Last updated: 18 May 2024
The world is a whole lot smaller than it used to be. Thanks to huge advances in business infrastructure, technology, and regulatory alignment, there are all sorts of new opportunities for enterprising businesses to make money trading overseas. UK businesses do an incredible job leveraging those opportunities.
According to the UK Government’s Department for International Trade, nearly one in ten UK-based small and medium-sized enterprises (SMEs) are now exporting overseas to generate income.
That activity represents hundreds of billions of pounds in exports by UK limited companies and sole traders. It covers everything from selling homemade goods on Etsy to providing business consultancy work in developing economies.
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But no matter which country you’ve been trading in, you’ll probably be responsible for paying taxes on the profit you make. His Majesty’s Revenue and Customs (HMRC) is the UK Government’s tax authority, and it imposes a wide range of rules on foreign income and how that overseas income is taxed here in the UK.
If you don’t pay taxes on eligible income, you could land yourself in hot water and be penalised.
To help make sure you’re fulfilling your tax liabilities and avoiding tax penalties, we’ll quickly break down what kinds of foreign income HMRC taxes and how to report your overseas income in the UK.
How does HMRC tax individuals on their foreign earnings?
If you’re self-employed, you might need to pay Income Tax on the money you make from trading in other countries. Those sources of income may include:
- wages from abroad
- income from foreign investments (like company dividends)
- money from rental payments on overseas properties
- cash from overseas pensions
But before we get into this any further, HMRC defines “foreign income” as any money you make outside England, Scotland, Wales, and Northern Ireland. For tax purposes, any income you generate in the Channel Islands and the Isle of Man is technically foreign.
Am I liable to pay tax on overseas income?
If you’re classed as a UK resident, you’ll normally be expected to pay tax on your foreign income. The only big exception to this rule is if you are resident in the UK but your permanent domicile is in another country. If you’re not a UK resident, you won’t normally be liable for tax on your foreign income.
Currently, non-domiciled individuals are not required to pay UK tax on the money they earn outside the UK unless it’s more than £2,000 and is brought into the UK.
According to HMRC, you may be a UK resident for tax purposes if:
- you spend 183 days or more in the UK during a tax year
- your only home is in the UK for at least 91 consecutive days, and you visit or stay in the property for at least 30 days during a tax year
- you work in the UK full-time for a period of 365 days, and at least one day of that period is in the tax year you’re checking for tax residence status
On the flip side, you’re normally classed as non-resident if you:
- spend no more than 16 days in the UK (or 46 days if you’ve not been classed as a UK resident for the last three tax years), or
- work abroad full-time and spend fewer than 91 days in the UK (with no more than 30 of those days spent working)
That might sound simple at first, but some people don’t fit into either category. Don’t panic if that’s you because HMRC has a relatively fair solution for that problem.
Split-year treatment
If you move in and out of the UK a lot, HMRC may split your tax year in two. This is called “split-year treatment”. It means you’re only expected to pay UK tax on foreign income during the time you are actually living in the UK.
If you’re a UK resident, that means you’ll be expected to pay taxes on both your income and capital gains generated both in the UK and in foreign countries.
You don’t need to pay UK tax on foreign income or capital gains if:
- you’ve made less than £2,000 in the relevant tax year, and
- you don’t bring that money into the UK
The current rules on bringing income or gains to the UK are explained in chapter 9 in HMRC’s guidance on ‘Residence, Domicile and the Remittance Basis’.
Remittance basis and foreign workers’ exemption
If your foreign income or gains was £2,000 or more in the most recent tax year, you’ll need to report it here in the UK. You can either pay UK tax on all of it or simply claim the remittance basis.
By claiming the remittance basis, you’ll only have to pay UK tax on the foreign income or gains you’ve brought to the UK. For example, if you’ve deposited the money into a UK bank account. You then won’t be taxed on any money that is held outside of the UK.
However, if you do claim the remittance basis on foreign income, you’ll lose your tax-free allowances for Income Tax and Capital Gains Tax. You’ll also be expected to pay an annual charge of either:
- £30,000 – if you’ve been a resident of the UK for at least 7 of the previous 9 tax years
- £60,000 – if you’ve been a resident of the UK for at least 12 of the previous 14 tax years
Because claiming the remittance basis on foreign income and gains can be a bit complicated, it’s advisable to contact HMRC first or enlist the help of a professional accountant.
From April 2025, the remittance basis of taxation for UK resident non-domiciled individuals will be abolished. In its place, the government will introduce a new regime based on tax residence, which will be simpler and fairer. You can read more about this in HMRC’s latest technical note on changes to the taxation of non-UK domiciled individuals.
If you work in the UK and overseas
If you work both in the UK and overseas, there are special rules that could save you money. You may qualify for the foreign workers’ exemption if:
- you earn less than £10,000 from an overseas job
- you earn less than £100 from non-employment sources of foreign income, such as bank interest
- all of your foreign income is subject to foreign tax
- your combined foreign and UK income is within the band for basic rate Income Tax
- you don’t have to complete a Self Assessment tax return for any other reason
If you qualify for this exemption, you won’t have to pay UK tax on your overseas income. You don’t need to take any action to claim this exemption.
If you’re not so lucky and do have to pay UK tax, then you must report it to HMRC.
How to report your foreign income to HMRC
If you’re liable to pay UK tax, you’ll need to report your foreign income from work or capital gains. You do this by filling out a Self Assessment tax return for HMRC. Our blog provides guidance on how to register for Self Assessment and file an annual Self Assessment tax return.
There are a few exceptions to this rule. For example, you don’t need to complete a tax return if:
- the only foreign income you receive is dividends
- the total value of those dividends is under £2,000, and
- you do not have any other income to report
Income from pensions is a little bit different, too. If you’re a UK resident or have been resident in any of the last five tax years, you’ll need to pay tax on foreign pension payments, including early payments and certain lump sums. To find out how your payments are affected, it’s worth getting in touch with your pension provider.
What happens if you get taxed twice?
One of the trickiest aspects of generating foreign income is getting taxed by two different tax authorities. You’ll be liable to tax in the country where you’ve made the money and also here in the UK.
However, you might be able to claim a tax refund with the relevant tax authority. It depends on whether the UK Government has a double-taxation agreement with that particular country.
You can get in touch with HMRC or consult a tax professional if you think you’ve been taxed too much in one or more jurisdictions. They should be able to advise if you’re eligible to apply for tax relief or a refund.
It’s worth bearing in mind you may not get back the full amount of foreign tax you paid.
How does HMRC tax limited companies on their foreign income?
The short answer here is simple. Companies registered in the UK are expected to pay UK tax on most of their income, whether it was earned here in the UK or in a foreign country. But as always, there’s a bit more to it than that.
All UK limited companies are required to pay Corporation Tax on all company profits. Currently, Corporation Tax is charged at rates between 19% and 25%, depending on a company’s total profits (2024-25 tax year). This means that for every pound you make in profit, either domestically or overseas, you’ve got to pay a percentage of that in Corporation Tax.
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If your company is incorporated in the UK, you’ll be expected to pay Corporation Tax on profits generated from any number of business activities. Those activities might include:
- buying or selling goods and services
- leasing or buying a property
- selling assets
- earning interest
- receiving dividends from shares
- managing investments
The same rules apply to a certain extent for foreign companies trading in the UK. If your company is based in another country but you’ve generated income here in the UK, your foreign business must pay UK Corporation Tax to HMRC. However, you’ll only be taxed on the profits generated at UK branches or through UK activities.
Further reading and professional advice
Want to learn more about Corporation Tax and how it affects your limited company’s foreign income? Check out our blog that explains how to register for Corporation Tax and fulfil your company’s annual tax obligations.
Just remember: taxes are nothing to mess around with. You or your company can be penalised for failing to report or pay your share of Income Tax or Corporation Tax on the overseas income or profit you make. You don’t want to let that ruin your business. So, if you’ve got any questions about how your foreign income is taxed, get some answers.
The 1st Formations Blog is a fantastic place to get started learning the basics of UK taxes and how they affect your foreign earnings.
But it’s always best to seek professional advice. When in doubt, contact HMRC or get in touch with a professional accountant with knowledge of international tax regimes. Doing so will ensure you’re fulfilling all of your tax obligations for income generated both at home and abroad.
