Updated on 4 August 2023
If you’re a UK expat, currently living and working in Hong Kong, it’s very possible that – at some stage – you’ll return to the UK.
Planning ahead for such a key event is always advisable. The longer you give yourself to plan and make the necessary arrangements, the better your chance of a successful transition.
If you’re returning to the UK to retire, one key consideration will be structuring an income plan.
With the UK having relatively high rates of tax, certainly when compared to Hong Kong, taxation will be a key factor when you’re putting your plans together.
Luckily, there are a series of allowances under a range of headings to enable you to put together a decent level of income that you can take on a tax-free basis.
Here are seven steps to structuring your financial affairs and arrangements to create an income stream that minimises the amount of tax you pay to HMRC.
1. Double up on your allowances
The first step is a simple reminder.
All of the allowances and tax-efficient facilities we’re outlining for you here apply to all individuals over the age of 18, rather than shared by couples.
This means that if you’re married or in a civil partnership, each of you is entitled to claim, and you can effectively double the amount you can receive tax-free or pay a minimal amount of tax on.
2. Your Income Tax Personal Allowance
The standard Personal Allowance is £12,570 (2023/24 tax year), which is the amount you can earn before you start paying Income Tax.
Each individual has the same allowance, which means that, as a couple, you can earn over £25,140 between you before you start paying Income Tax.
3. Tax-efficient income from your savings
The Personal Savings Allowance (PSA) means every basic-rate taxpayer is able to earn £1,000 annually in savings interest before paying any tax. Higher-rate taxpayers can earn £500.
There is also a £5,000 starting savings rate. This means that, by combining the Personal Allowance, the PSA, and the starting savings rate, someone earning less than £18,570 won’t pay tax on the interest from their savings.
The tax advantages on savings are primarily aimed at low earners, so when you’re structuring your savings and investments, it’s worth taking this into account if either you or your partner are in that position.
You also get an annual Dividend Allowance of £2,000, so the first £2,000 of dividend income you earn each year is free from tax.
4. Structuring income from an investment bond
Qualifying investment bonds can offer some attractive tax benefits for UK residents.
Investment income and gains on the underlying holdings within an investment bond are not immediately liable to tax and so benefit from greater compounding of investment returns.
Each year, you can withdraw 5% of your original investment without incurring an immediate tax charge.
You can also carry forward your unused 5% allowance from previous years, which provides an extra layer of flexibility when it comes to income planning.
Note that calculations are based on the year starting from the date the bond was taken out rather than the tax or calendar year.
Chargeable gains on investment bonds are subject to savings rates of Income Tax. As a result the various allowances described above can be used periodically to strategically realise investment bond gains free of tax.
5. Using your Capital Gains Tax allowance
Capital Gains Tax (CGT) is payable on the profit you make when you sell an asset.
This includes:
- Shares
- Unit trusts
- Business assets
- Buy-to-let residential property that doesn’t qualify for principal residence relief.
Each individual has a CGT allowance, which enables you to profit up to £6,000 on disposal of assets each year free of CGT.
This means that, by effectively structuring the ownership and sale of your assets, yourself and your spouse or partner can receive £12,000 income each year tax-free between you.
6. Maximising your ISA allowances
The current (2023/24 tax year) ISA allowance is £20,000 for each individual over 18.
As a result, a couple can invest a total of £40,000 into an ISA and withdraw money free of Income Tax and CGT.
By maximising your ISA allowance each year, you can build a healthy fund that can play a key role in providing you with a source of tax-efficient income.
7. Managing your pension income
As well as tax allowances and different savings options, pensions should also play a big part in your income planning. This applies both in terms of contributions and withdrawing income.
You get tax relief at your marginal rate on all contributions. The standard limits on pension contributions are £60,000 gross or 100% of your earnings – whichever is lower.
What’s often overlooked is that even someone who is not earning can contribute £2,880 to a pension and receive basic-rate tax relief, topping this up to £3,600. This makes pensions a highly effective savings vehicle.
From age 55 (rising to 57 in 2028), you can then take 25% of your fund tax-free, and there’s further flexibility around how you can take the non-tax-free element, which can help with your tax and income planning.
For example, some providers enable you to take tax-free cash on a regular basis – annually or monthly – rather than as a lump sum, which can help minimise the amount of tax you’re paying.
Get in touch
As you can see from the steps we’ve outlined here, by structuring your financial affairs effectively when you return to the UK, you can create a very tax-efficient income stream.
Please contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.
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