Being location-independent may mean freeing yourself from being tied down to any one place, but working online doesn’t necessarily mean escaping all the drudge that goes with employment. We often get asked questions about all the nitty gritty details of being digital nomads and working online – how we pay taxes when working abroad, do we have a pension, and so on. The answers are often less than simple as the genre of digital nomad is a relatively new one and lots of the old bureaucratic processes haven’t quite caught up with it yet. This results in a lot of grey areas, and you’ll find that many digital nomads and ex-pats have different answers about how they navigate the system.
Working abroad tax tips
We’ve put these digital nomad guides together to share our specific experiences as digital nomads. They are meant as a means of sharing what we do and what we’ve learned, rather than instructions on what you should do. Remember, we are in no way financial or legal experts, and there will be different answers for different people. However, we hope they’ll be useful to you as a starting point and another voice in the ‘how to be digital nomads’ debate.
This guide focuses on all things money including tips for working abroad taxes, pensions, retirement and banking. It could be useful for ex-pats, career breakers, and gap year students as well as digital nomads. We’ve written another guide covering visas, communications, insurance and voting.
Please note that as we’re from the UK, our experience is most relevant to UK nationals.That said some of the general principles apply worldwide.
Taxes for UK residents living abroad
This is one of the first questions people tend to ask. How/where do digital nomads and people working online pay tax?
The answer for us is the UK. We’re both registered as self-employed and do our own self-assessment tax returns. The reason for this is that although we’re living abroad, we’re still considered residents in the UK. Even though we don’t live in the UK full-time, we choose to be resident there as it comes with benefits such as having an address, a pension, and healthcare. We also own a house in the UK so have to pay tax on the rental income from that. It makes sense for us to pay all our tax in one place.
Other nomads choose to become resident in a different country where tax rates are lower, and some forego residency altogether and become tax nomads. This can mean avoiding tax altogether if you never spend more than 180 days in any one place. We haven’t done this so can’t say much on the subject.
If Steve and I were to start spending long periods of time in one particular country other than the UK, our tax would become a little more complicated. We’d likely have to pay taxes on anything we earned while living in that country. Fortunately, the UK has a double taxation treaty with many other countries, meaning we wouldn’t have to pay our taxes twice. However, this isn’t always the case so do double check that a double taxation treaty is in place with the country you plan to stay in.
It should also be noted that some countries have rules that ask you to pay taxes on any money earned there regardless of how long you’re there for. You need to check with individual countries to see if this is the case.
Another option we’ve heard people go with is to set up a corporation based in your home country, which would make all money earned originate there. If you go down this route, it’s best you speak to an accountant, as it’s definitely a more complicated option.
Pension / retirement planning for long-term travellers
When you register as self-employed in the UK, you are also supposed to register for Class 2 National Insurance contributions. If you pay these for 35 years, you are entitled to the full state pension when you retire. If you earn less than £5,725 a year then you can apply for an exemption. However, doing so will count against your 35 years. At less than £3 a week for a pension of around £140 a week, we consider it worth it.
The basic state pension is likely not enough to maintain one’s way of life post-retirement so many people choose to save in other ways too. For example, most people who live and work in the UK pay a percentage of their earnings into a pension fund, which their employee then tops up. The standard amount for this is about 6 per cent from both you and the employer. People choosing to become self-employed / digital nomads sometimes worry about missing out on this “free money” from their employers. For us, the benefits of being self-employed and able to travel outweigh that money.
However, I am not in the camp of eschewing pensions / savings altogether. I have no idea what the future holds and while some people use this as reasoning not to have a pension/ savings (financial markets might collapse, governments might fall etc etc), I see it as a reason to save. My Mum’s pension enabled her to have an income after she fell ill with a long-term illness, and my Dad’s pension / life insurance meant that he could provide for Mum and I in some ways after he died. Steve and I don’t yet know if we’ll have children, but if we do, having a retirement fund means we’ll be able to better provide for and support them. Also, although I enjoy my work, I doubt I’ll have so much energy or brainpower for it when I’m older, so even if I continue to work in some way, having an extra source of income will likely be necessary.
For these reasons, I am currently in the process of setting up a retirement fund. Currently I see two options: investing in a traditional pension plan or choosing to invest in ISAs. Both have different tax benefits and advantages, which are described in this Telegraph article. I go cross eyed when it comes to terms like annuity, Sipps and the like so I have enlisted a financial advisor to help me choose what to do. I don’t want to make a costly mistake that will bite me years down the line – better to invest in some advice now, rather than risk that in the future.
I think the main thing to take into account is that the earlier you start saving, the less you need to save each month because the savings will acquire interest over time. I was interested to read that someone who saves £100 a month from the age of 20 will end up with a bigger pension than someone who saves £200 a month from the age of 40. That’s not to say you need to start saving at 20, and many experts suggest that you only need to start considering a pension once you reach your 30s. They advise to clear your other debts before that too. I found this handy calculator quite useful when trying to get an initial idea of how much I need to save.
I should also add that none of these are hard and fast rules and I am definitely not an expert. There are many options when it comes to retirement planning and many choose a variety, from investing in property to pensions to ISAs. Unless your financially literate, I definitely suggest getting some advice from a financial advisor.
Banking on the road
Because we are considered resident in the UK, we bank in the UK too. We have one joint account and two separate bank accounts each. To see how we chose these, read our post on managing money when abroad, which has useful tips on how to save money on cash withdrawals and what credit card to choose.
Of course, also make sure to sign up to online banking before you leave.
Where to register your address while travelling
For all of the things mentioned above, you need an address. We are registered at Steve’s parents house in the UK. All our post goes there and Steve’s Mum kindly opens and scans it all to send to us (Thank you Ros!). It’s also a good idea to register for paperless accounts when it comes to banks, telephone bills etc. That way you can manage everything online. If you start to spend more than six months in one country, you might want to consider becoming resident there. It’s a good idea to look into the different tax laws and health provisions / insurance requirements before making that step.
Do let us know in the comments if you have any additional tips.
If you have more questions about the practicalities of living abroad, we’ve written another guide covering visas, communications, insurance and voting.