Overseas income affect your UK tax rate? 1 October 2022 at 9:04AM in Cutting tax 10 replies 162 views

gravlax

Is the UK marginal rate of tax calculated on all your taxable income, or just all your UK taxable income?

If you had £20,000 income subject to UK income tax and £20,000 investment income subject to UK capital gains tax. Then you had much more non-UK income, say £120,000 of income not subject to UK income tax. 

Your total worldwide income is £160,000, your UK taxable income is £40,000. For the purposes of any UK CGT (or any other UK taxes calculated according to marginal rates) are you taxed at the basic rate?

Dazed_and_C0nfused

Is this overseas income something that you are required to include on your Self Assessment return?

Jeremy535897

There are a number of misconceptions in this post:

• you don't pay capital gains tax on investment income. You pay income tax on investment income, and capital gains tax on profits on disposals of investments
• you will only escape paying UK tax on your worldwide income if you are not resident in the UK for tax purposes, or you are non-UK domiciled and don't remit your non-UK income to the UK.

If OP is not liable to tax on non-UK income, that non-UK income has no bearing on the rate of tax paid on UK income or capital gains. Income liable to UK income tax may affect the rate of tax payable on capital gains subject to UK capital gains tax. See:
https://www.gov.uk/guidance/capital-gains-tax-rates-and-allowances

gravlax

Jeremy, yes I know CGT is on gains not income, it was carelessly worded.

Yes the question assumes the tax payer is not UK resident for tax.

So there is the equivalent of £120,000 of non UK income earned overseas and taxed overseas, and on the UK SA tax return £20,000 of UK taxable property income and £20,000 UK taxable capital gains. Is the UK taxable income and gains all taxed below the higher rate tax band (i.e. the £120,000 taxable overseas has no bearing on the UK marginal tax rate)? Does the overseas income need to be shown on the UK SA tax return?

Jeremy535897

Income that is not taxable in the UK does not need to be reported on a UK tax return by a non-UK resident. Therefore it cannot affect the UK tax liability in any way.

The personal allowance may be available. In your example, if a personal allowance is due, tax on the £20,000 property income would be £20,000 - £12,570 = £7,430 at 20% = £1,486. Depending on the rules of the country of residence, they may allow a deduction of some or all of this tax from the liability there.

Tax on the capital gains, assuming they don't derive from residential property, would be £20,000 - £12,300 annual exemption = £7,700 at 10% = £770, but these gains may well be exempted by the relevant double tax agreement.

A basic guide here:
https://www.gov.uk/tax-uk-income-live-abroad

More information here:
https://www.litrg.org.uk/tax-guides/migrants/residence-and-domicile/do-i-have-complete-tax-return

gravlax

Jeremy, thanks for clarifying that.

Re the £12,750 personal allowance. Am I right in thinking that if you claim the PA, then all UK source income becomes UK taxable even if you are not UK tax resident? For example if you received either income or dividends from a UK limited company, as a non UK resident that would normally not be taxed in the UK but in the country of residence. But if you opt to use the UK PA, then the UK company income becomes UK taxable.

If this is true, are there any similar strings attached to non UK residents claiming the GTC tax free allowance?

Jeremy535897

What you are thinking of is outlined here:
https://www.gov.uk/government/publications/non-residents-and-investment-income-hs300-self-assessment-helpsheet/hs300-non-residents-and-investment-income-2019

The double tax agreement may modify the UK tax liability on dividends or interest by setting a limit on the UK tax, normally 0%,10%, 5% or 20%, depending on the agreement.

KathysBoy

Surely the key issue here is the taxation agreement between the UK and the country of residence. My understanding is that the UK personal allowance is available in respect of any income that is taxable in the UK, as defined the taxation agreement.

Jeremy535897

KathysBoy said:

Surely the key issue here is the taxation agreement between the UK and the country of residence. My understanding is that the UK personal allowance is available in respect of any income that is taxable in the UK, as defined the taxation agreement.

Not always:

Personal Allowance

You’ll get a Personal Allowance of tax-free UK income each year if any of the following apply:

• you hold a British passport
• you’re a citizen of a European Economic Area (EEA) country
• you’ve worked for the UK government at any time during that tax year

You might also get it if it’s included in the double-taxation agreement between the UK and the country you live in.

gravlax

KathysBoy said:

Surely the key issue here is the taxation agreement between the UK and the country of residence. My understanding is that the UK personal allowance is available in respect of any income that is taxable in the UK, as defined the taxation agreement.

I wasn't suggesting the UK PA wasn't available to a non-UK resident. I was saying that it was my understanding that the PA is optional for non residents, and if they choose to use the PA to reduce UK tax, then some income which would otherwise escape UK taxation and be taxed solely in the country of residence would also become taxable in the UK, such as income or dividends from a UK company.

nigelbb

The OP asks "Is the UK marginal rate of tax calculated on all your taxable income, or just all your UK taxable income?" & the answer is that by definition only UK taxable income is taxable in the UK & if it's not taxable in the UK it is not even reported on a Self Assessment tax return so cannot affect your UK marginal rate of tax. This is in contrast to eg France where you have to report your worldwide income then get an allowance for tax paid on income taxable overseas but that overseas income not taxable in France is added to income taxable in France so the overseas income does affect your marginal rate of tax.

You can be tax resident in the UK & have income taxable in France & vice versa eg a government pension or income from employment or income from rental property.