The tax system in the United Kingdom is relatively simple if your income is from UK sources. However, if you're a UK resident and have foreign earnings and gains, things might not be that straightforward. It is because UK residents with overseas sources of gains have to pay tax on foreign income in the UK.
Simply stated, if you live in the UK, you're a UK resident, but if you have foreign earnings and gains (income from outside the UK) while you stay in the country, the tax rules are complex. As the UK tax system taxes everyone living in the country on their worldwide income, understanding tax residency is essential. It will help you estimate and file self-assessment foreign income or self-assessment tax returns.
Let's delve into the details to find out everything you need to know about tax on foreign income.
When you come to the UK and become a tax resident and have foreign income (earnings outside the UK), you need to pay tax on it.¹
Foreign income and gains can include:¹
- Earnings or gains relating to work performed in a foreign country (even if the duties are for UK employment, or the UK govt pays the income)
- Profits and revenues from a business you run in another country
- Income that comes from a rented property in a foreign country
- Gains and profits from giving or selling away assets overseas ( it can be a house or shares)
- Interest on your savings in foreign bank accounts
- Pension income in a foreign country
- Other investment income in a foreign country that may include share dividends in foreign companies.
It is worth mentioning that if you're resident in the UK but non-domiciled, the UK tax you have on foreign income sometimes depends on your choice to bring your money or assets in the UK. Foreign income includes anything from outside the UK, Wales, Northern Ireland, and Scotland.
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You must be aware of the UK resident definition to workout tax on your overseas income. If you're classed as a UK resident, you not only have to pay tax but keep following the deadlines of HMRC tax year. If your country of domicile is different, you may be exempted from tax on foreign income. But if you're not a UK resident, there is no UK tax on your foreign income.
|Note that your UK residence status impacts your eligibility for paying taxes in the UK on overseas income. It is because a non-resident only has to pay HMRC tax on his UK income. UK HM Revenue and Customs doesn't tax non-residents foreign income.|
There is no exemption for residents as they normally pay taxes on their earnings and gains from abroad or the UK. As mentioned above, rules are different for UK residents whose domicile is overseas.
UK residency typically depends on the number of days a person spends in the UK's tax year. It usually begins from 6 April to 5 April of the next year. The UK government considers a person a resident automatically if;²
- The person has spent 183 (or more days) in the United Kingdom in the tax year
- The only home of a person is in the UK –He/she must have lived, owned, or rented a property in it for 90 to 91 days. Also, a person has spent 30 days in the UK in the tax year.
- He/she has spent not more than 16 days in the country or 46 days if he/she has not got the status of UK resident for the three previous tax years
- He/she works in another country full-time (averaging 35 or more hours a week) and has spent 91 days in any UK state (he/she should not have more than 30 working days in the country).
Remember that it is always better to consult HMRC foreign income guidelines if you feel your situation is more complicated. Getting professional help for your resident or non-resident UK tax is always the best solution to make things straightforward and avoid penalties.
Double taxation is another common situation many taxpayers encounter. It refers to a phenomenon when both the UK and other countries (where income is coming from) tax a person on his/ her foreign gains. Fortunately, the person experiencing this situation can claim tax relief by filing some or the entire tax amount.³
The way a taxpayer wants to claim depends on whether governments have already taxed foreign income. Keep in mind that if a person is a non-resident with the UK earning, he/she may have to consider other ways to claim relief.
Residents can claim "Foreign Tax Credit Relief" when reporting their foreign income in a tax return. UK's double-taxation contract with the other country (earning comes from) plays a major role in how much tax relief a person gets.³
However, it doesn't mean that taxpayers won't get any relief if there is no agreement. There are other solutions and exemptions (unless the foreign tax doesn't correspond to the UK Capital Gains Tax) to help taxpayers get some relief.
Still, it is important to consult HMRC or a professional tax attorney if you need help with double-taxation solutions.
All in all, if you reside in the UK and have overseas earnings (along with UK income), you have to pay tax on your foreign income in the UK. You need to file a self-assessment tax return for any foreign incomes like rental earnings from overseas properties, foreign savings, investments, and wages. Thus, the article includes all the relevant and important details you must know about your taxes on the UK's foreign income.
- gov.uk - Tax on foreign income
- gov.uk - Tax on foreign income - residence
- gov.uk - Tax on foreign income - taxed twice
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.
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