Most members of the armed forces will spend time working overseas during their service career. Depending on where you are posted you may or may not be accompanied by your family. The time you spend working abroad will also vary. How you will be taxed might depend on both these facts.
How will my armed forces’ salary be taxed?
Irrespective of the length of your overseas posting the salary and allowances you receive from the armed forces will continue to be taxed and subject to National Insurance contributions (NIC) in the UK as normal. This is irrespective of the length of time you are outside the UK and whether or not you remain tax resident or become non-resident in the UK for tax purposes.
There is more information on residence for tax purposes on the page ‘residence and domicile for armed forces’.
I have other income, how will that be taxed?
This depends on your UK tax residence position. From 6 April 2013 the UK introduced a Statutory Residence Test (SRT) and this test determines whether or not you are tax resident in the UK during your overseas posting.
There is more information on how to work out if you are resident in the UK for tax purposes in the ‘migrants and tax section’. HMRC have two calculation tools to enable you to check your tax residence status and these are available on GOV.UK. The “Tax Residence Indicator” looks at a full year, whilst the “Split Year Treatment cases 1 – 8” considers whether you can split the tax year in which you leave or return to the UK into a not tax resident part and a tax resident part. HMRC also publish a booklet “Guidance note for Statutory Residence Test: RDR3” which gives more information. RDR3 is available on the GOV.UK website.
If you remain tax resident in the UK then you are normally liable to tax here on all your income, wherever it arises in the world. This may not apply if you are dual tax resident in the UK and another country.
If you become non-resident in the UK for tax purposes whilst you are posted abroad then any income that arises outside the UK will not be taxed here. However, if you have any UK source income, for example you receive rental income because you rent out the house you normally live in in the UK whilst you are working abroad, then this income will remain taxable here.
As a member of the armed forces you will continue to receive your tax free personal allowances irrespective of whether you are resident or non-resident.
There is more information on the page ‘residence and domicile for armed forces’.
Will I have any tax liability in the country I am working in?
This will depend upon the tax rules of the country you are working in and whether you are tax resident in that country. It is possible to be tax resident in two countries at the same time: this is known as being “dual resident”. You can find out more about dual residence in the ‘migrants and tax section’ of our website. If you are a dual resident and there is a double taxation agreement (DTA) between the UK and the country you are posted to then this agreement will determine how your income will be taxed. You can find out more about DTAs on our website.
A DTA will normally specifically exempt your employment income from the armed forces from tax in the country you are working in. However, all DTAs are different and this exemption may not apply in certain circumstances, for example if you are a national of the country you are working in.
It is beyond the scope of this guidance to give specific information relating to the tax systems of countries other than the UK.
Generally we would expect that you might have a tax liability or reporting requirement if you have income that arises in the country where you are working and that income does not relate to your armed forces service. For example if you are self-employed and that self-employment continues whilst you are abroad.
My spouse or civil partner is accompanying me; what is their tax position?
Each individual’s tax residence position is determined separately. Your spouse or civil partner will need to establish their personal UK tax residence position in accordance with the guidance in HMRC’s booklet “Guidance note for Statutory Residence Test: RDR3”. RDR3 is available on the GOV.UK website.
If your spouse or civil partner is non-resident in the UK they will still be entitled to a UK personal allowance in certain circumstances, for example if they are an EEA citizen (which includes the UK). However if they are not an EEA citizen then they will only be entitled to a personal allowance if they qualify under the terms of a DTA. You can find out more about this on page RRN4 of HMRC’s guidance notes for form SA109 at the Box 15 reference, available on GOV.UK.
If your spouse or civil partner works abroad then we would expect their earnings from their work to be taxable in the country they are working in. In addition, they may also need to pay social security contributions in that country.
You can find out more about residence for tax purposes, and the tax implications, for your spouse on the page ‘residence and domicile for spouses and family’.
What is my spouse or civil partner’s UK social security position?
If your spouse or civil partner has accompanied you on your overseas posting they can apply for Class 1 NIC credits. This means that they are treated as having paid social security contributions whilst they are abroad with you and there is no gap in their contribution history.
Certain UK state benefits are dependent upon the individual’s NIC record, for example the state pension, so it is important that your spouse or civil partner applies for these credits to ensure they have as few gaps in their contribution record as possible. They can apply for Class 1 NIC credits on GOV.UK.
You can find out more about residence for tax purposes, and the NIC implications, for your spouse on the page ‘residence and domicile for spouses and family’.
What about the social security benefits that I/we currently receive; will I continue to get these during my overseas posting?
As a member of the armed forces you (and your partner) can continue to claim certain state benefits during your overseas posting. There are certain conditions you have to fulfil and you can find out about these on GOV.UK. Generally, so long as you normally live in the UK and were living here before you were first posted abroad, then you will qualify. You can also find out more about claiming UK state benefits during your overseas posting on Moneyforce.
You or your spouse or civil partner may also be entitled to benefits in the country you are posted to but this will depend upon the country. The most common example is “Kindergeld” – the equivalent of Child Benefit in Germany.
What about capital gains tax?
If you dispose of an asset whilst you are resident abroad you may still have a liability to capital gains tax in the UK. Capital gains tax is a complicated subject and you can find a general introduction in the ‘other tax issues section’ of our website.
You might also have a liability to capital gains tax in the country you are living in and, like income tax, double tax treaties attempt to mitigate any double taxation.
If you think you might dispose of an asset whilst you are living abroad you should seek specialist advice on whether you will have to pay capital gains tax. You can find a tax adviser on the Chartered Institute of Taxation website.