What Is Tax Residency?
Tax residency is a term that might sound niche – but it plays a major role in determining how much tax you owe, where you owe it, and what you need to report. For entrepreneurs, directors, freelancers and business owners, understanding what is tax residency is key to staying compliant with HMRC and avoiding surprise tax bills.
Whether you’re a UK-based director running your company from home or a non-resident director involved in a UK business, knowing where you stand tax-wise can make a huge difference. Let’s break it down in plain English
What Does “Tax Residency” Mean?
Tax residency refers to the country where you are legally recognised as a resident for tax purposes. This status plays a vital role in determining:
- Where you pay income tax
- Which income sources you must report (worldwide income vs. UK-only)
- Whether you can benefit from double taxation treaties to avoid being taxed twice on the same income
In the United Kingdom, tax residency is assessed by HM Revenue & Customs (HMRC) using the Statutory Residence Test (SRT). This test considers factors such as:
- The number of days you spend in the UK during a tax year
- The strength of your ties to the UK — including family, accommodation, work, and previous residence history
If you’re unsure of your status, HMRC provides detailed guidance and a Statutory Residence Test tool to help determine your tax residency position.
Understanding your tax residency is crucial, especially if you live or work in more than one country. It affects your tax liabilities and reporting obligations — both in the UK and abroad.
Why Tax Residency Matters for UK Business Owners
Your tax residency status has a direct impact on how your income is taxed — both in the UK and internationally. Understanding whether you’re classed as a UK tax resident or not is essential for staying compliant and optimising your tax position.
- If you’re a UK tax resident, HMRC requires you to report and pay tax on your worldwide income — including overseas earnings, foreign dividends, rental income from abroad, and gains from selling assets.
- If you’re a non-resident, you’re generally only liable for UK tax on income sourced within the UK. This could include rental income from UK property, profits from UK businesses, or salary earned while working physically in the UK.
Your tax residency status can affect several key areas:
- Income Tax – Determines whether you’re taxed on all global income or UK-only earnings
- Capital Gains Tax (CGT) – UK residents pay CGT on worldwide gains, while non-residents may still be liable for gains on UK property and land
- Dividend Tax – Directors of UK limited companies may still be taxed on dividends depending on their residency and the presence of double tax treaties
- Reporting Foreign Income – UK residents must disclose foreign income on their Self Assessment tax return
This becomes especially important for:
- Directors living abroad but owning UK limited companies
- Digital nomads working remotely for UK clients while travelling or living overseas
- Freelancers and contractors who earn across borders or from international platforms
If you fall into one of these categories, it’s vital to understand the rules that apply to you. HMRC’s guidance on UK tax for non-residents offers a good starting point.
How Tax Residency Is Determined in the UK
To decide whether you’re a UK tax resident, HMRC applies the Statutory Residence Test (SRT). This test considers the number of days you spend in the UK and the nature of your personal and professional ties.
The SRT is broken into three stages:
- Automatic Overseas Test
You’ll be automatically non-resident for the tax year if any of the following apply:
- You spent fewer than 16 days in the UK and were a UK resident in any of the previous 3 tax years
- You spent fewer than 46 days in the UK and were not a UK resident in the previous 3 tax years
- You work full-time overseas (with no significant breaks) and spend fewer than 91 days in the UK, of which no more than 30 are spent working
- Automatic UK Test
You’re automatically UK tax resident if any one of these applies:
- You spend 183 days or more in the UK during the tax year
- You have a home in the UK for more than 90 days and are present in it for at least 30 days
- You work full-time in the UK for 365 days, with no significant breaks, and part of that work period falls within the tax year
- Sufficient Ties Test
If you don’t meet the automatic tests, HMRC will look at how many ties you have to the UK, such as:
- Family tie – A spouse or minor children living in the UK
- Accommodation tie – You have accessible accommodation in the UK
- Work tie – You work in the UK for at least 40 days in the tax year
- 90-day tie – You spent more than 90 days in the UK in either of the last two tax years
- Country tie – (Applies if you were UK resident in 1 of the previous 3 years) The UK is the country where you spent the most days
The more ties you have, the fewer days you can spend in the UK before being classed as a tax resident. For example, if you have four or more ties, spending just 16 days in the UK may make you a tax resident.
