia
• Thailand
• The United Arab Emirates (UAE)

Most DTAs are based on the Organisation for Economic Co-operation and Development (OECD) Model Taxation Convention. However, some countries, such as the USA, have a separate standard form and do not use the OECD model.

Visit the government website for a complete list of UK tax treaties and details on each.

Why Double Tax Agreements Matter For Expats

Numerous circumstances can trigger double taxation in the UK. The two main culprits are:

• If you are a resident of a country that taxes worldwide income and have income from another country.

• You are classed as a resident in two countries.

Expats often fall into one of these two categories. Therefore, understanding DTAs is essential to avoid paying more tax than necessary or not paying tax in the right place.

It’s important to note that each double tax agreement is different. As an expat, you need to know if a DTA exists; if one does, you should know its terms or rules.

How Do Expats Benefit From Double Taxation in the UK?

Besides paying double taxation in the UK, DTAs provide two additional benefits for expats:

Clear Tax Treatment

Tax laws can be complicated at the best of times. However, they become even more challenging when dealing with cross-border tax laws.

Double taxation agreements clearly state which country has taxing rights on a specific income. This lets expats know where their income will be taxed and how much is due.

Reduced Tax Rates and Exemptions

Depending on the location, tax treaties often provide reduced tax rates and exemptions on certain types of income.

For example, let’s say an expat is working in the UAE or another low-tax jurisdiction. If that jurisdiction’s tax laws apply to income earned there, it could result in substantial tax savings.

Conclusion

While double tax agreements protect expats and provide several benefits, they can be complex. It is recommended that you seek expert advice to ensure you are as tax-efficient as possible.

At Taxd, we specialise in the expat market, meaning our team is fully equipped to handle cross-border tax implications and other financial challenges that come with working abroad.

FAQs

1. Is there double taxation in the UK?

You may have to pay taxes in both the UK and another country if you are a resident here and have income or gains abroad or if you are a non-resident here and have income or gains in the UK.

2. Do dual citizens pay taxes in both countries in the UK?

If you live in the UK and another country and both countries tax your income, you're a dual resident. You can claim full or partial relief on UK tax if the two countries have a double taxation agreement that allows you to do so. A double taxation agreement is an agreement between 2 countries.

3. Do I pay tax in the UK if I live abroad?

If you're a non-resident, you do not pay UK tax on income or gains earned outside the UK. Your non-resident status may begin the day after you leave the UK, depending on your circumstances and how 'split year treatment' applies to you. In such cases, filing a non-UK resident tax return may be necessary to ensure compliance with UK tax laws.

4. Does the UK have a double taxation agreement?

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.