Tax on foreign income is a complex and important topic that affects individuals and businesses that generate income from sources outside their home country.
In this blog, we will explore the basics of foreign income taxation, including how it works, who it applies to, and what individuals and businesses can do to minimise their tax liabilities.
How does foreign income taxation work?
Foreign income taxation on individuals and businesses depends on the tax laws of their home country and the country where the income was earned, individuals and businesses may be subject to double taxation, which means that they must pay taxes on the same income to both the home country and the foreign country.
To prevent double taxation, many countries have tax treaties in place that allow taxpayers to claim a credit for taxes paid to the foreign country.
Additionally, many countries have foreign income exclusion rules that allow taxpayers to exclude a portion of their foreign income from their taxable income.
Types of foreign incomes you need to pay tax on
- Employment income earned from working abroad.
- Profits earned from overseas businesses or investments.
- Rental income from properties owned overseas.
- Interest, dividends, or capital gains from overseas investments.
- Pension income received from overseas sources.
- Income from royalties or intellectual property rights earned overseas.
How is foreign income taxed in the UK?
If you are a UK resident, you are generally liable to pay UK tax on your worldwide income and gains, including any income or gains earned from overseas sources. However, if you are a non-UK resident, you may only be liable to pay UK tax on your UK source income or gains.
It’s important to note that the rules around foreign income and gains can be complex, and the amount of taxation you will need to pay will depend on a range of factors, including the specific type of gain, the country where it was earned, and any applicable treaties between the UK and the other country.
It’s always best to seek professional advice from an accountant or tax specialist to ensure that you comply with all relevant tax laws and regulations.
How to report your foreign income to HMRC
If you are a UK resident and have foreign income, you must report it to HM Revenue & Customs (HMRC) on your self-assessment tax return. Here are the steps you can take to report your foreign income to HMRC:
- Determine the type of foreign income you have: The first step is to determine the type of foreign income you have. This could include employment income, rental income, investment income, or business income.
- Convert foreign currency to GBP: If your foreign income is in a foreign currency, you must convert it to GBP using the exchange rate on the day you received the income.
- Report foreign income on the tax return: You must report your foreign income on the relevant sections of your self-assessment tax return. You will need to provide details of the income earned, the country where it was earned, and any tax paid in that country.
- Claim foreign tax credits: If you have paid tax on your foreign income in the country where it was earned, you may be able to claim foreign tax credits to offset the UK tax liability. You must provide evidence of the tax paid in the foreign country to claim the foreign tax credit.
- File your tax return by the deadline: You must file your self-assessment tax return by the deadline, which is usually 31 January following the end of the tax year.
It is important to ensure that you report all of your foreign income accurately and in a timely manner. Failure to do so could result in penalties and interest charges.
If you are unsure about how to report your foreign income, you should seek professional advice from a tax specialist.
What can individuals and businesses do to minimise their tax liabilities?
To minimise their tax liabilities, individuals and businesses can take a number of steps, including:
- Understanding the tax laws of both their home country and the foreign country where the income was earned. This can help them determine whether they are subject to double taxation and whether any tax treaties or foreign income exclusion rules apply.
- Keeping detailed records of their income and expenses, including travel expenses, to support any tax deductions or credits they may be entitled to claim.
- Working with a professional who is knowledgeable about foreign income taxation and can help them navigate the complex tax laws and regulations.
- Considering the use of offshore tax planning strategies, such as setting up a foreign corporation or trust, to legally minimise their tax liabilities on foreign income.
Tax on Foreign Income FAQs
HMRC uses a set of statutory residence tests (SRTs) to determine an individual’s tax residency status for a particular tax year. The SRTs are a set of objective tests that consider an individual’s presence in the UK, ties to the UK, and other factors that may indicate a strong connection to the country. Here are the main criteria used to determine UK residence for tax purposes
- Automatic Residence Test: An individual will be considered a UK resident if they spend 183 days or more in the UK during a tax year. This is known as the automatic residence test.
- Sufficient Ties Test: If an individual spends fewer than 183 days in the UK, they may still be considered a UK resident if they have sufficient ties to the country. The sufficient ties test considers factors such as family ties, property ownership, and employment in the UK.
- Split Year Treatment: If an individual’s residency status changes during a tax year, they may be entitled to claim split-year treatment. This means that they will be treated as a UK resident for part of the tax year and a non-resident for the other part.
It’s worth noting that the rules around UK residency can be complex, and the determination of residency status depends on a range of individual factors. The best way to determine your UK residency status is to use HMRC’s online tool or seek professional advice from a tax specialist.
UK residents normally pay tax on foreign income, although this depends on whether they have a permanent home abroad. However, for the majority of UK residents, tax is due on any income arising from working outside the UK.
If you are not UK resident, you will not have to pay UK tax on your foreign income. If you are UK resident, you normally pay tax on your foreign income, however, you may not have to pay if your permanent home (‘domicile’) is abroad. If you have a UK rental income as a non-resident landlord, you still pay tax in the UK.
If you’re a UK resident, that means you’ll be expected to pay taxes on both your income and capital gains generated both in the UK and in foreign countries. You don’t need to pay UK tax on foreign income or capital gains if: You’ve made less than £2,000 in the relevant tax year and you don’t bring that money into the UK.
There are certain tax exemptions and reliefs available for foreign income. The most common exemption is the “foreign income exemption” or “remittance basis.”
Under this basis, if you are a UK resident but not domiciled in the UK (a non-domiciled resident), you may choose to be taxed only on your income and gains that you bring (remit) to the UK. This means that foreign income and gains that you keep outside the UK and do not remit are generally not subject to UK tax.
It’s important to note that the rules regarding foreign income in the UK can be complex, and they may have changed since this article is published. Therefore, I recommend consulting a qualified tax professional or referring to the latest guidance from HM Revenue and Customs (HMRC) to get up-to-date and accurate information regarding the current tax-free thresholds and other exemptions for foreign income in the UK.
Getting taxed twice on the same income can be an issue if you earn income from multiple sources in different countries. This is known as double taxation.
However, to avoid double taxation, most countries have entered into double taxation agreements (DTAs) or treaties with each other. These treaties are designed to ensure that individuals are not taxed twice on the same income.
If you get taxed twice on the same income in the United Kingdom, it would generally be considered an error or a double taxation situation. The UK tax system is designed to avoid double taxation, both domestically and through international tax treaties. However, mistakes can occasionally occur, and it’s important to take steps to rectify the situation.
It’s important to address the issue promptly to avoid any ongoing financial burden. You can do this by contacting HMRC and seeking professional advice, you can work towards resolving the situation and ensuring that you’re not paying more tax than you’re legally obligated to.
In the UK, if you have paid tax on foreign income in another country and are also liable to pay UK tax on the same income, you may be able to claim tax relief under the terms of the relevant DTA. A double tax agreement (DTA) is a treaty signed between two countries to avoid double taxation of the same income in both countries. This usually involves claiming a foreign tax credit to offset the tax paid in the other country against your UK tax liability.
If your income is taxed in more than one country, you may be able to claim tax relief if you’re taxed in more than one country. If you’ve not yet paid tax on the foreign income, you may need to apply for a certificate of residence to prove you’re eligible for relief.
To claim tax relief under a DTA, you will usually need to provide evidence of the foreign tax paid and the amount of the income earned. You may also need to provide other supporting documentation, such as copies of your tax returns from the other country.
If you are not able to claim tax relief under a DTA, you may be able to claim relief under the domestic law of either the UK or the other country, depending on your specific circumstances.
How can Heighten Accountants help you?
In the UK, residents are generally liable to pay tax on their worldwide revenue, including that earned from foreign sources. Non-residents, on the other hand, are generally only liable to pay tax on their UK-sourced income.
Our team of tax experts at Heighten Accountants can assist both UK resident and non-resident individuals who have foreign income and need to comply with UK tax laws. Here are some of the ways our firm can assist:
We can assist you with the preparation and submission of your tax return, ensuring that you comply with all the relevant tax laws and regulations. We can also help you to accurately report your foreign income, claim any available tax credits or deductions, and avoid penalties for non-compliance.
We provide tax reviews and planning advice to help you structure your foreign income in a tax-efficient manner. We can also help you to understand the tax implications of different types of foreign income, and recommend strategies to minimise your tax liability.
Double Taxation Treaties
We help you to understand the double taxation treaties between the UK and other countries, and advise on how to claim foreign tax credits or exemptions for tax paid in other countries.
Advice and Support
We provide ongoing advice and support on all aspects of foreign income taxation, including changes to laws and regulations, and how they may impact your tax liability.