Some of the nuances of the UK tax system are particularly intricate, especially when it comes to understanding which types of income are targeted and when. Peter Webb, our Head of Tax Advisory, examines when tax on UK bank deposits might apply.
Last week one of my colleagues asked me what he thought was such a simple question: “Will my expat client pay tax on his UK bank interest?” With banks now paying interest on deposits this was a good and interesting issue to consider and we spent the next half hour talking it over; the answer is surprisingly complex.
Using tax allowances
As is frequently the case, the situation depends on your particular circumstances. The first option to consider is whether or not your interest income will be covered by your tax allowances. Even as an expat you can benefit from UK tax allowances but the availability of these will depend on whether or not you are a UK or EU citizen and whether or not a tax treaty gives you rights to a personal tax allowance. As well as a personal tax allowance of £12,570, based on your circumstances, you may have additional tax allowances that could relieve a further £500 to £6,000 of interest from UK tax. This may solve the issue fairly simply.
If your UK bank interest is not covered by tax allowances, the next place to look is at the double tax treaty that the UK may have with the country you’re in. The UK has tax treaties with most (but not all) other countries. Tax treaties make sure that you don’t pay tax twice on the same income; both in the UK and in the country you are living in. A caveat does apply – you must be tax resident in the overseas country you’re living in for this to potentially be relevant. However, not all tax treaties are created equal and it’s important to read the tax treaty carefully! For example, if you’re tax resident in Switzerland your UK interest is, generally, taxable in Switzerland and not the UK. If you’re tax resident in Singapore your UK interest, generally, remains taxable in the UK but is limited to 5%. And if you’re tax resident in Mauritius your UK interest, generally, remains fully taxable in the UK.
What if allowances and tax treaties don’t apply?
If your available tax allowances don’t solve the issue, and you don’t benefit from a favourable double tax treaty all is not lost. The “disregarded income” basis of taxation is another option. Sadly, there’s no way to make the “disregarded income basis of taxation” sound either interesting or intriguing, but it can really help.
It works like this – if you elect to be taxed under the “disregarded income” basis you’ll lose your entitlement to tax free allowances but won’t pay any tax at all on your UK interest (or other UK investment income and social security benefits such as your UK State Pension). The disregarded income basis is likely to be most helpful for expats whose UK income is limited to investment income and a State Pension; it may not give you a lower tax bill if you have other types of UK income, such as income from a property.
Whether or not, as an expat, you pay UK tax on your UK interest turns out to be a surprisingly complex matter. It’s worth speaking to a tax adviser to help you get the best outcome from a UK tax perspective. And do remember that, as an expat, you may have to pay tax on your UK interest in the country you are living in too.
For help and advice about any area of UK tax planning, please contact your nearest office.