If you’re a UK resident who has paid taxes on your overseas income, you may be eligible for a foreign tax credit. This credit can help reduce your UK tax liability by offsetting the foreign taxes you’ve already paid. Which is nice.
A foreign tax credit is a tax deduction that allows you to reduce your UK tax liability by the amount of foreign taxes you’ve paid on your foreign income. This is designed to prevent double taxation, where you’re taxed on the same income by both the UK and a foreign country.
To be eligible for a foreign tax credit, you must:
- Be a UK resident for tax purposes.
- Have paid foreign taxes on your foreign income.
- Have not claimed any other tax relief for the same foreign income.
There are two ways to claim a foreign tax credit:
- Claim it on your Self-Assessment tax return: If you’re self-employed or have other sources of income that require you to file a Self-Assessment tax return, you can claim your foreign tax credit on this form.
- Claim it using form P55: If you’re employed and your employer is aware of your foreign income and taxes, they may be able to claim the credit on your behalf using form P55.
To claim, you’ll need to provide the following information:
- The name of the foreign country where you paid the taxes.
- The amount of foreign taxes you paid.
- The period for which you paid the taxes.
- Evidence of the foreign tax payment, such as a tax return or a receipt.
Just to make it more complex, there are two types of foreign tax credits:
- Direct foreign tax credit: This credit is claimed directly against your UK tax liability. It’s available for most types of foreign taxes, including income tax, corporation tax, and capital gains tax.
- Indirect foreign tax credit: This credit is claimed indirectly, by reducing the amount of foreign income that’s subject to UK tax. It’s available for certain types of foreign taxes, such as withholding taxes on dividends and interest.
Not complicated enough yet? Well, in addition to the foreign tax credit, there may be other forms of double taxation relief available to you. These can include:
- Double taxation agreements: The UK has double taxation agreements with many countries. These agreements can help to prevent double taxation by setting out rules for how income and taxes should be allocated between the two countries.
- Unilateral relief: If there’s no double taxation agreement between the UK and the foreign country, you may be able to claim unilateral relief. This is a form of relief that allows you to reduce your UK tax liability by the amount of foreign tax you’ve paid, even if there’s no double taxation agreement in place.
It’s messy, but it can often be worthwhile, so if you want help to work your way through all this and make sure you’re income from abroad doesn’t weigh you down, then get in touch, and let’s make sure you’re in a wider world of tax efficiency.
