How HMRC taxes foreign income (2024)

Last updated: 6 Apr 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.

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:

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.