UK TAX ON FOREIGN INCOME

Tax on foreign income is a complicated subject. There are two sides to this complex subject. First, if you are domiciled in the UK and living in the UK but have foreign income, you will be taxed on your worldwide income depending on the type of income and the double tax treaty statutes. Remember, not all foreign income is taxable in the UK if the double tax treaty says otherwise.

In the second scenario, you live in the UK but will leave at the end of your stay. You may have come here temporarily, or your plans may have changed after arriving in the UK. In this situation, you are resident but non-domiciled. Depending on your circumstances and potential tax savings, you can pay taxes on either an arising or remittance basis.

Now if you are not a resident and non-domiciled but have income from UK sources, tax on UK income is treated differently; for example, you have to pay tax on income from property, but you do not pay tax on employment income (check double tax treaty).

Taxable income is any income earned through business, trade or investment. This will include employment income, Self Employment profits, income from rent, dividends from stock investments, interest on bank deposits, royalties, pension drawdowns, social security benefits or any other income that falls under the general definition of income but is not covered by specific tax laws. Any foreign income derived from these sources can be taxable in the UK, depending on the jurisdiction or country where this income is generated and the double tax treaty with the UK. On the other hand, tax on a remittance basis is not directly related to the origin of income. Tax is only charged on the money brought into the UK by a non-domciiled person.

We tend not to answer this question because of various reasons. The first reason is the complex nature of treating different foreign incomes. The complexity of understanding statutes of law related to the double tax treaty and HMRC guidance will not help the taxpayer to save taxes. We fear that taxpayers will pay either double tax or too much less tax, which can attract penalties of 100% under the requirement to correct guidance. Though HMRC guidance is readily available and can be accessed online, it will not give any guidnace on the treatment of different types of income and how to claim foreign tax credit. Some foreign tax credits are limited to certain amounts as agreed in DTA’s. To better understand your unique situation, we recommend contacting our team of specialist tax advisors for guidance and support.

We strongly advise clients to amend their tax returns as soon as they find some mistake, omission or any details which may impact their tax liability. Your intention to correct your mistake will have a greater impact on the type and percentage of penalty HMRC will charge on the outstanding tax. There are certain time limits to correct your tax returns. Self Assessment Tax Returns can be amended within four years after the end of the tax year. For example, we can only amend the 2019-20 tax return until 5th April 2024. Any outstanding tax before 5th April 2019 has to be notified through a disclosure facility.

If you are in the UK on a temporary basis, you have an allowance of £2,000 for foreign income. You are allowed not to disclose your foreign income to HMRC if it’s less than £2,000. If foreign income is above that limit and you choose to file your tax return on arising basis, it will become taxable in the UK. When using the remittance basis for taxation, there are no limitations on income earned abroad. Tax is calculated on money remitted to the UK, or you have used foreign resources, i.e., credit card, bank card, or sold any assets to fund your stay in the UK or buy any asset in the UK. Tax calculation on a remittance basis is complex. You can call our tax advisor to discuss your options.  

It is a common misconception that a tax return should not be filed if no tax is due. Unfortunately, this is not the case. Payment of tax is nothing to do with the filing of tax returns. Filling Tax returns is a legal obligation regardless of tax due. There are circumstances where taxpayers are exempted from filing tax returns, detailed in HMRC guidance. For example, if foreign income exceeds £300.00, the taxpayer must file a tax return, regardless of total taxable income above or below the Personal Allowance. Remember that there may not be any penalty for non-payment of tax, but you can get a penalty for non-filling the tax returns.

If you have made an error or failed to declare foreign income, you should voluntarily disclose this to HMRC as soon as possible. We always advise clients to make a disclosure before they receive a nudge letter. Penalties for a prompted and unprompted disclosure are different. HMRC will also include various factors, such as the nature of the error, whether it was deliberate or a mistake, and your level of cooperation.

If you have undisclosed foreign income, start by collecting all the papers and information related to that income. This includes bank statements, reports on your investments, and other financial records. Then, determine the amount of tax due on the undeclared income, taking into account any applicable double tax agreements. Once your disclosure has been submitted, you need to wait for HMRC to send you a payment reference. HMRC may come back for additional information and ask for the calculations. Therefore, it would be best if you had your paperwork ready.

Only individuals who are considered non-domiciled are exempt from filing a tax return if their foreign income is less than £2,000. However, if their foreign income exceeds £2,000 and they are following “arising basis,” they will be required to file a tax return or claim “remittance basis“. On the other hand, individuals who are considered domiciled in the United Kingdom do not have the same threshold as non-domiciled individuals. The limit for individuals who are domiciled in the UK is £300.00. This means that any person who is both resident and domiciled in the United Kingdom must file a tax return if their foreign income is more than £300.00.