Disregarded Income for Non-UK Residents: UK Tax Rules
- Omar Aswat
- Apr 9, 2024
- 4 min read
Table of Contents
Disregarded Income for Non-UK Residents: UK Tax Rules
What Does Disregarded Income for Non-UK Residents Mean?
Disregarded income (also known as ‘excluded income’) broadly refers to investment income such as interest, dividends, and pension income. Specifically, it includes:
Interest and alternative finance receipts from banks and building societies
Dividends from UK companies
Income from unit trusts
Income from National Savings and Investments
Profits or gains from transactions in deposits
Certain social security benefits, such as State pensions or widows’ pensions
Taxable income from purchased life annuities (except annuities under personal pension schemes)
How Non-UK Residents Can Benefit from Disregarded Income Rules
Non-UK resident individuals can only use the disregarded income provisions, and they cannot apply them in a year of split-year treatment (SYT is only available for UK residents). Non-residents with UK source income can choose between two options:
Be taxed on UK source income under the normal rules and, if eligible, benefit from the personal allowance.
Use the special rules on limiting UK tax liability under ITA 2007, ss 811–828 (referred to as disregarded income), which involves losing the personal allowance but avoiding higher/additional tax rates.
UK Tax Implications of Disregarded Income for Non-Residents
Non-resident individuals with UK source income can either:
Be taxed on UK source income under the normal rules and, if eligible, benefit from the personal allowance.
Use the disregarded income rules, which limit the UK tax liability. If they opt for this route, they will not be entitled to their personal allowance and the annual exempt amount for capital gains tax purposes. The key advantage is that no further tax is due in the UK, and higher/additional rate liabilities are avoided.
Comparative Examples: When Disregarded Income Rules Work Best
To illustrate how disregarded income rules can impact UK tax liabilities, let's look at two examples: Emily and Steve.
Example 1: When Disregarded Income Rules Produce the Best Result
Emily is a UK national living in Spain and is non-resident in the UK. She has:
UK property income (after allowable expenses) of £100,000
UK bank interest of £500
UK dividends of £30,000
Emily is not a temporary non-resident. As a non-resident, Emily can either:
Be taxed on UK source income under the normal rules, entitled to a personal allowance, or
Use the special rules on limiting UK tax liability, but she will not benefit from the personal allowance or the married couple’s allowance.
Under the normal rules:
Total income: £130,500 (UK property income: £100,000, bank interest: £500, dividend income: £30,000)
The personal allowance is reduced to nil, as Emily’s income exceeds £125,000.
Tax on non-savings income (property): £37,500 at 20%, £62,500 at 40%.
Tax on dividend income: £30,000, taxed at 32.5% (after applying the dividend nil rate band).
Tax due: £39,350
Under the disregarded income rules:
Only UK property income (£100,000) is taxed, with no personal allowance applied.
Tax on UK property income: £37,500 at 20%, £62,500 at 40% = £32,500.
Tax due: £32,500 Therefore, Emily benefits from the disregarded income rules, saving £6,850 in tax.
Example 2: When Normal Taxation Rules Work Best
Steve is a UK national living in France and is non-resident in the UK. He has:
UK property income (after allowable expenses) of £55,000
UK bank interest of £75
UK dividends of £10,000
Steve is not a temporary non-resident. As a non-resident, Steve can either:
Be taxed on UK source income under the normal rules, entitled to a personal allowance, or
Use the special rules on limiting UK tax liability, but he will not benefit from the personal allowance or the married couple’s allowance.
Under the normal rules:
Total income: £65,075 (UK property income: £55,000, bank interest: £75, dividend income: £10,000)
Personal allowance of £12,500 is applied, reducing taxable income to £52,575.
Tax on non-savings income (property): £37,500 at 20%, £5,000 at 40%.
Tax on dividend income: £2,000 taxed at 0%, balance taxed at 32.5%.
Tax due: £11,350
Under the disregarded income rules:
Only UK property income (£55,000) is taxed without the personal allowance.
Tax on UK property income: £37,500 at 20%, £17,500 at 40% = £14,500.
Tax due: £14,500 Thus, Steve benefits from the normal rules, saving £3,150 in tax.
How to Choose the Best Tax Strategy as a Non-UK Residen
Non-residents can choose which rules to apply to their UK income. This decision often requires comparative calculations, which we regularly compute for clients. You don't need to decide in advance of the tax year, and you don't need to make a claim. If the non-resident must complete a tax return, they should prepare it under whichever provisions provide the best outcome.
Disregarded Income vs Normal Taxation: Key Considerations for Non-UK Residents
When choosing between normal taxation and disregarded income rules, it is essential to consider your income sources and potential tax liabilities. As demonstrated, comparative calculations can help identify the most advantageous option for reducing UK tax exposure.
Conclusion
In these matters, we often assist with tax calculations and provide related advice for clients. Feel free to get in touch if you need help with your tax strategy or need further clarification on disregarded income and how it affects your UK tax liabilities.
Meet Omar Omar is a Chartered Tax Advisor (a.k.a an expert on tax issues) and founder of ASWATAX. He regularly shares his knowledge and best advice here in his blog and on other channels such as LinkedIn. Book a call today to learn more about what Omar and ASWATAX can do for you.
*Disclaimer: ASWATAX is a firm of Chartered Tax Advisors, and we strive to provide accurate, up-to-date tax insights. Tax laws may change, so this content is for general guidance only and not a substitute for professional advice. Seek independent tax and legal counsel before making decisions. ASWATAX is not liable for any loss from reliance on this information. Use at your own risk.
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