Digital nomads: Know your tax responsibilities before you travel

The way our society is working has changed, with the ability to now earn money online from almost everywhere, the digital nomad lifestyle is gaining unprecedented popularity.

This is a way of life embraced by those who seek to merge travel and work, exploiting technology to work remotely from foreign shores, cafes, and anywhere in between.

Digital nomads are pretty much only restricted by a lack of internet, so every country is available to work from.

According to Statista, the digital nomad community boasted around 35 million individuals in 2023, a figure that has undoubtedly grown as we entered 2024.

Citizen Remote sheds light on the financial aspect of this lifestyle, noting that the average digital nomad earns between $50,000 (£39,400) and $123,000 (£96,800) annually.

So, there’s little to suggest that this lifestyle isn’t lucrative as well as freeing in terms of ability to travel.

While the allure of this lifestyle is undeniable, it does come with its fair share of responsibilities, particularly concerning tax.

In this article, we’ll be looking at the tax implications for British nationals who are looking to become prospective digital nomads, but our team has also helped clients from India, Hong Kong, the US and many more countries to manage their tax liabilities.

How does tax residence work in the UK?

The tax residence issue is often a subject we find ourselves speaking to clients about.

In essence, your residence status usually dictates your tax obligations in the country in which you’re working – in the UK, the Government draws a clear line between residents and non-residents and domiciled and non-domiciled individuals.

Until recently, UK residents were subject to UK tax on their global income, whereas non-residents are taxed only on their UK income.

However, the Government has now changed the way that the non-dom system works, reducing the ability of non-domiciled residents of the UK to keep their global income separate to their UK income.

If you’re a non-national, planning to move to the UK for a period of time, please read our article on the updated non-dom regime.

For UK nationals planning to embrace the digital nomad lifestyle, you’re lucky – the Government has numerous Double Taxation Agreements (DTAs) in place to protect residents from being taxed twice on their global income.

For example, the DTA between the UK and South Africa outlines that an individual will pay tax in the country of which they are a resident, not the country in which they are earning.

If an individual has dual residency, they are taxed based on their permanent home or in whichever country they have closer personal and economic ties.

The UK has DTAs in place with over 130 countries, making it one of the largest networks of tax agreements in existence.

It’s important to note that each DTA is different and may result in taxes being paid in the country of earning, rather than residency – although they all seek to prevent the individual from being taxed at both source and home country.

How to reduce your tax obligations

Savvy planning before you depart can significantly reduce a digital nomad’s tax liability.

The tax treatment of investment income, pension contributions, and the impact of residence status all merit careful consideration.

  • Optimising your tax residence: Choosing to establish tax residence in a country with favourable tax treaties or lower tax rates can be beneficial.
  • Investment income planning: Structuring investment income in a way that takes advantage of lower tax rates or exemptions available in certain jurisdictions can reduce tax.
  • Pension contributions: Making contributions to pension schemes and National Insurance can offer tax relief in the individual’s country of tax residence and can provide significant tax savings.
  • Utilising DTAs effectively: DTAs between countries can prevent income from being taxed twice. Understanding how these agreements apply to your income sources, and planning your movements accordingly, can significantly reduce tax liabilities.
  • Income splitting: Where possible, splitting income among family members to utilise lower tax bands can reduce the overall tax burden.

As you can see, tax mitigation strategies and an understanding of double taxation agreements are indispensable tools in the digital nomad’s arsenal, ensuring a life of adventure doesn’t come with unwelcome fiscal surprises.

If you’d like tailored guidance on your liabilities and obligations whilst you travel, please get in touch with our team.

Posted in blog, Income Tax, Overseas Corporate Tax, Tax.