Tax on foreign income

Our experts tell you how HMRC treats any income you receive from overseas

Our experts at DSR Tax Claims know how hard it is to find good, quality information about HMRC’s tax regulations that is easy to understand, and that’s why we have created these handy guides to tell you everything you need to know. Our aim is to make life easier for our clients and that is why we want to share our expertise with you. You can also call our friendly team on 0330 122 9972 – we’re the tax experts you can trust. Or you can check out our online calculator to see if you could be due a refund.

What do HMRC consider to be foreign income?

HMRC considers foreign income to be any income you receive from outside England, Scotland, Wales and Northern Ireland. For these purposes, the Channel Islands and the Isle of Man are considered to be outside of the UK so any income you receive from these places will be treated as foreign income.

If you receive any income from overseas, you may have to pay UK income tax on it. This will include your wages, if you work abroad; any foreign investments or interest on overseas savings; any rental income you receive from foreign property as well as income from overseas pensions.

Whether you need to pay depends on whether you are considered to be a UK resident or not. If you’re not a UK resident, you won’t pay UK Income Tax on overseas income. If you are a UK resident, you will usually be required to pay tax on any foreign income you receive, unless your permanent home I s considered to be abroad.

To report foreign income to HMRC, you will usually be expected to complete and send a Self Assessment tax return. However, not all foreign income is taxed in this manner.

If you have to pay income tax in more than country, you might be able to claim tax relief. If you need to prove that you are eligible for this tax relief, you may have to apply for a certificate of residence.

How does UK residence affect your foreign income?

Whether you are classed as a UK resident determines whether you will have to pay tax on your foreign income. If you are not a UK resident, you will only have to pay Income Tax on your UK income but not your foreign income. If you are classed as a UK resident, you will be expected to pay Income Tax on all your income, whether it is foreign income or UK income. However, this might not be the case if your permanent residence (or domicile) is considered to be overseas.

Your residence status usually depends on how many days you spend in the UK in any tax year(which runs from 6th April to 5th April the following year).

You are automatically classed as a UK resident if either:

  • You spent 183 or more days in the UK in any given tax year
  • Your only home is in the UK, which you must have owned, rented or lived in for at least 91 days in total, and you spent at least 30 days there in any given tax year.

You are automatically classed as a non-resident if either:

  • You spent fewer than 16 days in the UK (or 46 days if you haven’t been classed as a UK resident for the 3 previous tax years)
  • You work abroad full-time (for an average of at least 35 hours a week) and you spent fewer than 91 days in the UK, working on no more than 30 of those days.

If your residency status is more complicated than this, you might need to seek professional help. HMRC provides guidance on the Statutory Residence Test.

What happens if you move?

If you move in or out of the UK, the tax year in which you move is usually split into 2 parts – a resident part and a non-resident part. You will then only pay tax on the part of the in which you were a UK resident. HMRC calls this ‘split-year treatment’. You don’t need to claim this split-year treatment, it is automatically applied to your taxes.

However, you won’t get the ‘split-year treatment’ if you live abroad for less than a full tax year before returning to live in the UK. there are also other conditions you will need to meet – HMRC guidance explains this in more detail.

Your residence status can change from tax year to tax year. You need to check what your status is if any of the following apply:

  • You change your job
  • You spend more or less time in the UK
  • You buy or sell a home in the UK
  • Your family moves in or out of the UK
  • You get married, separate or have children.

Does residency affect capital gains?

Yes it does. If you are classed as a UK resident, you will be required to pay Capital Gains Tax on your UK and foreign gains. However, if you are a non-resident, you will only pay Capital Gains Tax on any capital gains you make on UK residential property or if you return to live in the UK.

What are ‘non-domiciled’ residents?

Non-domiciled residents are UK residents who have the main home, or domicile, abroad. As a result, they might not have to pay UK tax on their foreign income.

Your domicile is usually considered to be the country your father considered to be his permanent home when you were born. However, it could change if you move abroad and don’t intend to return. If you’re not sure what your domicile status is, HMRC have published guidance to help you work out which country you are domiciled in.

If you are non-domiciled in the UK you won’t have to pay UK tax on your foreign income or capital gains as long as both of the following apply:

  • Your foreign income or gains are less than £2,000
  • You don’t bring them into the UK in any way, for example, they aren’t transferred into a UK bank account.

If your foreign income or gains are more than £2,000, you need to report these to HMRC with a Self Assessment tax return. You will then either have to pay UK tax on them, although you might be able to claim it back, or you will claim the ‘remittance basis’. That means that you will only pay tax on the income or gains you bring into the UK but you will lose your tax-free allowances for Income Tax and Capital Gains Tax and you will alsopay an annual charge if you have been a UK resident for a certain amount of time.

The annual charges are as follows:

  • £30,000 if you have been here for at least 7 years out of the previous 9 tax years
  • £60,000 if you have been here for at least 12 years out of the previous 14 tax years
  • £90,000 if you have been here for at least 17 of the previous 20 tax years.

What happens if you work abroad and in the UK?

HMRC has special rules if you work in both the UK and overseas. If you get a ‘foreign worker’s exemption’, you won’t have to pay UK tax on any foreign income or gains, even if you bring them in to the UK.

You qualify for foreign worker’s exemption if:

  • Your income from your overseas job is less than £10,000
  • Your other foreign income, such as bank savings interest, is less than £100
  • You have paid foreign tax on all of your overseas income, even if you didn’t have to pay yax because you were subject to a tax-free allowance
  • Your combined UK and foreign income is within the Basic Rate Income Tax band
  • You don’t send in a Self Assessment tax return for any other reason.

If you qualify, you don’t need to do anything to claim this exemption.

If you are seconded to the UK by your employer, you might be able to claim ‘Overseas Workday Relief’. If you qualify for this relief, you will pay UK tax on your UK income based on the number of days you’ve worked in the UK but you won’t pay any UK tax on the income you earn working abroad, as long as you don’t bring this income into the UK.

There are special rules for people who come to study in the UK.

How do you pay tax on foreign income?

If you are a UK resident with foreign income or capital gains to report, you will usually do this by sending in a Self Assessment tax return. There’s no need to send a Self Assessment tax return if your foreign income consists solely of dividends of less than £300 in total. However, there are some forms of foreign income which are taxed differently – we will come to those in the next section.

To declare your foreign income in your Self Assessment tax return, you need to use the ‘foreign’ section. You will need to include income which has already been taxed abroad, if you want to claim Foreign Tax Credit relief.

If you don’t usually have to send a Self Assessment tax return, you need to register by 5th October following the end of the tax year in which you received the income. Once you have registered, HMRC will write to inform you of what you need to do next.

Is any foreign income taxed differently?

As previously mentioned, although most foreign income is taxed in the same was as UK income, there are a few special rules for pensions, rental income and certain types of employment income.

Pensions

You will have to pay tax on pensions if you are a UK resident, or have been a UK resident in any of the previous 5 tax years. Any foreign pension payments will also be subject to UK tax, including unauthorised payments such as early payments or lump sums.

Rental income

You will pay tax on your overseas rental income in the same was as you would UK income, but you are allowed to offset losses against other overseas property if you rent out more than one foreign property.

Certain types of employment income

There are special tax rules for the following overseas occupations:

  • If you work on a ship or in the offshore gas and oil industry
  • If you work for the EU or government, or as a volunteer development worker

What can you do if you are taxed twice?

It is possible that your foreign income will be taxed twice – both in the UK and the country in which the income originates. If this is the case, you can usually claim tax relief to get at least some, if not all, of this tax back. How much tax relief you can claim depends on whether it has already been taxed overseas.

If you have already paid tax on your foreign income, you can usually claim Foreign Tax Credit Relief in your Self Assessment tax return. The amount of tax relief you will get will all depend on the ‘double-taxation agreement’ that the UK holds with the other country. Even if the UK doesn’t hold an agreement with the other country, you might still be able to get tax relief as long as the foreign tax corresponds to UK Income Tax or Capital Gains Tax.

You might not get the full amount of foreign tax you paid back. If a smaller amount is set by the double-taxation agreement, or the income would have been taxed at a lower rate in the UK, you will get less in tax relief. If you want more information about how Foreign Tax Credit Relief is calculated, HMRC has published guidance notes. You won’t be able to claim this tax relief if the double-taxation agreement states that you need to claim the tax back from the country in which the income originated.

If you haven’t paid tax on the foreign income, you need to apply for tax relief in the country the income is from. This is applicable if:

  • The income is exempt from foreign tax but is taxed in the UK, for example, most pension income.
  • If it is required by the double taxation agreement the UK has with that country.

If this is the case, you need to ask the foreign tax authority how to claim tax relief. Before you do so, you will need to prove you are eligible for tax relief. To do so, you will need HMRC to confirm that you are a UK resident. Once you have got this proof, you will be able to apply to the foreign tax authority for your tax relief.

Capital Gains Tax

You usually pay Capital Gains Tax in the country you are a resident of and you will be exempt in the country in which you made the capital gain. You don’t usually need to claim this as tax relief. However, if you make capital gains on UK residential property, you will have to pay Capital Gains Tax even if you are not a UK resident.

There are different capital gains rules if your gains come from assets that either can’t be taken out of the country (for example, land or property) or you are using the asset for business in that country. In these instances, you will need to pay tax in both cases and claim your tax relief in the UK.

People with dual residency

If you have dual residency, HMRC has issued guidance on claiming double taxation relief.

How are you taxed if you have come to the UK to study?

If you are a foreign student, you won’t usually be required to pay UK tax on your foreign income or gains, as long as you are using this income to cover the costs associated with your studying, such as course fees or living costs, including rent, bills, food and study materials. You need to check that your home country has a double-taxation agreement which covers students.

However, if your living costs are more than £15,000 in any tax year (excluding course fees), HMRC may ask you to account for your living costs.

There are a few instances in which foreign students may be required to pay tax on foreign income. These are:

  • If you are from a country which doesn’t have a double-taxation agreement which covers students.
  • If you have other income which you don’t bring into the UK.
  • If you bring foreign income into the UK which you spend on things not associated with your study and living costs.
  • If you plan to stay in the UK permanently.

If you work in the UK while you are studying, whether you will have to pay tax on that income will again depend on the double-taxation agreement of your home country. If your country doesn’t have a double-taxation agreement which covers your income, you will be required to pay tax in the same way as other people who come to the UK to work.

How can DSR Tax Claims help?

We aim to make life as simple as possible for our clients and that includes giving you the information you need to make your taxes (and your life) simpler and less stressful.  Our team of experts at DSR Tax Claims are always on hand to help our clients and our excellent standing with HMRC means that we can make sure you don’t fall foul of their regulations, while claiming your maximum tax rebate. We can even take care of all that paperwork and deal with HMRC on your behalf too. Call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.

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