How to pay tax on your foreign income

If you live or are domiciled in the UK and earn foreign income from abroad then you may have to pay UK tax on this income in the UK.

Generally, foreign income or gains are taxable in the UK for UK resident taxpayers. If you are earning foreign income you should understand if you need to pay UK tax, how to pay it as well as understand reporting, tax returns and double taxation.

In this blog, we will cover all of these points and more.

Understanding UK tax on foreign income

If you are a UK resident, you may need to pay UK income tax on your foreign income for things like:

• wages from work abroad
• overseas property income
• foreign investment income, for example savings interest or dividends from overseas assets
• pension income from pensions held overseas

If you live in the UK, are liable to pay UK tax and have these types of foreign income, you will normally be required to complete a self assessment tax return for HM Revenue & Customs (HMRC) to declare and pay UK tax on your foreign income.

UK residence and tax

Your UK residence status affects whether you need to pay tax on your foreign income here in the UK.

Non UK residents only pay tax on their UK income and do not pay UK tax on their foreign income.

UK residents normally pay UK tax on all of their UK income and gains and income and gains from abroad. However, there are special rules for UK residents whose permanent home (‘domicile’) is abroad (see below).

How do I know if I’m classed as a UK resident?

You will be classed as a UK resident if both of the following apply:

• you meet one or more of the automatic UK tests or the sufficient ties test
• you do not meet any of the automatic overseas tests

Otherwise, you’ll be non-resident in the UK for tax purposes.

You will be classed as a UK resident under the automatic UK tests if:

• you spend 183 days or more in the UK in the tax year (the tax year runs from 6th April to following 5th April)
• your only home was in the UK for 91 days or more in a row - and you visited or stayed in it for at least 30 days of the tax year
• you worked full-time in the UK for any period of 365 days and at least one day of that period was in the tax year you’re checking

If your status changes during the tax year you should notify HMRC as this may mean you only pay tax on the money made in the UK, but check with a qualified accountant such as dns accountants for help and advice.

If you spent a number of days in the UK and you have additional ties to the UK, like work or family, you may also be resident under the sufficient ties test.

What if I’m a UK resident? Tax overview

The UK taxes anyone that is resident in the UK on income both in the UK and worldwide income and gains as well.

If you are not UK resident, you will not have to pay UK tax on your foreign income.

How much Income Tax you pay in each tax year depends on:

• how much of your income is above your Personal Allowance
• how much of your income falls within each tax band

The UK tax year is from 6 April to 5 April the following year.

Find out more about UK tax rates here.

How to report your foreign income to HMRC

If you need to pay tax on foreign income, you usually report your overseas income via a Self Assessment tax return. But there’s some foreign income that’s taxed differently (see below).

The SA106 form: how to use it to pay tax on your foreign income

When completing a self assessment tax return, if you need to declare income from more than one country, you will need to use supplementary pages SA106 to record income and gains from overseas when completing your SA100 tax return.

Foreign income that’s taxed differently

Although most overseas income is taxed in the same way as UK income, there are special rules for things like:

• pensions
• rent from property
• certain types of employment income

Double taxation

If your income is taxed in more than one country

If you’re taxed in more than one country and pay foreign income tax, then you may be able to claim tax relief.

You may need to apply for a certificate of residence to prove you’re eligible for relief, if you’ve not yet paid tax on the foreign income.

Apply for tax relief before you get taxed on foreign income

You have to apply for tax relief in the country where your income is from if the following:

• the income is taxed in the UK but is exempt from foreign tax (for example, pensions)
• required by that country’s double-taxation agreement

You must prove you’re eligible for tax relief by either:

• completing and sending the form to HMRC. They will then confirm whether you’re resident and send the form back to you
• including a UK certificate of residence, if you’re applying by letter

Once you’ve got proof, send the form or letter to the relevant foreign tax authority.

If you’ve already paid tax on your foreign income

You can usually claim Foreign Tax Credit Relief when you report your overseas income in your tax return. The amount of tax relief you get will depend on the UK’s ‘double-taxation agreement’ with the country your income is earnt from.

You may still get relief even if there is not an agreement, unless the foreign tax does not correspond to UK Income Tax or Capital Gains Tax.

Double taxation is a complex area, so we’d always recommend getting professional tax help from an accountant such as dns accountants.

Getting foreign tax back via a double taxation agreement

You don’t always get back the full amount of foreign tax you paid. You may get back less if:

• the country in question sets a smaller amount in their double-taxation agreement
• the income would have been taxed at a lower rate in the UK

HMRC issues guidance on how Foreign Tax Credit Relief is calculated, and this can be found here: ‘Foreign notes’.

If the UK’s double taxation agreement requires you to claim tax back from the country your income was from then you won’t be able to claim this relief in the UK.

What if my permanent home is abroad?

UK residents who have their permanent home (‘domicile’) outside the UK may not have to pay UK tax on foreign income. When this is the situation, you are classed as being a non-domiciled resident.

Tax if you’re non-domiciled and foreign income is less than £2,000 per tax year

You won’t pay UK tax on overseas income or gains if both of the following apply to you:

• You have less than £2,000 of foreign income in the tax year

and you

• keep the income abroad and do not bring it into the UK (for example, you don’t transfer it into a UK bank account).

If the above applies to you, then you do not need to do anything or pay UK tax on your overseas income.

Tax if you’re non-domiciled and foreign income is £2,000 or more

You must report foreign income or gains of £2,000 or more, or any money that you bring to the UK, in a Self Assessment tax return.

You can either:

• pay UK tax on them - you may be able to claim it back
• claim the ‘remittance basis’

Claiming the remittance basis means you only pay UK tax on the income or gains you bring to the UK, but you:

• lose tax-free allowances for Income Tax and Capital Gains Tax (some ‘dual residents’ may keep them)
• pay an annual charge if you’ve been resident of the UK for a certain amount of time

You pay an annual charge of either:

• £30,000 if you’ve been here for at least 7 of the previous 9 tax years
• £60,000 for at least 12 of the previous 14 tax years

Note: From 6 April 2025, the current remittance basis of taxation will be abolished for UK resident non-domiciled individuals. This will be replaced from 6 April 2025 with a new 4-year foreign income and gains (FIG) regime for individuals who become UK tax resident after a period of 10 tax years of non-UK residence.

Qualifying individuals will not pay tax on FIG arising in the first 4 tax years after becoming UK tax resident and will be able to bring these funds to the UK free from any additional charges. They will not pay tax on non-resident trust distributions either. They will pay tax on UK income and gains, as is the case for non-domiciled individuals now.

Individuals who on 6 April 2025 have been tax resident in the UK for less than 4 years (after 10 years of non-UK tax residence) will be able to use this new regime for any tax year of UK residence in the remainder of those 4 years.

However, with a new UK Government being elected in July 2024, this may change again, so please seek advice from a tax professional on your own personal situation and updated legislation.

Dual residents

You can be resident in both the UK and another country. You’ll need to check the other country’s residence rules and when the tax year starts and ends and any double taxation agreements that may be in place. Seek professional advice from qualified tax advisors, such as dns accountants.

Working while you study: paying tax

If you have a job when you’re a student in the UK you may need to pay Income Tax and National Insurance.

If you are a foreign student working in the UK then some double-taxation agreements mean you do not pay income tax in the UK if you work while you’re a student. If your country does not have this type of double taxation agreement, you have to pay income tax in the same way as others who live in the UK.

If you live and study in the UK but decide to work abroad during the holidays you’ll need to pay:

• UK income tax on anything you earn above your Personal Allowance (The standard Personal Allowance is £12,570, which is the amount of income you do not have to pay tax on).
• National Insurance if you work for a UK employer but abroad.

Be aware that if you work for a foreign employer you won’t need to pay National Insurance in the UK, but you may be required to pay contributions in the country you’re working in.

Capital Gains Tax (CGT)

Where Capital Gains Tax is concerned, you generally pay tax in the country where you’re resident and be exempt from tax in the country where you make the capital gain.

You have to pay Capital Gains Tax on UK residential property even if you’re not UK resident.

Summary

Working out your tax liability and paying UK tax on your income and gains from a foreign country can be incredibly complex. Foreign earnings will complicate your personal tax situation and may need to be included on your UK self assessment tax return.

For more help and advice on tax on foreign income, double taxation, residency or other UK and overseas tax questions, call us today on 03300 886 686, or you can also e-mail us at enquiry@dnsaccountants.co.uk.

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