12 May 2022    |    Taxation

Foreign tax credit relief

What is a foreign tax credit?  If you are working in a foreign country and pay income taxes abroad, then you are entitled to get relief in the UK against the UK tax on the same income.  This should mean you pay the higher of the two tax liabilities, but not pay twice.

World

However, that simple wording hides a very complex series of issues.  It is very important to take advice if you are travelling to certain less common countries.  There are few, if any, issues when dealing with the EU/EEA, USA and most of the rest of the globe.  The UK has fairly standard tax treaties with most other countries to cover these possibilities.  However, places like Equatorial Guinea are not covered and special care is needed.

The most common question is always about getting credit for the tax paid, and how that foreign tax credit is calculated.

As an example, the following examples explain in simple terms.  We have used generalised figures to provide an example of how double tax works with Norway.  The principle assumptions are that the taxpayer is a UK resident and that the exchange rate is 10kr/£.  National Insurance at 8.2% is included in the tax assessment, but cannot be offset against the UK tax liability.

You will see, that regardless of what is deducted on the payslip in Norway, the overall liability is determined by the UK tax liability, and any underpayment or overpayment in Norway is collected by Skatteetaten.

This is a complex area, and the example is deliberately simplified.  If you have income from different sources or different countries, then the interaction can be highly problematic.   There are circumstances in which the foreign tax credit may not be fully deductible.

US citizens with both UK and US source income can be badly affected by the application of these rules by the IRS.

Disclaimer

The information provided is for general information purposes only.

Legislation and details may have changed since this was written.  The text may not include all matters that are relevant to your individual situation.

You should not make decisions, or refrain from making decisions, without taking further professional advice about your specific circumstances.

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