Life as a Digital Nomad: Should I pay digital nomad taxes to the UK government?
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This article is not formal tax advice is for informational purposes only, and the facts might have changed since we wrote it.
Anybody who wants formal advice should contact a tax professional, or in some cases, the government departments directly.
As information communications and media technologies continue to connect the world and make the global village smaller, eliminating borders and changing how we do business, countries and governments have the unenviable task of updating existing policies and legislation to adapt to the times.
Among the needed updates is one to taxation systems so they provide more clarity and accommodate new, emerging ways of working—such as digital nomad taxes. Taking full advantage of the freedom of remote work and the gig economy, digital nomads are gaining more prevalence as a popular way of working.
Digital nomads wander from country to country, enjoying a life of adventure and freedom, as they use the internet to do work on the road. Popularized by social media influencers and internet content creators, the lifestyle only managed to become more accepted around the world when the pandemic forced many countries into lockdown.
Now, countries like Barbados, Bali, Greece, Malta, Croatia, and the Cayman Islands are offering residence visas and permits for remote workers, digital nomad visas in essence, to attract nomads to bolster tourism. As long as they make a minimum income from their work outside these countries, digital nomads can stay, live, and work in these countries for months, up to years.
But while the lifestyle is appealing and the list of countries welcoming them becoming longer as time goes on, digital nomad taxes are challenging to work out in may situations, and even downright confusing at times.
As a nomad from the United Kingdom, should you pay digital nomad taxes back to the British government?
As a relatively new concept, digital nomad taxes are not considered in many tax systems, including that of the UK government. At the very least, digital nomad taxes are in a legally uncertain grey area found in between being classified as UK income or foreign income.
Many digital nomads often move from country to country, while others prefer to stay in a cheap and comfortable getaway of their choice. The revenues the government gains from digital nomad taxes, in such cases, are severed from their country of origin, beyond that of typical foreign income.
Meanwhile, many nomads are sustained by contractual work. The gig economy in this case funds jobs that are fundamentally incompatible with the Pay As You Earn tax system employed by many countries around the world.
All these different factors only serve to add confusion to where and how digital nomads should file their tax obligations.
What are the basics you need to know about digital nomad taxes as a British nomad?
As a British citizen, the UK government requires you to pay income taxes on your foreign income, such as those you make from wages working for companies abroad, from foreign investment income like dividends and savings interest earned from foreign assets, rental income on overseas properties you own, or any income you earn from pensions held overseas.
In general, the British government defines foreign income as any income you earn from outside England, Scotland, Wales and Northern Ireland. For such cases, anything you earn from the Channel Islands and the Isle of Man are also seen as foreign income.
If you work for a UK company, you need to pay your due digital nomad taxes to the British government.
In such cases, you and your employer may be subject to certain legal and tax implications. This might vary depending on your particular case, but working in another country normally would place you under the jurisdiction of that country and its own employment laws and taxation system.
This is the case if you reside in a country that taxes you on your UK income. If it has a ‘double-taxation agreement’ with the UK, you can claim tax relief in the UK to avoid being taxed twice.
The wisest option in these cases is for you to settle all your legal and tax obligations before you leave the United Kingdom.
If these variables do not apply to your particular case, should you still pay digital nomad taxes to the UK government?
At this point, the first question to ask is if you are still considered a UK resident for tax purposes.
Tax residency is a complicated issue in even the best of circumstances, so formal tax advice from a tax professional is recommended, but to put it simply, your tax obligations are very different if you are considered a UK resident or a foreign tax resident.
Keep in mind, tax residency is very different from citizenship. You can be considered a foreign tax resident while still being a British citizen, and vice versa. For digital nomads, this distinction is of the utmost importance.
Whether you need to pay digital nomad taxes working outside the UK and for non-British companies depends on if you’re classed as ‘resident’ in the UK for tax purposes.
How do you know if you are a UK resident for tax purposes?
First off, the UK government has an online residence status checker you can use to check your current status as a nomad figuring out if you should pay digital nomad taxes.
The residence status checker will give you an indication of whether you were a UK resident in any tax year from 6 April 2016, but you may need to declare information such as how many days you spent living and working in the UK and abroad; roughly how many hours a week you work; if you have remaining family in the UK; and details of your home in the UK.
There is also the UK Statutory Residence Test, which came into effect in April of 2013. The test allows you to work out your residence status for a particular tax year while working as a digital nomad. Each tax year is looked at separately, so you may be resident in the UK in one year but not the next, or vice versa.
We have written extensively on the UK Statutory Residence Test before. But essentially, the tests will consider your specific circumstances as a digital nomad and figure out whether you need to pay digital nomad taxes.
You may be considered a UK resident under the automatic UK tests if you spent half the tax year or 183 or more days in the UK. Additional ties to the UK, such as family and work, may be considered sufficient grounds to deem you a UK tax resident for your digital nomad taxes.
Your home is also a factor. If your only home or domicile is in the UK for 91 days or more in a row – and you visited or stayed in it for at least 30 days of the tax year, you also pass the automatic UK test.
You may also need to work out your domicile. In typical cases, the UK government recognizes your domicile as the country your father considered his permanent home when you were born. This can change as you move abroad and if it can be proven that you do not intend to return.
The process of working out your domicile if you have established a home abroad can be tricky and complicated. Once again we suggest you seek formal, professional help as well as check the guidance provided by the UK HM Revenue and Customs.
Finally, if you worked full-time in the UK for any period of 365 days and at least one day of that period was in the tax year you’re checking, you are also considered as a UK tax resident.
Generally, you may be considered a non-resident if you satisfy either of two conditions. First, you spent fewer than half a month, or 16 days in the UK. This rule extends to 46 days if you have not been a UK resident for the three previous tax years.
Or second, you worked abroad full-time, meaning an average of at least 35 hours a week, and spent fewer than 91 days in the UK, of which no more than 30 were spent working.
According to the UK government, when you move in or out of the UK, your tax year will be split into two distinct parts – a non-resident part and a resident part. This is relevant as a digital nomad, because this means you need to only pay the UK government digital nomad taxes on foreign income based on the time you were living there.
The government calls this the ‘split-year treatment’. You will not get split-year treatment if you live abroad for less than a full tax year before returning to the UK. There are also other conditions you need to meet.
If working as a digital nomad, you spend more or less time in the UK, buy or sell a home in the UK, change occupations, or your family moves in or out of the UK, or get married, separated, or have children, you may need to recheck your residence status.
The HMRC has additional guidance you might wish to check for your particular case.
If you are deemed as a UK tax resident
If you are a UK resident earning foreign income or even capital gains, you typically will need to file a Self Assessment tax return. But there’s a catch.
Some foreign income are taxed differently, and you might not need to fill in a tax return at all if your only foreign income is from dividends, if those dividends combined with dividends earned from UK assets are less than the £2,000 dividend allowance, and you have no other income to report.
If you do not usually send a tax return, or if this is the first time you are declaring your income, digital nomad taxes or otherwise, you will need to register by 5 October following the tax year you had the income.
In general, the process is not much different from filing a tax return on UK income.
When filling in your tax return, you should use the ‘foreign’ section of the tax return to record your overseas income or gains. Be sure to include income that’s already been taxed abroad to get Foreign Tax Credit Relief, if you’re eligible.
The HM Revenue and Customs (HMRC) has further guidance on how to report your foreign income or gains in your tax return.
For rental income you earn on overseas properties that you own, or any income you earn from pensions held overseas, as well as certain other types of employment, you face special tax rules.
As British nomads wishing to file digital nomad taxes, however, many of these tax rules may not be as relevant to you and so we will not discuss them in detail.
For pensions, for an example, you have to pay tax on pensions if you are considered a resident, or were resident in any of the five previous tax years. You also need to pay the UK government a share on any foreign pension payments, including unauthorized payments like early payments and some lump sums.
These cases can vary, and so it is best to check with your pension provider to find out how you’ll be taxed.
If you are deemed as a foreign tax resident
If you are not considered one for tax purposes, then you simply do not have to pay the UK government digital nomad taxes from your foreign income.
Certain exceptions apply, as mentioned earlier, and you may need to look at your current country’s tax treaties with the UK to check relevant tax agreements. But once you’ve made certain you are a non-resident to the UK for tax purposes, you may rest easy.
Do note, however, that you may still need to pay your host country digital nomad taxes, depending on the visa you hold or local tax system policies.
As more and more countries welcome digital nomads and accept changing work cultures, the uncertainties regarding digital nomad taxes may soon become addressed. However, as things stand, you need to do your due diligence to make sure you comply with your tax obligations as a digital nomad.
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