Expat Tax Matters: Foreign employment exemption explained for South Africans in the UK

If you’re a South African working in the United Kingdom, you’re going to want to pay attention. Changes to South African tax law that came into effect in March 2020 mean that you could be liable to pay tax on your income back home. That’s right. These new ‘expat tax’ rules could result in South Africans working outside of South Africa (but intending to return home at some point) being exposed to tax back in the R of SA, which means you’ll be paying both Her Majesty’s Revenue and Customs, and the South African Revenue Service a fair chunk of your earnings. Before you weep and kiss your hard-earned money goodbye, let’s take a look at the tax position in respect of foreign income, and take a look at how these changes might affect you, as a South African working in the United Kingdom.

 

Who do the new tax rules apply to?

Expat tax will apply to South African ‘tax residents’, wherever they may be in the world. Broadly speaking, a South African tax resident is defined as:

• An individual who is resident in South Africa; or
• An individual who is ordinarily resident in South Africa

You will be considered ordinarily resident in South Africa if it is the country to which you will ultimately return at the end of your travels. As a South African tax resident, you will be taxed on your worldwide income and capital gains, subject to certain conditions and exemptions.

 

What is the current tax position for South Africans working overseas?

The position for South African tax residents working abroad is that the remuneration of up to R1.25 million for services rendered outside of South Africa is exempt from South African tax as long as in a 12 month period the individual:

• Works outside of SA for more than 183 days,
  • 60 of which must be consecutive

However, this foreign income exemption does not automatically apply to your income, and you will need to declare the income in your South African tax return and request that the exemption be applied in order to make use of the tax relief.

 

What do the new tax rules mean for South African tax residents?

South Africans working overseas will be expected to pay tax in South Africa in line with their tax bracket on their foreign income where it exceeds R1.25 million.

• Non-South African income of up to R1.25 million (approximately £61,000) per annum will be exempt from tax in South Africa.
• Non-South African income over R1.25 million will be taxable in South Africa, and subject to normal tax brackets, which means that up to 45% tax is payable.
• South Africa does have a Double Tax Agreement with the United Kingdom,  which means that if you already pay tax in the UK, you will be able to claim a tax credit back in SA for taxes already paid, to offset your South African tax liability.

What does this mean? As mentioned above, it means that if you are a South African tax resident working outside of the country you will need to file an income tax return back home to declare foreign income and seek approval from the South African Revenue Service in order to utilise the foreign income tax exemption. This is because South Africa has a residence-based tax system according to which you will be taxed on all local and foreign income you receive, regardless of where it’s earned.

 

Does this mean that you can become a non-resident for tax purposes to avoid paying expat tax on your foreign income?

Hypothetically speaking, the answer is yes. If you cease tax residency in South Africa, the South African Revenue Service only has jurisdiction to tax you on income with a South African source. However, before you embark on tax emigration, it’s important to be aware of a number of consequences. Under section 9H of the Income Tax Act, a  Capital Gains Tax liability becomes payable, based on the market value of the worldwide assets you hold on the date that you ceased tax residency. What does this mean? It means SARS is coming for you, one last time, to the maximum tune of 18% tax on your worldwide assets. Do you have the necessary liquidity to roll with that tax blow?

 

FinGlobal: tax specialists for South Africans abroad

Managing tax affairs in two different tax jurisdictions can be tricky and time-consuming. To ensure that you’re compliant on both sides, our team of expert cross-border financial service providers would love to help you:

• Calculate your potential tax exposure and provide objective advice on your tax filing and payment obligations.
• Assess and advise whether tax emigration will make a favourable difference in your tax position.
• Complete and submit all South African tax returns, including tax clearance and tax refunds.

Got a complicated tax situation? We’d love to hear about it. Leave us your contact details and we’ll be in touch to discuss your financial future.