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Taxes When Leaving The UK

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Taxes When Leaving The UK

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(Disclaimer - I'm no tax expert, and things change - This page is simply a guide to principles and a suggestion of actions to take. Always get professional advice.)

If you are going to be resident for tax purposes in the USA then here are a couple of useful tips and pieces of information for you. Be prepared to take some action on the basis of this!


[edit] Letting The Tax Man Know You're Leaving... Why & How

First, it is a very good idea to let HMRC (aka 'The Tax Man'!) know that you are moving to the US.

[edit] Why?

[edit] Avoiding Future Problems

By telling the 'Tax Man' you'll ensure you don't get any unwarranted demands for tax payments - sorting such demands out is usually pretty straightforward, but takes time, and the complexity and stress increase when trying to do this from outside the UK.

[edit] You're Probably Due A Tax Rebate! (Even if not a UK Citizen)

Secondly and if you've been employed and paying tax (PAYE) then there is a fair chance you will be due a tax rebate, especially if you are moving earlier in the tax year. Why is this? Employees pay tax each month and this amount is based on the assumption that you will use up 1/12 of your annual personal tax allowance each month. This means that over the course of the whole tax year, you get the total benefit of your tax allowance (the amount of income you can earn and not pay tax on).

If you leave the UK and become non-resident for tax purposes, and you do this before the end of the tax year, you will miss out on the full benefit of your tax allowance. Let's look at a simplified situation to illustrate how things work.

For example, let's say (to keep the maths simple!) you tax allowance for the current year is £5000. This means you can earn £5000 during the year before you pay any tax, and you only pay tax on what you earn above this £5000 limit.

NB - in the examples that follow, salary and income are not the same! I have, say a salary of £50,000 per year (I wish!) but by half way through the tax year, I will have had an income of only (!) £25,000. This difference is significant and you need to understand it for the rest of this page.

Let's say that you move to the USA half way through the tax year. Let's also say that your salary is £20,000. With a tax allowance of £5000, you will end up paying tax on the other £15,000, i.e. on the salary for the year, minus your personal tax allowance.

So when you actually move to the US and become resident there, you will have received an income of £10,000 - i.e. half your salary (because you are half way through the tax year).

But you will have paid an amount of tax each month, taken out of your gross pay each month. This amount of tax will typically be the same each month. It is calculated by assuming you'll receive your salary of £20,000 by the end of the tax year. The 'Tax Man' determines your taxable income is £20,000 minus your £5,000 personal allowance, that is, £15,000.

If the tax rate is say, 20%, then you will pay tax equal to 20% of that £15,000, or £3,000. This amount is split in to 12 equal amounts, to be taken from your gross pay each month. That comes to £250 in tax each month.

Your gross pay for each month is £20,000 split in to 12 equal amounts (assuming no pay rise, benefits, overtime etc and other changes).

So you get gross pay each month of £1666.67 (£20,000 divided by 12).

Take away the tax of £250 each month gives you your take home pay or nett pay - in this case, £1416.67 (I know, what about NI and pension payments etc - I ignored those for the purposes of clarity).

So by the time you leave the UK and become resident in the USA, half way through the tax year, you will have paid £1500 tax, on an income of £10,000.

Still with me? Good, as we're nearly there!

Your personal tax allowance is for the whole year, and covers all income (i'm being simplistic here for the sake of clarity!).

So, £10,000 income, with a tax allowance of £5,000 means that you should have only paid tax on the additional £5,000 above your personal tax allowance.

With a 20% rate, as before, that results in an actual tax bill of £1,000.

But you've already paid £1,500 in tax.

So the 'Tax Man' owes you £500.


[edit] How To Claim Rebate?

So, let the 'Tax Man' know, and claim your refund, all at the same time. The P85 form does this for you. You can get further details and a copy of the form online, direct from HMRC at http://www.hmrc.gov.uk/cnr/r_and_d.htm

Fellow forum members tell me that you need only send 2 of the 3 parts of your P45 with your P85 form - you keep the third part for your own records.

Where do you send it? Why, your tax office, of course! You can get the address of this from your employer. If they don't have the address, get from them your EMPLOYER tax number - it starts with 3 digits, then a '/' and then about 5 or 6 more digits. You can use this at this HMRC web site to find the postal address of the office you need. http://search2.hmrc.gov.uk/kbroker/hmrc/locator/locator.jsp?type=1

At this link above, you'll also find a link and reference to something called Declaration Form R105 which you can use to get any interest from UK banks and building societies 'tax free' while resident abroad.

[edit] When?

When is a good time to let the Tax Man know you're leaving?

Well, firstly, at the time of writing this (Sep 2010) you have up to 6 years to notify the Tax Man, and you can do it from overseas.

That said, do it in the last month you are in the UK, allowing time for any final pay from your employer to be included while minimising the time you'll be in the USA before you receive any tax rebate.

If using form P85 you need to send in 2 parts of your P45, so you usually have to wait until after you've left your employer...

[edit] Calculating Possible Tax Rebates When You Leave

You can get an idea of likely tax rebate amounts by using the calculator at this web address: http://www.taxfix.co.uk/forum/articles/moving-abroad-claim-a-tax-refund-from-hmrc.html

It's not affiliated with HMRC, so it's not 'official' - but it is useful!

Other useful links include:

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/LeavingOrComingIntoTheUK/DG_078445 http://www.hmrc.gov.uk/cnr/p85_p85s.htm