Tax implications of becoming a digital nomad

In recent years, the concept of the "digital nomad" has increased significantly in popularity, This may be particularly relevant if you're running an online business or working in the tech sector. You may have chosen to work remotely from multiple locations around the world. This article explores the UK tax implications of becoming a digital nomad, if you decide to leave the UK.

Tax implications of becoming a digital nomad

Your tax residence status

Your tax residence status is the key consideration that determines the tax implications of becoming a digital nomad. As a starting point, HMRC regards individuals as either residents or non-residents. Your tax residence status ultimately determines how you are taxed on your worldwide income.

If you are regarded as UK tax resident, you are generally subject to UK tax on your worldwide income. However, as a digital nomad, your time spent in the UK might decrease significantly, potentially leading to a change in your residence status.

Conversely non-UK tax residents are only subject to UK tax on income arising from UK sources .For example, rental income from a UK property, dividends from a UK company or interest from a UK bank account. 

If you’re a UK national or citizen of the European Economic Area (EEA) you’ll still receive the UK tax-free personal allowance (currently £12,570). Therefore any remaining income would be subject to tax at the usual UK rates.

Breaking UK tax residence

If you leave the UK and break most of your ties to the UK this can potentially lead to non-resident status for tax purposes.

To break UK tax residence and establish yourself as a non-resident, you must meet certain criteria. The two main tests that you should consider are the Automatic Residence Test and the Statutory Residence Test. It's crucial to understand these tests, as they determine your tax liability in the UK:

The Automatic Residence Test considers factors such as the number of days spent in the UK, your previous residence status, and your connection to the UK. For example if you spend fewer than 16 days in the UK during a tax year (or 46 days in the UK over a period of three consecutive tax years, with no more than 16 days in a single tax year), you are considered automatically non-resident for tax purposes

The Statutory Residence Test evaluates various factors, including the number of days spent in the UK, the presence of a UK home, and your employment situation. It can be more complex than the Automatic Residence Test and may require careful planning to ensure non-residence status.

What happens when working outside the UK?

Where you’re thinking of moving overseas though aren’t sure about taxes, it’s worth checking those countries that have special regimes in place. Some of these overseas jurisdictions allow foreigners to exempt their UK income from taxation in the relevant country. In some cases, this might be up to six years!

In order to acquire a work visa in a country you’ll typically need to have a firm, written job offer from a corporation with offices in that country. Although, in more and more countries, immigration offices are developing special classifications to accommodate foreign freelance workers.

The rules vary per country, but many now offer some sort of freelance visa that allows you to legally reside in that country without being employed by a local firm.

Alternatively if you’re freelance or working remotely, you could spend a few days working whilst on a trip or visiting another country for a very short period. As far as this is concerned, the rules are vague where you’re not intending to live in a country and are there short-term for a change of scenery. 

Travel visas

A travel visa allows you to visit a country for a specific period. This could be for personal or professional reasons. This type of visa is suitable if you're a freelancer planning short-term trips. However, most travel visas don't give you the legal right to work in the country concerned.

Is it possible to obtain a visa if you're a freelancer?

You can obtain a visa for freelancing within that country often known as  ‘self-employed visas’ or ‘entrepreneur visas’ They are a relatively new development in a lot of countries and are usually for a limited period of 1 or 2 years. Examples of some countries that offer this type of visa are Croatia, Greece, Indonesia, Malaysia and Thailand.

These countries have introduced these type of visas to incentivise digital nomads as freelancing continues to become more and more popular. Typically  you’ll most likely need to provide correspondence that confirms your digital nomad status, a copy of your passport and travel documents, a background check from your home country, health insurance, proof of funds to support yourself and the temporary address at your choice of destination.

Dual residency

You might be under the impression you can only be deemed a tax resident in one country at a time. However frequently individuals might become ‘dual-residents’. In other words they meet the residence criteria for more than one country at the same time in the same tax year (or tax years that overlap).

For example, you may spend six months a year in the UK and six months in Portugal. This would mean you'd be classed as tax resident in both of those countries.

In this case, it would be necessary to examine the UK/Portugal double tax treaty to establish where that individual is a treaty resident. That treaty resident country would then obtain the primary taxing rights, however it may also be appropriate to review categories of income and their sources. 

Other points

Some other aspects to the tax implications of becoming a digital nomad that need consideration are as follows:

  • Plan your departure strategically to minimize your UK tax liability. This might involve leaving partway through a tax year to qualify for non-resident status soonert
  • Consider the tax treatment of income generated from UK investments, such as dividends or capital gains, and whether it's more advantageous to sell or retain these investments.
  • Review your pension contributions, as these may be subject to different rules depending on your residence status. Non-residents may have limited options for contributing to UK pensions.
  • Be aware of the potential for double taxation if you earn income from sources in multiple countries. The UK has double taxation agreements with many countries to help prevent this issue.

Bottom line, if you do decide to leave the UK and become a digital nomad you need to think very carefully about your medium/long term plans in conjunction with the statutory residence test.

For more useful information, check out our Ebooks here.

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