Tax on Foreign Income

Have you ever wondered how your money can work across borders and what happens when you earn income from another country? It might sound confusing—even for experts—but here’s your guide to understand whether you need to pay tax in the UK on any foreign income.

What Is Tax on Foreign Income?

Imagine you work in your home country and earn money from a local job. Now, picture yourself taking up an exciting opportunity to work overseas, owning a rental property in another country, or even receiving a pension from abroad. When money comes from these foreign sources, it is called “foreign income.” In the UK, this foreign income might still be subject to tax.

For example, if you’re paid while working in another country or if you receive money from investments or business ventures outside the UK, that money might be taxed. The idea is that, for many people, having foreign income adds an extra layer of complexity to their overall tax situation. A lot depends on your personal circumstances, the amount you earn from abroad, and your residency status.

Who Pays Tax on Foreign Income?

Understanding who pays tax on foreign income is mostly about one thing: your residency status. In the UK, the rules change depending on whether you are a resident or non-resident. Let’s break it down:

• UK Resident: If you live in the UK and are considered a resident (or even domiciled) here, you are generally taxed on all your income, no matter where it comes from. This means that if you earn money overseas, it still counts as part of your income for tax purposes.
• Non-Resident: If you do not live in the UK, you are only taxed on the money you earn within the UK. Foreign income earned outside the UK is usually not taxed by the UK government.
• Non-Domiciled Individuals: There is a special category for people who are UK residents but have their main home (or “domicile”) in another country. These individuals often have different rules. They can choose how their foreign income is taxed, which brings us to our next point.

This might sound a bit confusing at first, but think of it as a simple rule: if you live in the UK most of the time, HMRC expects you to declare all the income you earn—even if some of it comes from other countries.

How Do I Pay Tax on Foreign Income?

When it comes to paying tax on foreign income, you have to report it in a similar way to how you report any other income. The process is done through a self-assessment tax return. Here’s a step-by-step look at what that might involve:

1. Filling Out a Self-Assessment Tax Return: Even if you are not self-employed, if you have foreign income, you need to declare it by filling out a self-assessment tax return. This form is similar to the ones used by people who run their own businesses. It asks for details of all the income you earned during the tax year, including any money from abroad.
2. Categorising Different Types of Income: Most foreign income is treated the same as regular UK income. However, there are some exceptions and special rules for certain kinds of income. Here are a few examples:
   • Pensions: If you receive a pension from another country, check with your pension provider to understand how it will be taxed. Different countries have different rules, and you need to know what steps to take next.
   • Rental Properties: If you own a rental property overseas, the income you get is usually taxed similarly to rental income in the UK. However, if you own several properties abroad, you can offset any losses from one property against the profits from another.
   • Work Income: If you work in specific industries such as oil and gas or for organisations like the EU or the government, there might be unique rules that apply to your situation.
3. Reporting All Your Income: When you report your income on the tax return, you must include all the money you earn, no matter if it comes from the UK or from abroad. The idea is to ensure that you pay the right amount of tax on everything.

The process may seem like much work, but it’s designed to ensure that everyone pays what they owe while also giving you the chance to claim any reliefs or allowances you might be entitled to.

The Arising Basis of Taxation

One important concept to understand is the “arising basis” of taxation. This is a rule for UK residents, and it means that you pay tax on your income in the year it is earned, no matter whether you bring that money into the UK or keep it abroad. Let’s break it down:

• Arising Basis: If you live in the UK and earn income—whether in the UK or from foreign sources—you are taxed on that income in the tax year when you earn it. For example, if you earn money in 2023 from working abroad, you must pay the tax on that income in 2023, even if you never transfer the money back to the UK.

This rule ensures that all income is taxed fairly, regardless of where the money physically ends up. It doesn’t matter if you keep your money in a foreign bank account or use it for something else; if you earned it while you were a UK resident, it’s taxable in the year you earned it.

The Remittance Basis of Taxation

Now, for some people who live in the UK but are not considered “domiciled” in the country, there is an alternative way of paying tax called the remittance basis. This option can be especially helpful if you earn much money from abroad but do not bring most of it into the UK. Here’s how it works:

• Remittance Basis Explained: Under the remittance basis, you pay tax on your UK income for the year, but you only pay tax on your foreign income when you actually bring that money into the UK. This means if you keep your foreign income in an overseas account and never transfer it here, you may not be taxed on it at all.
• Who Can Use It: The remittance basis is only available to non-domiciled UK residents—this includes many migrants and people who have moved to the UK but still have strong ties to another country.
• Automatic Application for Small Amounts: For foreign income amounts of less than £2,000, the remittance basis applies automatically. In other words, if you earn only a little bit of foreign income, you don’t have to worry about complicated tax rules unless you choose to bring more money into the UK.

Understanding whether to use the arising basis or the remittance basis is a crucial decision. It can affect how much tax you end up paying and when you have to pay it. For many people, this choice is one of the most important decisions to make when they start dealing with foreign income.

Will I Be Taxed Twice? (Double Taxation)

One of the biggest concerns for people earning money from abroad is the fear of being taxed twice—once by the country where the income is earned and again by the UK. This is known as double taxation. The good news is that there are rules in place to help prevent this:

• Double Taxation Agreements (DTAs): The UK has made agreements with many other countries to avoid taxing the same income twice. These agreements are designed to give you relief if you have already paid tax on foreign income in another country.
• Claiming Tax Relief: Even if you end up paying taxes in two different countries, you can often claim tax relief. This means that the tax you paid abroad can be deducted from your UK tax bill, reducing the overall amount you have to pay.
• How It Works: The exact amount of relief you receive depends on the double taxation agreement between the UK and the other country. Each agreement has its own rules, so the process can vary depending on where your foreign income comes from.

The main goal of these agreements and reliefs is to ensure that you are not punished by having to pay tax twice on the same income. It’s a key part of making the international tax system fairer and less burdensome for individuals who earn money from multiple sources around the world.

Special Rules for Foreign Students

If you’re an international student studying in the UK, you might be wondering whether you need to pay tax on money you bring in from abroad. Generally, the rules are quite different for students:

• Money for Living Expenses: If you use your foreign income to pay for your studies, including food, rent, bills, and study materials, you usually don’t have to pay tax on that money.
• No Double Taxation Agreement: However, if there is no double taxation agreement in place and you bring in money for purposes other than your living expenses, you might need to pay tax on it.
• Special Considerations: The rules for international students can be complex, so it’s important to check your specific situation. Often, students are exempt from paying taxes on certain types of income if they are using it solely for educational purposes.

For many students, the focus is on getting a good education, so the tax rules are made to be as simple and helpful as possible. If you’re unsure about your situation, it’s a good idea to consult with a tax advisor who understands the rules for international students in the UK.

Tips to Avoid Common Mistakes

Handling foreign income tax might seem complicated, but here are some incredible tips to help you avoid common pitfalls:

• Stay Updated on Tax Laws: Tax rules can change, and international agreements might be updated. Check official sources like HMRC’s website or consult with a tax professional regularly.
• Understand Your Residency Status: Know whether you are classified as a UK resident, non-resident, or non-domiciled. Your tax obligations change significantly based on this status, so it’s important to have a clear understanding.
• Use the Right Tax Basis: Decide if the arising basis or remittance basis is more suitable for you. If you have significant foreign income, consider whether keeping it abroad might benefit you under the remittance rules.
• Double-Check Your Self-Assessment: Before submitting your tax return, review it carefully. Errors or omissions could result in fines or additional tax bills later.

Determining whether you need to pay tax in the UK on foreign income doesn’t have to be complicated. While the rules may seem overwhelming, breaking them down makes them easier to understand. Knowing your tax obligations is essential whether you’re earning abroad, renting property overseas, or receiving a pension from another country.

If you need help with tax on foreign income or income from foreign property, we recommend contacting one of our specialist tax accountant. We offer free advice with no obligation to use our services.