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 at 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. It also includes both limited companies and sole traders, and it covers everything from selling homemade goods on Etsy to business consultancy work in developing economies.
But no matter which country you’ve been trading in, you’ll probably be responsible for paying taxes on it. 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 you need to report your overseas income.
How does HMRC tax individuals on their foreign earnings?
If you’re a sole trader, you might need to pay income tax on the money you make trading in other countries.
Those sources of income might include wages from abroad, income from foreign investments (like company dividends), the money you get from rental payments on overseas properties, or cash from overseas pensions.
Before we get into this any further, HMRC defines “foreign income” as any money you make outside of England, Scotland, Wales, or Northern Ireland. For tax purposes, the 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.
According to HMRC, you’ll be counted as a UK resident for tax purposes if you:
- Spent 183 days or more in the UK during a tax year
- Your only home is in the UK (and you owned, rented, or lived in it for at least 91 days during a tax year)
On the flip side, you’re legally a non-resident if you:
- Spent 16 days or less in the UK (or 46 days if you’ve not been classed as a UK resident for the last three tax years)
- Work abroad full-time and spent less than 91 days in the UK
That might sound simple at first, but some people don’t fit in either category. Don’t panic if that’s you, because the HMRC has a relatively fair solution for that problem.
If you move in and out of the UK a lot, HMRC may split your tax year in two. This is called a “split-year treatment.” It means you’re only expected to pay UK tax on foreign income during the time you were 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
- You don’t bring that money into the UK
Remittance basis and foreign workers’ exemption
If your income was above £2,000 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 those gains or simply claim the remittance basis.
By claiming the remittance basis, you’ll only have to pay tax on the foreign income you’ve brought to the UK (e.g. 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 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. Because claiming the remittance basis on foreign income can be a bit complicated, it’s advisable to contact HMRC first or enlist the help of a professional accountant.
If you work both in the UK and overseas, there are special rules that could save you money. You may qualify for a foreign workers’ exemption if you:
- Earn less than £10,000 from an overseas job
- Earn less than £100 from other (non-employment) income
- 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
The good news if you qualify for this exemption is that you don’t have to pay UK tax on your overseas income. You don’t need to claim anything to HMRC or take any action.
If you’re not so lucky and do have to pay UK tax, then you’ve got to 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 by filling out a Self Assessment tax return.
Check out our blog for guidance on how to register for Self Assessment and complete your annual Self Assessment tax return.
There are a few exceptions to this rule. For example, if your only foreign income was dividends, the total value of those dividends is under £2,000 and you have no other income to report.
Income from pensions is a little bit different, too. If you’re a UK resident or were resident in the last five tax years, you’ll need to pay tax on foreign pension payments, early payments or 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 parts about generating foreign income is getting taxed by two different tax authorities: the country where you’ve made the money, and then again here in the UK. If the UK Government has a double-taxation agreement with a particular country, you might be able to claim for a tax refund with the relevant tax authority.
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: UK limited companies are expected to pay HMRC 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 charge at rates between 19-25%, depending a company’s total profits (2023-24 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.
If your company is incorporated in the UK, you’ll be expected to pay Corporation Tax on company 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, interest or dividends, managing investments, and more.
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 HMRC Corporation Tax.
But you’ll only be taxed for 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 how to fulfill 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 for 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 worth seeking professional advice. When in doubt, contact HMRC or get in touch with a professional accountant with knowledge of international tax regimes, to make sure you’re fulfilling all of your tax obligations for income generated both at home and abroad.