There was nothing to pay in 2019/20 because all of Ron’s income was ‘disregarded income’ (S.813 Income Tax Act 2007). This is important because our tax rules say that a non-resident individual’s income tax bill can never exceed the total of tax deducted at source or treated as paid on his or her disregarded income plus the income tax on any other income UK sources of income. So, as long as no tax has been deducted at source on his state pension, Ron’s bill is limited to the tax treated as paid on the dividends at 7.5% under S.399 Income Tax (Trading and Other Income) Act 2005. Since, he’s treated as having paid that tax already, he has nil to pay for that year.
In 2020/21, the introduction of rental income complicates the income tax position because rent is not ‘disregarded income’. We still need to calculate the limit on Ron’s bill imposed by S.811 ITA but it has been raised by £6,000 because of the rental income. This is because we have to increase the limit by the tax referable to the income that is not disregarded (i.e. the rent) without setting against it any of Ron’s personal allowance even though he is entitled to one as a British national. This maximum amount is applicable to any non-resident regardless of where in the world they are living. However, Ron has moved to France – a country with which the UK has a full double taxation agreement – and so the provisions of that agreement are more likely to limit Ron’s exposure to UK income rather than the calculation of S.811.
Article 23 (Other income) of the agreement with France entirely excludes the UK’s right to tax the UK state pension and Article 11 (Dividends) limits the tax charged on the dividends to 15% of the gross dividend. This means that the claim form associated with HS304 is needed for the pension and the dividends. Because the UK’s right to tax the pension is excluded by the treaty, the pension is reported in the table on page 1 of the claim form and is omitted from the tax return. The dividend income goes on page 2 of the claim form as well as the return; the amount by which the tax payable on the dividend exceeds 15% of the gross dividend then feeds into Box 22 and is credited in the income tax calculation.
Most countries will have a treaty with the UK that says something about the UK’s right to tax its state pension and a dividend from a UK company when they are paid to someone resident in that other country. However, the relevant treaty must be looked at in each case. For instance, if Ron had instead moved to Spain, that agreement would also stop the UK taxing the state pension but the tax charged by the UK would be limited to 10% instead of 15%. On the other hand, if he’d settled in Germany, that treaty provides the same 15% limit on the dividends but gives the UK exclusive rights to tax the state pension.
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