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10. Types of income

This part provides a series of tables so that, depending on your individual circumstances, you can see which types of income are taxable in the UK. There is additional information to help you understand the tables and to apply them to your individual circumstances.

Before using the tables you must decide, by reference to the guidance provided earlier, if you are:

• resident or not resident in the UK
• ordinarily resident or not ordinarily resident in the UK
• domiciled or not domiciled in the UK.

When you are liable to UK tax it means that you will pay UK tax on the income, after any allowances and other tax reliefs you are entitled to.

The first part of this section deals with earned income and the second part with investment income.

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10.1. Earned income

Earned income is any payment that you receive as a result of an employment, from a trade, profession or vocation you have, or from a pension you receive.

You can earn income both in the UK and anywhere else in the world. What UK tax you have to pay on your earned income will depend on whether you are resident or not resident in the UK. If you are resident in the UK but are either not ordinarily resident or not domiciled here, you might wish to use the remittance basis of taxation. This will affect the amount of UK tax you have to pay on income earned from outside the UK. You will always be liable to UK tax on income earned in the UK.

If you receive income or gains from employment-related share schemes you should keep full records, for example of acquisition, terms and realisation to show where the duties that relate to the award of shares were performed.

10.2. Earned income – When you are resident in the UK

Unless you are able to use the remittance basis, when you are resident in the UK you are liable to UK tax on the arising basis of taxation. This means that you are liable to UK tax on all of your earned income, wherever it arises.

10.2.1. Earnings you receive from an employer

When you are liable to UK tax on the arising basis, you are taxed in the UK on your earnings from any employments, whether your duties of employment are carried out in the UK or abroad.

If you can and choose to be liable to UK tax on the remittance basis, your UK employment earnings are taxed in the UK but any earnings from employment abroad will only be taxed if they are remitted here.

But if you are resident and ordinarily resident in the UK, but are not domiciled here, the remittance basis will apply only to foreign employment income where the employment is performed wholly outside the UK for a foreign (non-UK) employer. A foreign employer is an individual, partnership or body of persons resident outside, and not resident in, the UK. You will be liable to UK tax on the arising basis for any UK employment income and for any overseas employment income where any of the duties of employment are carried out in the UK.

If your overseas employment duties are performed wholly or partly outside the UK for a UK employer you will not be able to claim the remittance basis and the income will be liable to tax in the UK on the arising basis – see table 10.10.1, note 3(b).

The table at 10.10.1 will help you to see what UK tax you will pay on your income earned from employments.

10.2.2. Earnings from a trade, profession or vocation

When you are liable to UK tax on the arising basis you are taxed in the UK on your earnings from any trade, profession or vocation, whether the trade, profession or vocation is carried out in the UK or abroad.

If you are liable to UK tax on the remittance basis, your earnings from any trade, profession or vocation carried out in the UK are taxed in the UK but any earnings from a trade, profession or vocation carried out wholly outside the UK will be taxed only if they are remitted here.

The table at 10.10.2 will help you to see what UK tax you will pay on your income earned from a trade, profession or vocation.

10.2.3. Pensions

When you are liable to UK tax on the arising basis you are taxed in the UK on most pensions whether they are from the UK or abroad. If you receive pension payments from outside the UK (an overseas pension) you might be entitled to a 10% deduction from the amount chargeable.

If you receive lump sums from overseas pension schemes or provident funds, the guidance at 10.9 explains your UK tax liability on the lump sum payments that you receive.

If you are liable to UK tax on the remittance basis, you will pay UK tax on any UK pensions that you receive but any overseas pensions will only be taxed if they are remitted here. You are not entitled to the 10% deduction for overseas pensions when you use the remittance basis.

The table at 10.10.3 will help you to see what UK tax you will pay on your income from pensions.

10.3. Earned income – Seafarer’s Earnings Deduction

If you are a seafarer (or ‘mariner’) who is resident and ordinarily resident in the UK you might be entitled to a deduction in your UK tax. This is called the Seafarer’s Earnings Deduction (SED).

A seafarer is a person who performs the duties of their employment on a ship. An offshore installation, for example an oil rig, is not a ship for the purposes of SED.

The SED is available only to seafarers.

10.4. Earned income – When you are not resident in the UK

10.4.1. Earnings you receive from an employer

Although you are not resident in the UK you will still pay UK tax on any employment duties which you carry out in the UK unless those UK duties are ‘merely incidental’ to an employment abroad – see 10.6.

You will not pay UK tax on any employment duties which you carry out wholly abroad.

If your employment duties are carried out partly in the UK and partly abroad you need to keep details of the employment – for example those days you spend working in the UK and those working abroad – to allow you to identify the earnings you have received for duties carried out in the UK. The duties carried out in the UK will be liable to UK tax. We may ask to see the records on which such calculations are based.

The table at 10.10.1 will help you to see what UK tax you will pay on your income earned from employments.

10.4.2. Earnings you receive from a trade, profession or vocation

Although you are not resident in the UK you will still pay UK tax on any income or profits from a trade, profession or vocation that you carry out wholly in the UK.

You will not pay UK tax on any income or profits from a trade, profession or vocation that you carry out wholly abroad.

If you carry out your trade, profession or vocation partly in the UK and partly outside the UK you will pay UK tax on the income or profits from the part of the trade, profession or vocation carried out in the UK.

The table at 10.10.2 will help you to see what UK tax you will pay on your income earned from a trade, profession or vocation.

10.4.3. Pensions

Although you are not resident in the UK you will still pay UK tax on most pensions from sources in the UK.

You will not pay UK tax on pensions from sources outside the UK.

The table at 10.10.3 will help you to see what UK tax you will pay on your income from pensions.

10.4.4. Double Taxation Agreements

As someone not resident in the UK, you might be able to make a claim under a Double Taxation Agreement (DTA) for your UK earnings or pensions, including taxable UK Social Security benefits, to be exempt from UK tax. This will depend on the content of any DTA between the UK and the other country concerned.

If, for the whole tax year, you are not resident and you do not claim relief under the terms of a DTA, your liability on taxable UK Social Security benefits is limited to the tax, if any, deducted before payment.

10.5. Offshore oil and gas workers

If you are working offshore in the UK oil or gas exploration or exploitation industry you are not a seafarer and are not eligible to the SED unless you are on a ship.

If you are a non-UK resident working offshore in the UK oil and gas industry and your work is being carried out on the UK continental shelf but outside the UKs territorial waters it will be treated as being performed in the UK for the purposes of taxing your employment income. Your earnings will be UK earned income and be subject to UK tax. You should address any queries that you have about the repayment of that tax to South Wales Area, Cardiff (see part 13) and not to any other HMRC office. You might not be due a repayment of UK Income Tax.

If you are a resident of a country with which the UK has a Double Taxation Agreement (DTA) there might be specific provisions for the offshore oil and gas industry. You should address any queries that you have about to South Wales Area, Cardiff (see part 13 Contacting HMRC).

10.6. Employment income – Where your duties are carried out

If you are not resident in the UK or you use the remittance basis, where you actually carry out your duties will determine if your earned income is UK income or is income earned abroad. Income is taxed in the UK based upon the facts of where the duties, for which you are being paid, were carried out.

Seafarers and aircrew

Individuals working on international planes, ships and trains are performing UK duties if they travel through the UK, UK airspace, UK territorial waters or UK continental shelf. The extent to which the whole journey is considered UK duties will depend both on whether the journey starts or ends in the UK, and whether or not you are UK resident. If you are not resident in the UK, whether you are relieved from UK tax on duties carried out in the UK will depend on the terms of any relevant Double Taxation Agreement (DTA). It may also be dependent on the country of residence of the company operating the ship or aircraft on which you are employed. You will need to find out the residence of the operator and look at relevant articles of the DTAs involved.

Other workers

If your work is normally carried out abroad but you have to carry out some of your duties in the UK, the work you do in the UK will be part of your duties abroad only when you can show that the work you did in the UK was merely incidental to the duties of your employment abroad.

Whether or not duties performed in the UK are merely incidental to an overseas employment will always depend on the circumstances of each particular case. Any decision has to be based on the nature of the work carried out in the UK and not simply the amount of time spent on it.

If the work that you perform in the UK is the same or is of similar importance to the work that you do abroad, it will not be merely incidental. You will have to show that there is a purpose to the work you did in the UK which enabled you to do your normal work abroad and which you could only do in the UK.

Examples of work carried out in the UK as part of an overseas employment: incidental work

• time spent in the UK by an overseas sales representative of a UK company to make reports or receive fresh instructions
• a short period of time spent training in the UK by an overseas employee, provided that no productive work is carried out in the UK by the trainee non-incidental work
• time spent in the UK as part of the duties of a member of the crew of a ship or aircraft
• attendance at directors’ meetings in the UK by a director of the company who normally works abroad.

10.7. Earned income from employment when you come to or leave the UK part-way through a tax year

The following guidance relates only to income that you earn as an employee. All other types of earned income are taxed in the same way as unearned income – see 10.11.

When you become resident in the UK

If you come to the UK during a tax year to take up permanent residence or to stay for at least two years, you are resident in the UK for the whole of that tax year. But there is a concession (subject to conditions) which allows you to be taxed as a non-resident for the part of the tax year before you became resident (Extra-Statutory Concession A11). This means that the foreign income you received before you arrived in the UK will not be liable to UK tax.

When you are resident in the UK any leave pay you receive is normally taxable. If you have been working abroad and are paid for a period of leave spent in the UK, it will be taxed here as ‘terminal leave pay’. It is taxed as arising in the period to which it relates – even if your entitlement to the leave pay was built up during a period of overseas employment. If you are able to claim the Seafarer’s Earnings Deduction, you may be exempt from UK tax on your leave pay but this will depend on your individual circumstances. Any leave pay you receive for a period when you are resident and ordinarily resident is normally taxable.

When you stop being resident in the UK

If you leave the UK during a tax year for full-time service under a contract of employment, the concession which applies to those people arriving in and becoming resident in the UK during a tax year (Extra-Statutory Concession A11) works in a similar way, subject to certain conditions. The concession allows you to be taxed as a non-resident for the part of the tax year after you left the UK. This means that the foreign income you receive in the tax year after you leave the UK and become non-resident will not be liable to UK tax.

10.8. Coming to or leaving the UK if you carry out a trade, profession or vocation

If you carry out a trade, profession or vocation there are provisions which apply when you start or end the business (‘commencement’ and ‘cessation’ provisions).

If you have been carrying out a business wholly or partly outside the UK and you:

• become resident in the UK, or
• stop being resident in the UK then, in some cases, and provided your business is continuing despite the change in your UK residence status, at that point you are ‘deemed’ to have ended one business and started another. This means that special cessation provisions apply up to the date of ‘deemed’ cessation and special commencement provisions apply from the date of ‘deemed’ commencement. This may affect the amount of tax that you have to pay.

Normally the cessation and commencement of residence in the UK (and therefore the ‘deemed’ cessation and commencement of trade) takes place at the start of the tax year in which your change of residence occurs. Despite the ‘deemed’ cessation of one business and commencement of another, where this applies, any losses incurred by the business before the change in your UK residence status can be carried forward and set against the profits of the ‘deemed’ commencing business.

This will not apply to all trades, professions or vocations. It will depend on where the business is carried out rather than on where the proprietor of the business resides.

A change in your residence status will usually trigger the cessation of one business and the commencement of another. Most trades and professions are carried out in a particular location such as a shop or factory. This means that changing the location of a business (for example from one country to another) will usually result in the new business being different from the old one. Even if the type of business being carried out is the same, the fact that it is in a completely new location is likely to mean that it has a different structure, customer base and employees. When this is the case the normal rules for the cessation and commencement of a business will apply and you will have ceased one business and started a new one. You will not be able to carry forward losses from the old business to set against the profits of the new one.

There are some businesses which are not localised in this way. These businesses are mainly carried out by professional people, wherever in the world the person happens to be. Examples of this type of trade would be international actors, sportsmen or women, authors and musicians. If you carry out this type of profession and continue to do so in the same way after a change in your UK residence status, you will be liable to UK tax in the year of the change in your UK residence status as follows:

• when you become resident in the UK you will be liable to UK tax on the proportion of your profits for the full year which reflects the profits made from the date of your arrival in the UK to the following 5 April
• when you cease being resident in the UK you will be liable to UK tax on the proportion of your profits from 6 April until the date of your departure from the UK.

10.9 Lump sums received from overseas pension schemes and provident funds

If you receive lump sum retirement benefits from an overseas pension scheme or provident fund which relate to an employment outside the UK, you will not be charged UK Income Tax or will be charged at a reduced rate. This is by concession (Extra-Statutory Concession A10). What UK Income Tax you are charged will depend on the extent of your foreign service.

You will receive a full exemption where, in the employment to which the pension relates:

• at least 75% of your total service was abroad, or
• your total foreign service exceeds 10 years and the whole of the last 10 years service was abroad, or
• your total foreign service exceeds 20 years and not less than 50% of the total service was abroad, including any 10 of the last 20 years.

If you do not meet these conditions you will not receive a full exemption. You will be charged Income Tax on the percentage of the lump sum which equals your UK service in the employment.

10.10. Tables showing the scope of liability to UK tax for earned income

Using the tables

These tables are designed to help you identify your liability to particular types of income, based on your UK domicile and UK residence status and, if appropriate, whether you claim the remittance basis.

Your starting point will be whether you are domiciled in the UK or outside the UK and you will then proceed to the question of whether you are resident and ordinarily resident, resident and not ordinarily resident or not resident in the UK.

Some additional notes of explanation are provided as notes.