Non-UK residents are subject to income tax in the UK on UK-sourced income. However, they do have a choice to either be:
- Taxed under the normal rules; or
- Taxed under special rules per the provisions of s.811 ITA 2007 which applies a limit on the UK tax liability.
The special rules
If opting to be taxed under the special rules, the non-resident’s UK income tax liability is limited to Amount A plus Amount B where:
- Amount A = income tax paid at source, or deemed to have been paid at source, on disregarded income*
- Amount B = income tax due on UK source income that is not disregarded (for example, property income, employment or trading income)**
*which is generally investment income, such as interest and dividends
**when calculating Amount B, the taxpayer is not entitled to the personal allowance, blind person’s allowance or married couple’s allowance
Following the changes to the taxation of bank interest in 2016, and banks no longer deducting tax at source, in practice it is rare that any income tax is paid at source on disregarded income. The income is still disregarded meaning that no UK income tax is payable on this income under the special rules.
Choosing the most efficient method
The taxpayer can choose each year on which basis to calculate their tax liability, this process usually involves preparing tax computations under both rules to compare the position.
If you or your clients have any queries regarding residency and the taxation of non-residents, please let us know and we would be happy to help.
