Updated on: Nov 5, 2023
With the recent improvement in the working holiday scheme for Kiwis looking to move to the UK, I thought today we would take a look at some tax advice for Kiwis looking to make the journey to the UK to live/work for a few years.
With having our contractor accountant business owned by two Kiwis (myself and Helen) and having done this ourselves in the early 2000s, we have not only been through this, but we have also been handing out tax advice in this area for nearly 20 years.
This article will be relevant to nearly everyone who is looking to upsticks and embark on their OE to the UK, regardless of whether they plan to work as a normal wage/salary earner or are looking to contract through their own limited company. If you are Australian, we have written a separate blog post.
Want to watch our YouTube video instead? It summarises the main points but refer back to this article for more in-depth information.
New Zealand Tax Resident
Firstly, let’s just cover off what it means from a tax residency perspective to move to the UK. In the most common scenario where a Kiwi is looking to leave New Zealand and head over to the UK for a few years, their tax residency in NZ usually ends on the day of departure, and their tax residency in the UK usually starts the day they set foot in the UK.
Tax residency in NZ can be a bit curly and it’s best to ensure you cease your NZ tax residency on the day you leave because this makes your tax affairs much easier to handle. Effectively the scenario you are after is that before you depart New Zealand any income you earn in New Zealand gets taxed in New Zealand and once you arrive in the UK any income you earn in the UK gets taxed in the UK. This makes things nice and simple.
To determine your NZ tax residency there are a couple of things to consider first of all;
- 183 day rule. If you’re in NZ for more than 183 days in any 12 month period you are deemed to be a resident from the first day you arrived;
- 325 day rule. If you leave NZ and are absent for more than 325 days in any 12 month period you are deemed to be not resident;
However, in determining if you are a tax resident of NZ, the permanent place of abode test overrides all other tests. If you have a permanent place of abode in NZ, you are tax resident regardless of how long you spend in NZ. A permanent place of abode is not simply owning a house or apartment in New Zealand, but it has to be a place where you habitually reside from time to time. It’s usually empty except for when you are in New Zealand (or you might own it and you have family members living there), you’ll have personal possessions there, your post will be delivered there, and for all intents and purposes it would appear to be your property.
It does not matter if you own the property yourself (it might be owned by a Trust for example), the main point is, do you have a property im NZ available to you use as “an abode”.
So long as you do not have a permanent place of abode in NZ, and you are outside of NZ for more than 325 days in the 12 months starting the day you leave, then the last day of your NZ tax residency will be the day you departed to go to the UK.
The permanent place of abode test it is critical to assess when you are leaving New Zealand because you can unexpectedly remain a New Zealand tax resident even when you are living overseas.
The most up to date information available for New Zealand tax residents leaving the UK is found in Tax Information Bulletin Vol 28 No 10 October 2016, in the “IS 16/03: Tax residence” section. New Zealand still has this strange concept where an individual may have two permanent places of abode in the world which can produce some unusual results, but the tax bulletin here actually does a pretty good job in assessing 9 different examples for the permanent place of abode test.
Make sure you have a read of the examples because they can help shed light on how you might interpret your own position when it comes to a permanent place of abode. In one example (example 1) a New Zealand tax resident goes to live in Canada for three years and rents out their NZ property, and there is a scenario where they would remain a New Zealand tax resident which is surprising (and indicates our tax residency rules are in desperate need for an overhaul). Another example (example 2) suggests at a young person who lives with their parents and then embarks on his OE to the UK may remain a New Zealand tax resident for the entire time they live in the UK by virtue of the fact their parents house is a permanent place of abode (another very unusual outcome). A further example (example 3) suggests that a business person who spends less than 183 days a year in NZ but has their own house here is also a New Zealand tax resident. It would be reasonable to extend this and suggest that overseas owners of New Zealand properties who spend a few months in New Zealand every year are potentially also New Zealand tax residents but I just can’t believe that the IRD has the resources or capability to (a) find these owners, and (b) convince them to file a New Zealand tax return reporting their worldwide income.
Double Taxation Agreement
Yes, there is a double taxation agreement (DTA) between New Zealand and the UK. The DTA is useful because it prevents double taxation by both countries on the same income and is often used when Kiwis live in the UK and have a New Zealand source of income to report on their UK tax return.
For wage and salary earners the DTA also makes it clear that the country where the money is earned is where the money should be taxed. Which goes back to my point above, if you can cease your NZ tax residency on the day you leave NZ and start your UK tax residency on the day you land this makes your tax affairs fairly easy to handle.
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 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 the correct amount of tax.
The UK personal tax year runs from 06 April to 05 April every year, and just like New Zealand 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 (same as New Zealand) 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.
The other difference is in the UK you get a personal allowance which for the 2023/24 tax year is ְ£12,570. You pay no tax on your personal allowance which means the first £12,570 in income that you earn is completely tax free.
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, paid 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 NZ
Usually when our clients leave NZ and come and work in the UK then their obligations to file a New Zealand tax return cease. However, that is not always the case and there are some situations where Kiwis living in the UK still need to file a NZ tax return every year.
As a general rule if you are a non-resident for tax purposes in New Zealand you will still need to pay tax on income earned from a NZ source. Examples of income include (a) interest from a NZ bank account (b) dividends from a NZ company (c) rental income from a New Zealand property (d) selling a residential property for profit within the bright-line test rules (effectively working as a capital gains tax).
Once you are living in the UK, you would not however pay any tax in New Zealand on your UK sourced income because that already gets taxed under the UK tax rules.
When you were living in the UK any income that you need to report on your NZ tax return will also need to be reported as foreign income on your UK personal tax return. This is where the double taxation agreement comes in and any tax you pay on your overseas income while living in the UK gets taken off the tax calculation on your UK personal tax return. Effectively your UK tax return recognises that tax has already been paid on your foreign income and ensures you are not taxed twice on it.
So, you can see there are instances where a Kiwi living in the UK still faces tax obligations back in NZ.
Non Domiciled UK Residents
Domicile is a tricky concept. If you are UK resident but not domiciled (non-dom) in the UK there are special rules which might apply to your foreign income and gain. Domicile is a general legal concept. You will generally be domiciled in the country where you consider your ‘roots’ are, or the country where you have your permanent home. It is not the same as nationality, citizenship or residence. If you were born and raised in New Zealand, if your family live there or your family “roots” are in New Zealand, then its likely that New Zealand will be your domicile. Usually, your domicile will be with you for life, but you do hear of instances where individuals do change the domicile after living in a different country for a considerable number of years.
The nice thing about being non domiciled is that you do not pay tax on your foreign income or gains if both of the following applying (a) the income/gains are less than £2,000 per year (b) and you do not bring them into the UK (by bank transfer for example).
What this means for Kiwis living in the UK who are non-domiciled is that so long as their NZ income/gains is less than around NZD4,000 per year (the threshold is £2,000 so it depends on the FX rate) and they leave those funds in their NZ bank account, then there is no requirement to report this as foreign income on their UK personal tax return.
If your income/gains exceeds £2,000 then in the vast majority of cases we suggest our clients report their worldwide income on their UK personal tax return. As mentioned above, credit will be given for any taxes already paid on that income in New Zealand, and if the tax rate on that particular income is higher in the UK then the difference will need to be paid to the UK tax office.
While we’re here let’s just quickly talk about the remittance basis. This is available for non domiciled UK tax residence, and where your income/gains exceeds £2,000 you can elect to be taxed under the remittance basis. What this means is that you get to keep that income off your UK personal tax return. Doing so means that you lose your tax free allowances for income tax and capital gains tax, which is why the vast majority of our clients do not choose the remittance basis (because overall they end up paying more tax if they choose this option).
If you are using the remittance basis and have been in the UK for at least seven of the last nine tax years, then you not only lose your tax free allowances, but you must also pay the HMRC (UK tax office) a lump sum of £30,000. And once you’ve been in the UK for at least 12 of the past 14 years this increases to £60,000.
So you see the remittance basis really only applies to non-dom individuals who have extremely high overseas income that they want to keep off their UK tax returns.
Tax advice for Kiwis leaving the UK to return to NZ
If you are a normal salary/wage earner in the UK then it’s likely you have never filed a UK personal tax return. However, if you happen to leave the UK partway through a tax year it’s likely that your employment income will have been overtaxed in the UK due to the way that the personal tax allowance works. There are numerous companies that offer the service where you can get this tax back, however it is extremely simple to do this yourself. You just need to call the UK tax office, provide them with your details, and they will arrange for a tax refund to be issued to you.
If you work through your own limited company in the UK and are looking to move to New Zealand, then with the correct tax planning you have the potential to optimise your overall taxes substantially when you come to close your company. This is because of a temporary tax exemption that applies to qualifying transitional NZ tax residents. Under these conditions you pay no tax in New Zealand on a vast array of overseas income sources which include you limited company and any overseas rental properties that you own. And this applies for the first 4 years when you are back in New Zealand, so you can see it can be very attractive. The tax services provided by someone like No Worries Accounting can help advise you further on this 🙂