Income Tax can be a complex topic to get your head around. Like many types of UK tax — such as Value Added Tax (VAT), Corporation Tax and Council Tax — how much you pay depends on various factors. But unlike some taxes, your own personal circumstances are taken into account when determining how much you’re charged.
The rate of Income Tax you pay is based on how much you earn. For the tax year 2022/23, people in England, Northern Ireland and Wales don’t pay tax on income below £12,570 per year; 20 per cent is charged on annual earnings between £12,570 and £37,700; 40 per cent is charged on annual earnings between £37,701 and £150,000 and 45 per cent is charged on annual earnings above £150,000. Those in Scotland don’t pay tax on income below £12,570 per year; 19 per cent is charged on annual earnings between £12,571 and £14,732; 20 per cent is charged on annual earnings between £14,733 and £25,688; 21 per cent is charged on annual earnings between £25,689 and £43,662; 41 per cent is charged on annual earnings between £43,663 and £150,000 and 46 per cent is charged on annual earnings above £150,000.
But things can get more complicated when it comes to paying tax on foreign income. It can be difficult to understand whether you have to pay tax on sources of foreign income, what the rules are if you’re no longer living in the UK and if there are any exemptions you should be aware of.
In this article, we aim to make all this clearer and answer any other questions you might have when it comes to paying tax on foreign income.
If you’re classed as a ‘resident’ in the UK for tax purposes, you will normally have to pay tax on your foreign income, however, if you’re a UK resident with a permanent home abroad (‘domicile’), you may not. UK limited companies must pay Corporation Tax on company profit they make overseas and foreign companies that generate income in the UK must also pay Corporation Tax on profits they make at UK branches or through UK activities.
Most foreign income will be taxed in the same way as UK income (see above), but there are different rules depending on the type of income, for example, pensions and certain types of employment income.
Continue reading to find out whether you might have to pay tax on your foreign income.
Foreign income is anything you gain that comes from outside of England, Scotland, Wales and Northern Ireland. Note that the Channel Islands and the Isle of Man are classed as foreign.
Some examples of foreign income and foreign gains that may be subject to UK tax are:
- Earnings from overseas employment, even if it’s for a UK company or earnings are paid from the UK
- Foreign investment income — from dividends or savings, for example
- Income from overseas pensions
- Interest on international bank accounts
- Profits from an overseas business
- Rental income from overseas property
Whereas, some examples of foreign income and foreign gains that are not taxable in the UK are:
- Gifts from someone overseas
- Gambling winnings from overseas
- Lottery winnings from overseas
Before we go into how UK residents are taxed on foreign income, it’s worth mentioning here that if you’re a non-resident, you only pay UK tax on your UK income and not your foreign income.
UK residents normally pay UK tax on all their income, whether it’s from the UK or overseas — unless their domicile is abroad (which we’ll go into in the next section).
How do I know if I’m classed as a UK resident for tax purposes?
You may be classed as a UK resident in the following circumstances:
- You spent 183 or more days in the UK in a tax year (6th April — 5th April)
- Your only home was in the UK and was available to live in for at least 91 days, of which you spent 30 days living in during the tax year
- You had a full-time job in the UK for any period of 365 days, with at least one of these falling into the specific tax year
- You spent a number of days in the UK and you also have links such as work or family
- You don’t meet any of the below criteria
You’re automatically classed as a non-resident if you either:
- Spent less than 16 days in the UK (or 46 if you haven’t been classed as a UK resident for the previous three tax years)
- Work at least 35 hours overseas each week and spent less than 91 days of the tax year in the UK, of which no more than 30 were spent working
If you’re still unsure about what your UK resident status is, you can read about the Statutory Residence Test on HMRC’s website.
What happens if I move in or out of the UK?
If you’ve moved in or out of the UK, the tax year will normally be split into two parts: A resident part and a non-resident part. This is called ‘split-year treatment’ and it means you’ll only pay UK tax on foreign income for your time spent living in the UK, providing you live abroad for more than a full tax year before you return to the UK.
If you have a permanent home outside the UK, you may not have to pay UK tax on foreign income.
You won’t have to pay UK tax on your foreign income and gains if they come to less than £2,000 in the tax year and you don’t bring them into the UK in any way — such as by transferring them to a UK bank account.
If you bring any money into the UK, or your foreign income is £2,000 or more, you must declare it on a Self Assessment tax return.
How are limited companies taxed on foreign income?
All UK limited companies must pay Corporation Tax on all company profit, whether it’s made in the UK or overseas. Corporation Tax is currently 19 per cent, which means that for every pound a company makes in profit, they’ll have to pay 19 pence in Corporation Tax.
Companies based in another country that generate income in the UK also have to pay Corporation Tax, but they’ll only be taxed for the profits they make at UK branches or through UK activities.
While most foreign income is taxed the same, there are different rules depending on the type of income. For example:
Pensions
If you’re not a UK resident, you won’t normally have to pay UK tax on your pension, but you may have to pay tax in the country you live in. There are some exceptions to this, though, like UK civil service pensions, which will always be taxed in the UK.
If you’re a UK resident domiciled abroad, or you were a resident in any of the five previous tax years, you have to pay tax on pensions you receive. You must also pay tax on any foreign pension payments.
Certain types of employment income
If you work in the UK and abroad, you’ll usually pay tax in the normal way, however, there are special rules if you work on a ship, in the offshore gas or oil industry, for the EU or the government or as a volunteer development worker.
There are several tax exemptions on foreign income:
Remittance basis
If you are a UK resident domiciled abroad and you bring any money into the UK or your foreign income is £2,000 or more, you can either pay UK tax on it – which you may be able to claim back — or you can claim the ‘remittance basis’. This means you’ll only pay UK tax on the income you bring into the UK. However, you may lose your tax-free allowances for Income Tax and Capital Gains Tax, and you could have to pay an annual charge, depending on how long you’ve been a resident of the UK.
Overseas workday relief
If your employer sends you to work in the UK on secondment, you may be able to claim overseas workday relief, provided you meet the following criteria:
- You pay tax on UK employment income according to how many days you’ve worked in the UK
- You don’t pay tax on income from days you work abroad, and you don’t bring this income into the UK
Foreign workers’ exemption
If you work in both the UK and overseas, you may qualify for the ‘foreign workers’ exemption. This means you don’t have to pay UK tax on foreign income — including that which you bring into the UK — provided you meet the following criteria:
- You are a UK resident
- You are not domiciled in the UK
- You are employed in the UK
- You earn less than £10,000 from your overseas job
- Any other foreign income you receive is less than £100
- All your foreign income is subject to foreign tax (even if it’s exempt)
- Your UK and foreign income combined falls within the 20 per cent income tax rate bracket (i.e. you’re a basic rate taxpayer)
- You’re not required to submit a tax return for anything else
Exemptions for foreign students
Foreign students don’t usually pay UK tax on foreign income, provided it’s used to pay for course fees or living costs, such as rent, bills, food and study materials.
If you need to pay tax on foreign income, you usually report it by filling out a Self Assessment tax return, however, there are some exceptions to this.
If, for example, you have to pay tax on foreign pension payments, early payments or lump sums, the tax you owe will affect your payments, so you should contact your pension provider to find out how.
Dividends are another exception, because of the tax-free Dividend Allowance. If you receive foreign income in the form of dividends that come to no more than £2,000 (including any UK dividends you may have also received), there is no need to declare this.
If your foreign income is taxed by both the UK and the country where you made the money, you may be able to claim a tax refund if the UK government has a double-taxation agreement with the other country.
Note that you might not get back the full amount of foreign tax you paid, though.
The rate of Income Tax you pay is based on how much you earn, but it gets more complicated when it comes to paying tax on foreign income.
Foreign income is anything you gain that comes from outside of England, Scotland, Wales and Northern Ireland.
If you’re a non-resident, you only pay UK tax on your UK income and not your foreign income.
UK residents normally pay UK tax on all their income, whether it’s from the UK or overseas unless they have a permanent home outside the UK (domicile). UK residents domiciled abroad won’t have to pay UK tax on foreign income and gains if they come to less than £2,000 in the tax year and they don’t bring them into the UK in any way.
All UK limited companies must pay Corporation Tax on all company profit, whether it’s made in the UK or overseas and companies based in another country that generates income in the UK also have to pay Corporation Tax.
Most foreign income is taxed the same, however, there are different rules depending on the type of income, for example, pensions and certain types of employment income.
Some of the tax exemptions on foreign income include the remittance basis, overseas workday relief and the foreign workers’ exemption.
You usually report tax that’s owed on foreign income by filling out a Self Assessment tax return, however, there are some exceptions to this, and if you’re taxed twice, you may be able to claim a refund.