Spending a year of your course abroad?
Whether you are going abroad to work, study, or a mixture of both, you should be aware that there are potential tax consequences – you get no special treatment just because you are a student. Here we tell you what you need to know before you go.
If you are planning on working while you are on your sandwich year, either as part of an arranged work placement, or just part time or casually, for example, to help support yourself while you study, then you will need to pay UK tax on anything you earn above your personal allowance.
This is because if you normally live and study in the UK but are abroad for only a limited time, you will remain attached to the UK for tax purposes (‘resident’). You can find out more about tax residence here.
It does not matter that your employer is an overseas employer, or your wages are paid into a foreign bank account, or you are paid in a foreign currency – HM Revenue & Customs (HMRC) will still be interested in your earnings, so it is important that you retain your payslips and any other documents that you are given whilst abroad, in case you need to show them to HMRC at a later date.
Earnings above the personal allowance
For the tax year 2014/15 you will have a personal allowance of £10,000 to use against your worldwide income. This will probably cover any part time or casual overseas earnings that you may have and if so HMRC probably will not want you to do anything but it is best to check with them.
If you are on a paid industrial or work placement however, your earnings may well exceed this personal allowance, so you will be required to pay UK income tax at 20% on the balance. To do this, you will have to complete a tax return with the foreign income details included. We provide more information about that here.
It is worth noting, however, that an academic year spans two tax years (a tax year starts on 6 April and finishes on the following 5 April), so you will be entitled to two personal allowances over the duration of your placement (remember to add in any UK earnings you have had in the tax year when calculating if you are below the limits).
Foreign tax too?
It is of the utmost importance that you have a basic understanding of the tax regime at your destination. Every country has their own set of tax rules and just because you are still caught by the UK tax regime, does not mean you get an automatic exclusion from overseas tax.
There are lots of scenarios as a consequence of this: It may be that you will not have to pay tax in either country (because your earnings are under the personal allowance in the UK and the equivalent of the personal allowance in the foreign country for example). Or you may have to pay tax in the UK but not in the overseas country. Or the other way around. It may sound a bit complicated, but all of these situations are manageable.
But what if you have had to pay tax in the UK and overseas on the same income? DON’T WORRY! In this case, there are some special rules that recognise this situation and you will get ‘double tax relief’ by the UK basically giving a credit for some or all of the foreign taxes paid. This is explained in more detail here.
National Insurance contributions
If you work for a foreign employer, you do not need to pay National Insurance contributions in the UK but you might have to pay contributions in the country you are working in. These are not typically reclaimable, although they may help you qualify for some welfare benefits there or even back in the UK – if they are made in certain countries. We talk about National Insurance in more detail here.
Going abroad for a year of your degree but not working?
HMRC may owe you a tax refund for your year of departure if you had a job before leaving. However, you will only be able to claim this if you do not plan to do any work while you are abroad. You should complete a form P85 in this situation. For further guidance on this, please see here.
Need further information?
There is a lot of information here to understand – but there is also a lot of guidance and a number of worked examples to help you avoid any problems on our website. Take a deep breath, get stuck in and then you will be able to enjoy your time abroad knowing your tax position is taken care of.