Australia has a tax treaty with the UK but things aren’t as simple as they may seem at the outset. Expats working in the UK can still fall into some UK tax traps.
Resident or tax resident?
Residency is more complicated in the UK than it is with any other country. On the surface, the UK resident test makes you a UK tax resident if you live in the UK for 183 days or more in a year. On top of this, however, there is also a UK ties test. If you are deemed to have significant ties to the UK and live in the UK for less than 183 days in a year then you may still owe tax to the UK government.
The key distinction here is that a UK tax resident is subject to tax on their worldwide income, whereas a non-resident will be taxed only on their UK income.
One way to get around this is with salary packaging. By adding some benefits on to your salary such as flights, accommodation and meals, your employee tax return can be mitigated. The added benefit of this is that it will ensure that you do not have any residence in the UK that could be deemed a permanent residence. Salary packaging can help you to avoid becoming a UK tax resident and owing tax on your worldwide incomes.
Retirement plans also need to be considered when you are working abroad in the UK. Employer contributions to a superannuation are not taxable in most cases but there will be tax levied on unusual or irregular payments by employees or employers.
This means that your superannuation payments will need to be pre-planned to ensure you can contribute enough without paying the tax on this. You should also consider taxes on withdrawing these funds because pension takings can be taxed by the UK government if you are classed as a UK tax resident. This could significantly impact on your retirement plans.
Despite the tax treaty between the UK and Australia, there are still some tax traps that you need to be alert to and wary to avoid. IF you have any questions or if you need some Australian taxation advice, please feel free to contact our friendly team at Expat Tax Services.