In today’s connected world, many UK taxpayers earn money from outside the country. If you are a freelancer with clients abroad, a property investor with foreign assets, or an employee working overseas, it is crucial to declare your foreign income correctly.
Understanding Foreign Income
Foreign income is any money you earn from sources outside the UK. This can include:
- Employment Income: Salaries, wages, or bonuses earned while working abroad.
- Investment Income: Dividends, interest, or rental income from overseas investments.
- Self-Employment Earnings: Profits generated from providing services to clients outside the UK.
- Other Sources: Royalties, pensions, and any other payments received from foreign entities.
If you live in the UK, you must report all your income, even if it comes from another country. This is because the UK tax system taxes residents on their worldwide income. If you have already paid tax on that income in another country, you can get relief from being taxed again in the UK.
Steps to Declare Your Foreign Income
- Keep Detailed Records: Keep detailed records of your foreign earnings, including bank statements, contracts, invoices, and taxes paid abroad. These documents are essential for calculating your taxable income and claiming eligible tax credits.
- Determine the Correct Tax Year: Make sure you note which tax year the income was earned. HMRC’s tax year goes from 6 April to 5 April the next year. It’s important to match your foreign income with the correct period to stay compliant.
- Convert to GBP: All foreign income must be reported in British Pounds (GBP). Use the exchange rate published by HMRC or an acceptable alternative for converting the amounts, and keep a record of the rate used. This conversion is important for reporting income correctly and claiming benefits.
- Report on Your Tax Return: You need to declare any foreign income on your Self-assessment tax return. There are specific sections for reporting overseas income and the tax you paid abroad. Fill in the relevant boxes with details like the type of income, the amounts you received, and any foreign tax credits you are claiming.
- Claim Double Taxation Relief: If foreign tax has been taken out at the source, you might get relief from paying tax twice on the same income. To claim this relief, include the details of any foreign tax you paid on your tax return. Follow HMRC guidelines to calculate the relief you can receive.
Practical Example
A UK resident earning rental income from a property in Spain must declare this income in GBP on their Self-assessment return while paying Spanish tax. By converting the rental income using the appropriate exchange rate and claiming double taxation relief for the Spanish tax paid, the landlord can ensure accurate reporting and avoid overpaying UK tax.
Although declaring foreign income to HMRC might seem complex, it can be straightforward with good record-keeping and diligent use of reliefs. If you’re uncertain, call our tax advisors or send us an email for further clarification.
