Understanding taxation is one of the most important issues to address when moving overseas.
For many students the United Kingdom (UK) is one of the top destinations to seek higher education owing to its world-class universities. So if you're planning to study in the UK, how can you make sure you pay the right tax, and is taxation different for international students?
According to a report by the UK’s Higher Education Policy Institute international students are worth £20 billion (roughly USD 26bn) a year to the UK economy. International students boost the UK economy through a combination of university fees, spending, and working.
In a separate study by the same body, the economic benefits of international students were also shown to continue long after the studies had been completed, as many students choose to stay on and work in the UK or start their own businesses.
Taxation depends on your residency
The amount of tax you pay depends on your residency status. The rules surrounding residency are set by Her Majesty’s Revenue and Customs office (HMRC) in the UK. HMRC is the UK equivalent of the US Internal Revenue Service (IRS).
Your residency status is usually dependent on the number of days you spend in the country and your long-term intentions. Currently, the rules for the UK are:
- You’re considered a resident if you come to the UK and are planning to stay for two years or more.
- You are a resident for the tax year if you spend 183 or more days in the UK, even if you're planning to stay for no more than two years. If you spend less than 183 days in England during those two years, you are not a resident for tax purposes.
If you’re doing a typical university degree, then you will likely spend enough time in the UK to be be classed as a UK resident and will therefore need to pay taxes on your income. It’s important to note this may also include paying tax on any foreign income you earn outside the UK, for example from work back in your home country during the holidays.
However there is also a category called 'Non-domiciled' UK residents. These are UK residents who have their permanent home (or 'domicile') outside the UK and who usually do not have to pay tax on any foreign income. Most international students will fall into this category, and you can find out more about your tax and domicile status from this helpful guide.
Tax treaties help avoid double taxation
As an international student you'll need to consider the tax implications of your original home country as well as the country where you choose to study. In particular it is important to know whether your home country has a double taxation agreement with the UK, which could prevent you from being taxed twice on the same income. You can find out if your country has a double taxation agreement with the UK on the UK Government website here.
The US is one of the few countries in the world that taxes international income earned by its citizens and permanent residents living overseas. So if you’re a US citizen, you’ll have to file taxes to the US every year even if you live in the UK. Certain provisions do, however, protect you from having to pay double taxes in the UK and the US. These are:
- The Foreign Earned Income Exclusion, which allows you to exclude $103,900 (2018 figure) in earned income from foreign sources.
- Tax credit on tax on any remaining income to be reduced on taxes you paid to foreign governments.
- An exclusion of foreign housing, which allows additional exclusion from foreign income to be used for household expenses due to living abroad.
The above rules usually mean that most US international students don’t have to worry about paying taxes in both the US and the UK.
Tax rates and limits to be aware of
So what tax should you expect to pay as an international student?
Crucially financial support whilst studying is not classed as taxable income in the UK. Items that count towards financial support and which are not subject to tax are:
- Scholarships or bursaries;
- Family gifts; and
- Savings you’ve made before coming to the UK.
Income brought to the UK for 'maintenance' is also usually exempt from tax up to a limit, depending on the double taxation agreement your country has with the UK. Maintenance is defined as money used to fund your education and general living expenses, such as books, food and accommodation (this excludes course fees). Most international students are allowed to bring up to £15,000 for maintenance (around USD 20,000 based on May 2019 exchange rates) to the UK in a given tax year, without having to pay tax.
Any other income you earn as a student, for example from a part time-job, would be subject to UK tax. The tax rate will vary depending on how much you’re earning. The tax-free personal allowance for 2019/2020 is £12,500 (around USD 16,000 based on May 2019 exchange rates) – this is how much you can earn without having to pay any tax. Any income above this will be subject to tax. You can find out more about the tax rates here.
Complete a tax return after leaving the UK
Once you finish your studies and if you decide not to stay on in the UK, it’s important to check you’ve paid the right amount of tax before you leave.
The UK uses a system called Pay as You Earn (PAYE) to calculate your tax. If you’re employed, your tax contributions are automatically calculated and the appropriate amount is taken from your salary on a monthly basis.
However those that work part-time or have several different jobs, as is often the case with students, might not have the right amount of overall tax deducted. This means international students are often entitled to a tax refund when they leave the UK.
Before you leave you should complete a P85 ‘Leaving the UK’ form here and send it to HMRC to see if you are eligible for a refund. If you have any queries, you can call HMRC and they will be able to advise you on your individual circumstances.
Will Brexit have an impact on tax?
Following the referendum in 2016 the UK voted to withdraw from the European Union (EU). At the time of writing in May 2019, the UK’s terms of departure from the EU remain unclear.
The information in this guide is applicable as of today. However following the UK’s departure from the EU the tax arrangements for international students coming from EU countries may change.
This article will be updated should further updates regarding Brexit have an impact on tax arrangements for international students.