17 March 2021
Understanding double taxation relief
As we head towards the end of the 2020-2021 tax year, some taxpayers will need to consider double taxation relief. Read our latest article to find out more, and whether the rules apply to you..
As we head towards the end of the 2020-2021 tax year, some taxpayers will need to consider double taxation relief. Any income received from a country outside the UK is considered to be foreign income. Whether you have to pay income tax to the UK government relating to the foreign income will depend upon whether you are classed as a resident for tax in the UK. Only residents are required to pay income tax on their foreign income in the UK, however, if you are a resident but your permanent home is abroad then you might not have to pay tax on your foreign income.
Foreign income should be reported on your self-assessment tax return and different types of foreign income are taxed differently. Even if you are sure you are not required to pay tax on the foreign income, you must still report it on your tax return. Failure to do so could be considered as tax evasion, which is illegal and could attract a fine and/or a prison sentence. However, if you are taxed on the income in more than one country, you may be able to claim double taxation relief from HMRC.
The first thing you should do is to find out whether you are considered a UK resident for tax purposes. You are automatically a resident if the following apply:
- You spent at least 183 days in the UK during the tax year from 6th April to the following 5th April
- Your only home was in the UK and you must have spent at least 30 days at this home during the tax year and it must be a residence that you have rented, owned or lived in for at least 91 days in total.
You will automatically be considered a non-resident if either:
- You were in the UK for less than 16 days, or if you have been classed as a non-resident for the previous three tax years then this would be less than 46 days.
- You work an average of at least 35 hours a week abroad which would be considered full-time and you were in the UK for less than 91 days and you did not spend more than 30 of these working.
When you move between the UK and another country, the tax year is usually split into a part where you were a resident and a part where you were not. You will only have to pay tax on foreign income based upon the time you were living in the UK. This is known as split-year treatment. However, split-year treatment cannot be applied in certain circumstances, so it is wise to seek professional advice before making any claims.
You may be taxed on your income twice, once by the country from where your income originates and also by the UK. If this happens, you may be able to claim some relief to get some or all of this tax back. The claiming method depends on whether the foreign tax has already been paid. If you have not yet been taxed on your foreign income by the other country, then you will have to apply for tax relief from that country, not the UK.
Ask the foreign tax authority for the relevant form, or if there isn't one, you can apply by letter. Ask HMRC to confirm your resident status through their form which you can include with your letter to the foreign tax authority. If you have a certificate of residency then you could include that with your letter instead.
If you have already paid tax on the foreign income, you can usually reclaim it through your self-assessment tax return. The amount you receive will depend on the UK's double taxation agreement with the relevant country.
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