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Understanding UK taxes on foreign income

UK taxes on foreign income
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    Understanding the intricacies of taxation in the UK is difficult enough for UK residents, but it gets a little more complex for non-residents who earn abroad.

    If you live in the UK, you have to pay tax on all of your income – including international earnings. If you’re a non-resident of the UK, then you are only taxed on UK income. Taxation depends on residency status and whether income is remitted to the UK.

    There are different rules for non-residents in the UK, so it helps to know your tax obligations if you’re not a fully-fledged UK resident. In this article, we’ll help you understand UK taxes on foreign income by looking at how the current system works.

    For precise guidance tailored to your circumstances, consider consulting with our team of tax professionals at WIS Accountancy. Contact us today.

    Do you have to pay UK tax on foreign income?

    The requirement to pay UK tax on foreign income largely depends on your residency status. UK residents are generally taxed on their global income, which includes any income earned from outside of Scotland, England, Wales or Northern Ireland. It’s worth pointing out that income earned from the Channel Islands or the Isle of Man falls into the foreign category.

    Non-residents are only taxed on income that arises in the UK. Exceptions and relief policies, such as double taxation agreements, can significantly affect the actual tax due, so it’s worth understanding the intricacies of these rules.

    Loosely speaking, you may need to pay UK income tax on foreign income if it comes from sources such as:

    • Wages earned abroad
    • Forms of foreign investment income such as savings interest
    • Rental income generated from foreign properties
    • Income from pensions held abroad

    How much foreign income is tax-free in the UK?

    As is the case with many aspects of taxation in the UK, your residency status will determine how much foreign income is tax-free.

    For non-domiciled residents of the UK, you won’t have to pay UK tax on foreign income if you earn less than £2,000 in the tax year or if you don’t bring the funds into the UK.

    If you work both in the UK and in another country, then you will have different guidelines to follow with regards to foreign income taxation. You won’t be expected to pay any tax on your foreign income or gains – even if you bring them into the UK – if you have a foreign workers exemption.

    You can obtain this if you fall into one of the following categories:

    • Your income from an overseas job is less than £10,000
    • Your foreign income from things like bank interest is less than £100
    • Your foreign income is already subject to foreign taxation
    • Your combined UK and foreign income falls within the basic rate of income tax
    • If you don’t need to fill in a tax return

    How does your residency status determine your UK tax obligations?

    Understanding the impact of your residency status on UK tax obligations helps inform you of your tax obligations.

    The UK determines tax liability primarily through the Statutory Residence Test, which considers factors like how many days you spend in the UK and your ties to the country.

    UK resident

    If you’re considered a UK resident under the Statutory Residence Test, you’re typically liable to pay UK tax on your worldwide income. This includes all earnings, both domestic and foreign. Residents may benefit from the Personal Allowance, which reduces the amount of income that is subject to tax.

    Non-UK resident

    For non-UK residents, only income generated within the UK is subject to UK taxes. Income from overseas is generally not taxed by the UK. However, if you move countries partway through the tax year, you may be subject to Split Year Treatment, which could complicate your tax affairs.

    What does remittance basis mean?

    The remittance basis is an alternative tax treatment available to UK residents whose permanent home (‘domicile’) is outside the UK. Opting for the remittance basis means you only pay UK tax on foreign income or gains if and when they are brought into the UK.

    However, claiming the remittance basis may result in losing certain tax allowances and involves a charge if you have been a UK resident for a significant number of years.

    How do I report foreign income on my UK self-assessment tax return?

    Foreign income must be reported on a Self-Assessment tax return. It’s important to distinguish between different types of income here – such as employment, savings, or property – and report each type in the relevant sections of the return.

    You’ll need to convert foreign income into GBP using the appropriate exchange rate and take into account any foreign tax paid for credit against UK tax due.

    Get tax advice from WIS Accountancy

    We specialise in tax matters for individuals with foreign income, our accountants can provide personalised advice to ensure compliance and optimise tax affairs.

    If you have any questions or would like our assistance with your tax, please contact us today.

    Frequently asked questions about UK tax on foreign income

    Can HMRC check overseas bank accounts?

    Yes, HMRC can check overseas bank accounts as part of its effort to prevent tax evasion. The Automatic Exchange of Information (AEOI) agreements between many countries allow HMRC to receive information about UK taxpayers with accounts overseas.

    Will I have to pay tax to the country where the income was earned?

    Often, yes. If the income was earned in a country with which the UK has a double taxation agreement, you’ll typically pay tax in the country of origin but can claim relief on these taxes in the UK to prevent double taxation.

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