Updated on: Sep 3, 2023
Thanks to the Australia-United Kingdom Free Trade Agreement (A-UKFTA), which came into force on 31 May 2023, there are a number of significant changes coming through that positively impact both Australians looking to live in the UK and Brits looking to move to Australia.
When we founded our business in 2005 the vast majority of our clients were from Australia, New Zealand, or South Africa. Since then our client base has expanded significantly and there is a much more diverse range of countries that they call home.
Some of these changes were related to changes in visa conditions for working in the UK, and we expect with this most recent change to welcome a number of new Australian clients onto our books.
Want to watch our YouTube video instead? It summarises the main points but refer back to this article for more in-depth information.
Youth Mobility Scheme Changes
So what exactly is changing? From our perspective I want to look at the youth mobility scheme changes that positively impact Australians looking to live and work in the UK. At the moment the scheme is open to those aged 18-30 years old, and they can live and work in the UK for two years. For any of you who have used the two-year working holiday visa (sorry, now called the youth mobility scheme) you will know that two years seems to fly by.
The first change is that from 31 January 2024, the upper age limit increases from 30 years to 35 years inclusive. For those Australians who are 29 or 30 years of age, the door to entering the UK has just opened a lot wider.
The second significant change is that the duration of the youth mobility scheme increases from two years to three years, which represents an extension to your stay of 50%. For those who may be considering staying in the UK for longer, this extra year under the youth mobility scheme just gives you an extra buffer to be able to decide what your next steps will be.
Australian Tax Residency
When we supply tax advice to Australians who have moved to the UK the first thing we need to look at is the tax residency of the individual. With that in mind let’s take a look at the rules relating to Australian tax residency. Remember, what we are considering here is Australian tax residents who are looking to move to the UK, with the main issue being does the individual remain as an Australian tax resident once they are living and working in you the UK.
On 7 June 2023, the Australian Taxation Office (ATO) issued final Taxation Ruling TR 2023/1, covering the tax residency tests for individuals. This ruling replaces and consolidates previous tax rulings and is now the “go to” resource for individuals looking to determine their tax residency. It is extremely helpful when tax residency guidelines are clear and up to date, and the ATO have done a good job here. Having said that, when considering tax residency for Australians there can often be grey areas where it can be unclear whether the individual is a tax resident or not. What this means is that in some cases you need to take a holistic all-encompassing approach when considering your Australian tax residency such as the length of time physically in Australia, your intentions when leaving, family/business/employment ties, and location of assets.
With that being said, the Australian Tax Office (ATO) do have a very useful online tool to help you determine your tax residency. I would suggest you use this as the first port of call.
Keep the following information in mind when planning your trip overseas and thinking about your tax residency.
(1) You do not cease to be a tax resident of Australia simply because you have left. The question becomes whether you have maintained a “continuity of association” with Australia.
(2) If you leave Australia to work overseas and have a series of temporary assignments in various countries where no permanent place of abode can be established it’s likely you will remain a tax resident of Australia. Remember though that you must take a holistic approach. If your intention is to work and travel overseas for five years then you are unlikely to remain at tax resident of Australia. If you maintain a house in Australia and you make frequent trips back to Australia then it starts to indicate that you do remain Australian tax resident.
(3) As a rule of thumb if you intend to stay overseas for less than two years then you are unlikely to establish a permanent place of abode outside of Australia, which means you remain an Australian tax resident. But remember this will depend on your circumstances and the question is, have you abandoned your Australian residency and are you living overseas in a permanent way. The Taxation Ruling TR 2023/1 shows two examples of this (Example 7 and Example 8). In both cases the individual is out of Australia for 2 years, yet one is determined to be Australian resident for tax, and the other is non-resident.
(4) In Example 10, an Australian has left Australia to live overseas indefinitely but due to his itinerant living arrangements he never establishes a permanent place of abode overseas and so remains a tax resident of Australia (even though he has indefinitely left!).
Generally speaking what you can take from these examples are;
(a) If you leave Australia and intend to return within two years and if you maintain connections with Australia you will likely remain an Australian tax resident;
(b) If you leave Australia and don’t know when you will return and you set up a permanent place of abode overseas, you will likely not be an Australian tax resident
The ATO Tax Ruling is actually pretty useful with the way it is written and with the numerous examples that are at the end of it. If you really want to look into the detail around your Australian tax residency when heading off to the UK then this document would be a great one to read.
UK Tax Residency
Typically speaking you become a tax resident of the UK on the day that you arrive, provided you intend to stay and work in the UK for a period of time.
Just like Australia, there are a number of rules/criteria that need to be met to ensure you become tax resident. In the UK this is called the statutory residence test. This test is used to determine if you are a UK tax resident for any particular year. The tax years in the UK run from 06 April to 05 April, and if you meet the criteria of the statutory residence test of being a tax resident, then your tax residency status in the UK is applicable for the entire tax year. There is a caveat to this which I will mention in a moment, but strictly speaking if you arrive in the UK on say the 10 Dec 2023 and you meet the statutory residence test, then your tax residency starts from 06 April 2023. Naturally this would have a significant impact because you would be deemed a tax resident for a period of time when you never even lived in the UK (ie prior to 10 Dec 2023).
To resolve this issue that tax year may be split into two parts (a) the part where you actually lived in the UK (b) the part from 06 April to when you arrived in the UK. This is called getting Split Year treatment. You do not apply for this, and no notification is required, you simply account for your taxes using this treatment if it applies to you.
So when you combine the Statutory Residence Test and Split Year treatment, you arrive at the most common scenario where your tax residency in the UK commences on the day you arrive.
The Statutory Residence Test and Split Year treatment rules are comprehensive and can appear to be overwhelming however keep in mind that these rules were created to cover a vast array of scenarios, many of which do not apply to our sorts of clients, and in most cases when our clients leave Australia they ceased to be tax residents of Australia, and they start to become tax residents of the UK on the day they land.
Double Taxation Agreement
In the event you are a tax resident of both Australia and the UK, a mutual agreement on double taxation (DTA) between Australia and the UK exists. The DTA is advantageous as it prevents both nations from subjecting the same income to double taxation. This agreement is frequently used by individuals from Australia residing in the UK who are obligated to disclose their Australian-based income in their UK tax returns.
For individuals earning wages and salaries, the DTA also serves to clarify that the country in which the income is generated is where the tax obligation lies. Building upon my earlier statement, if you terminate your Australian tax residency upon departing the country and commence your UK tax residency upon arrival, managing your tax-related matters becomes relatively simple, because there is no crossover of income that needs to be declared on both tax returns.
Working in the UK
Once you have arrived in the UK and if you are looking to contract through your own limited company, we can help you with the company set up, and these days it’s relatively easy to get your business bank account established. You will also need to apply for a UK National Insurance number. It’s not essential that you get one of these before you start work, but it pays to put the effort in early and get one sorted out sooner rather than later.
If you are working through your own limited company, your personal earnings will generally be made up of a mixture of salary and dividends. This is a tried and tested formula for limited company contractors as at optimises the overall UK income tax that you pay. This salary and dividend income gets reported as taxable income on your UK personal self-assessment tax return every year.
Self Assessment Tax Returns in the UK
If you are a normal salary or wage earner in the UK then chances are you will not need to complete a personal tax return in the UK (these can also be referred to as a self-assessment tax return). This is because all of your income will be taxed through the UK PAYE system and that has its own way of ensuring that you pay UK tax at the correct rate.
The UK personal tax year runs from 06 April to 05 April every year, and just like Australia there are various income bands that get taxed at different rates. However, the UK have two different types of tax deductions that get taken off your pay slip. The first is called PAYE (Income tax in Australia) and the second is called National Insurance (NIC). National Insurance contributions are paid into a fund, from which some UK state benefits are paid, including the state pension, statutory sick pay and maternity pay. Whether the funds do actually get distributed like this is another question however for our purposes you can just consider PAYE and NIC as two types of taxes you will need to pay on your income. Although Australia has the Medicare levy, this is only 2% of your taxable income whereas NIC deductions are significantly higher.
If you work through your own limited company then what we suggest is that you keep your salary low to avoid paying PAYE and NIC and pay yourself dividends instead. Dividends are taxed in the UK at a different tax rate to PAYE/NIC which is how you can get some tax efficiency in working through your own limited company. Of course, when you are a contractor with your own company you don’t get paid annual leave or sick pay, and you need to pay for your own training and any materials that you need to carry out your work. So, there are pros and cons to working through your own company, but our clients do enjoy the higher rates of take home pay and increased job flexibility.
Personal Tax Returns in Australia
Typically, when individuals relocate from Australia to work in the UK, the requirement to file Australian tax returns also ends. Nevertheless, there are certain situations in which Australians residing in the UK may still need to complete an annual tax return in Australia.
In general, if someone is considered a non-resident for tax purposes in Australia, they are still liable to pay tax on income earned from Australia sources. Examples of such income include interest from Australian banks, dividends from Australian companies, and rental income from a property in Australia.
Once individuals are living in the UK, they are not required to pay tax in Australia on income earned in the UK, as it is already subjected to UK tax regulations.
However, any income that needs to be reported on an Australian tax return while residing in the UK must also be reported as foreign income on the UK personal tax return. This is where the double taxation agreement proves beneficial, as any tax paid on overseas income while living in the UK is deducted from the tax calculation on the UK personal tax return. In essence, the UK tax return acknowledges that tax has been paid on your foreign income and ensures you are not taxed twice on it.
Non Domiciled UK Residents
Understanding domicile can be complex. If you are a UK resident but not domiciled (non-dom) in the UK, there are specific rules that may apply to your foreign income and gains. Domicile is a broad legal concept that relates to the country you consider your roots or permanent home, and it differs from nationality, citizenship, or residence. For instance, if you were born and raised in Australia, have family residing there, or have ancestral ties to Australia, it is likely that Australia would be your domicile. Typically, domicile remains with you throughout your life, although some individuals may change their domicile after living in another country for an extended period.
One favourable aspect of being non-domiciled is that you are not required to pay tax on your foreign income or gains if both of the following conditions apply: (a) your income or gains amount to less than £2,000 per year and (b) you do not bring them into the UK, such as through bank transfers.
For Australians living in the UK who are non-domiciled, this means that as long as their Australian income or gains are below approximately AUD4,000 per year (subject to the exchange rate due to the £2,000 threshold), and they keep those funds in their Australian bank account, there is no obligation to report this as foreign income on their UK personal tax return.
However, if your income or gains exceed £2,000, we generally recommend that our clients disclose their worldwide income on their UK personal tax return. As mentioned earlier, any taxes already paid on that income in Australia will receive credit, and if the tax rate on that particular income is higher in the UK, the difference will need to be paid to the UK tax office.
While we are at it, let’s briefly discuss the remittance basis. This option is available for individuals who are not domiciled in the UK for tax purposes. If your income or gains exceed £2,000, you can choose to be taxed under the remittance basis. Essentially, this means that you can exclude that income from your UK personal tax return. However, by doing so, you forfeit your tax-free allowances for income tax and capital gains tax. That’s why most of our clients opt not to choose the remittance basis, as it often results in higher overall tax payments.
If you are using the remittance basis and have resided in the UK for at least seven of the last nine tax years, you not only lose your tax-free allowances but also have to pay a lump sum of £30,000 to the HMRC (UK tax authorities). This amount increases to £60,000 once you have been in the UK for at least 12 of the past 14 years.
Therefore, the remittance basis is typically only relevant for non-domiciled individuals with substantial overseas income who wish to keep it off their UK tax returns.
Tax advice for Australians leaving the UK to return to Oz
If you are an ordinary salary/wage earner in the UK, chances are you have never had to complete a UK personal tax return. However, if you leave the country during a tax year, it’s possible that you have been overtaxed on your employment income because of how the personal tax allowance functions. Many companies provide a service to help you claim this tax refund, but it is actually quite easy to do it yourself. All you have to do is call the UK tax office, provide them with your information, and they will arrange for a tax refund to be sent to you over the phone.
If you work through your own limited company in the UK and are looking to move to Australia then you can optimise your overall taxes through some tax planning. The most common way to do this is to close down your company using Business Asset Disposal Relief. There are a couple of different avenues you can use and the best one depends on the total amount of retained earnings in your business. For high earners, using a members voluntary liquidation (MVL) is usually the best option but we can help advise on all options available.