If you own a UK company, you commonly cannot take along dividends if you become a non-resident. The company’s profit will be subject to UK Corporation’s tax which is 19%. These after-tax profits of the company are then withdrawn as dividends. Non-residents circumvent UK income tax on dividends because interest income and dividends are subject to different tax rules. UK rental income, self-employment profits, and salaries are not ignored but are fully taxed.
Our corporate tax specialists have explained how UK residents are taxed and the dividend income of non-residents. Keep reading to find out.
Dividends – How UK Residents Are Taxed
Dividends are not national insurance but are subject to income tax. Income tax rates on salaries are more than the income tax rate on dividends and other incomes because dividends are the extra and paid after-tax profits which means after paying corporation tax.
The dividend tax has been eliminated; it is no longer essential to cash your dividend to calculate your tax. Tax calculations now work with cash dividends.
To those who receive dividends in addition to dividend allowance, the following income tax rates will be considered:
Basic-rate taxpayers Old:0% Current:8.75%
Additional-rate taxpayers Old:30.6% Current:39.35%
Higher-rate taxpayers Old:25% Current:33.75%
Dividends – How Non-Residents Are Taxed
Non-residents can leave paying tax on UK dividends, but this is not a blank tax exemption; it is a bit more complex than that.
Section 811 of the Income-Tax Act limits the sum of tax non-residents must pay by associating two tax calculations. In the first place, the tax liability is calculated on your income_ the standard technique. Secondly, the calculation of other income like dividends is omitted, but personal allowance is also taken away. If this second method produces a lower tax bill, then this method is preferred.
Omitted income comprises the following:
- Income from reliance/trusts.
- Income from investments products
- Income from national savings.
- Dividends were collected from UK companies.
- Taxable revenue from purchased life payments eliminates allowances under personal pension schemes.
- Interest from building societies and banks.
- Different social security aids, e.g., state pensions
In short, as a non-resident, you can consistently accept tax-free dividends from UK firms, but for this, it will take your allowance. This means you have to pay more tax on UK income, such as rental income.
Two kinds of tax calculations need to be done to see which creates the smallest tax bill:
- One eliminates your dividends, and the other ignores income but without individual allowance.
- Or the one for your total UK income with the individual allowance.
According to Section 399 of the (Trading and Other Income) Income Tax Act, any non-resident who accepts a UK dividend is treated as paying tax on the distribution of the ordinary dividend rate currently, which is 7.5%. HMRC has made minimal directions, but one should deduct 7.5% of the dividend income tax credit in preparation for two calculations.
If there is no other taxable income (like rental income) apart from dividend income, then it does not matter if you lose your allowance and make your dividends tax-free. It should be considered that UK citizens can draw their allowance if their income is more than £100,000. Once it is more than £125,000 in 22/23, your allowance will vanish completely.
How Much Tax Can Non-Residents Save?
It is essential to recall the introductory rate for taxpayers. Those whose income is up to £50,000 in 2022/23 pay almost 8.75% of income tax on their dividend income. Dividends within the £2,000 dividend or £12,500 personal allowance are tax-free. If you have more dividend income subject to an additional rate that is 39.35% or a higher rate that is 33.75%, non-resident gets more favour from this.
It was believable to withdraw tax-free dividends (profits) in the past during a short span of non-residence. UK companies built up more distributable profits like these. Revenue from “closely controlled companies” is taxed if the receiver becomes a UK tenant again after a short period.
This lasts for five years or less. This tax opportunity is not available in the introduction containing “anti-avoidance rules.” If you are a non-resident and your company makes profits, the dividends paid out of this income are not taxable whenever you return to the UK. This anti-avoidance rule does not relate to “post-departure trade profits.”
Dividend Income from ISAs
If you have some money invested in ISAs and then shift abroad, you cannot continue investing money in ISAs unless you are a Crown employee. However, you can keep your current ISA investment; your income, capital gains, and interest will not be conditional on UK tax.
Real Estate Investment Trusts
REIT (real estate investment trust) pays dividends as a regular dividend, property income dividend, or a combination of both. Property income tax dividends are taxed at standard rates of 20%, 40%, and 45%.
These are taxed as property letting income separating from different property letting businesses. A non-resident is not eligible for PIDs paid gross with no tax deduction. Though, investors can claim tax payments by relying on relevant double taxation treaties.
Though some dividends may escape UK tax, it is essential to consider overseas tax. It can be possible if you are in a tax-free foreign country. Else this can be possible that the UK dividend will be entirely taxed in any other country, and that tax will be more than you pay as a UK resident. A person needs to look after the income from ISAs; it does not mean that if your ISA income is tax-free in the UK, it will be accessible in any other country.
Double Tax Treaties
Double treaty tax planning involves two countries which are the place where you live and the place from where your income arises. A double tax treaty helps reduce the amount of tax payable under the local law of two countries.
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