What is the Concept of Tax Residency and Foreign Income?

How To Decipher HMRC’s Legal Letter?

1. What is foreign income? 

Foreign income is anything from outside England, Wales, Scotland, and Northern Ireland. The Channel Islands and the Isle of Man are classified as foreign. 

You may need to pay UK Income Tax on your foreign income, such as: 

  1. Wages if you work abroad  
  2. Rental income on overseas property  
  3. Income from pensions held overseas  
  4. Foreign investment income (dividends and savings interest) 


2. How is your residency status determined? 

Your residency status is determined by the number of days you spend in the UK in the tax year. 

You will be classified as a resident if: 

  1. You spent 183 or more days in the UK in a tax year, or  
  2. Your only home was in the UK – however, you must have owned, rented, or lived in the UK for at least 91 days in total and you spent at least 30 days there in the tax year. 

Similarly, you will be classified as a non-resident if: 

  1. You spent fewer than 16 days in the UK (or 46 days if you have not been classified as a UK resident for the three previous tax years), or  
  2. You work abroad full-time (averaging at least 35 hours a week) and spent fewer than 91 days in the UK, of which no more than 30 were spent working 

In case your situation is more complicated, or you need to confirm your status, you can read HMRC’s guidance on Statutory Residence Status 


3. How does your residency status determine the tax that you pay? 

Normally, residents pay UK tax on all their income, whether it is from the UK or abroad. However, UK residents may not need to pay tax on foreign income if their permanent home (domicile) is abroad.  

On the other hand, non-residents only pay tax on their UK income and do not need to pay UK tax on their foreign income. 


4. How can you report your foreign income? 

If you need to pay tax, you usually report your foreign income in a Self-Assessment Tax Return. 

However, you do not need to fill in a tax return if all the following apply: 

  1. Your only foreign income is dividends  
  2. Your total dividends – including UK dividends are less than £2,000 dividend allowance  
  3. You have no other income to report 

Please note that some foreign income is taxed differently that includes: 

  1. Rent from property  
  2. Pensions 
  3. Certain types of employment income  

You can read more about it here. 


5. What can you do if your income is taxed more than one country? 

You may be able to claim tax relief if you are taxed in more than one country. 

To find more about being taxed twice, you can go here. 

Please note that you may have to Apply for a Certificate of Residence to prove that you are eligible for relief in case you have not paid tax on the foreign income. 


6. Is it possible that your situation changes from one tax year to the next? 

Yes. It is possible for your situation to change from one year to the next. This can happen if: 

  1. You change your job 
  2. You spend more or less time in the UK 
  3. You buy or sell a home in the UK  
  4. Your family moves in or out of the UK, or your marital status changes 


7. How can you determine your residence status for capital gains? 

You can determine your residence status for capital gains in the same manner you do it for income. 

While UK residents have to pay tax on their UK and foreign gains, UK residents have to pay tax on income, but only pay Capital Gains Tax either if they return to the UK or on UK property or land. 


8. What is a split-year treatment? 

When you move in or out of the UK, the tax year is usually split into a non-resident part and a resident part. This means you only pay UK tax on foreign income based on the time you were living here. This is called ‘split-year treatment’. 

It may be important to mention that you will not get split-year treatment if you live abroad for less than a full tax year before returning to the UK. Additionally, some other conditions may need to be met. 

To find out if you qualify for split-year treatment, you will need to mention this on your Self-Assessment tax return.

To find out more, you can read HMRC’s Guidance note on the Statutory Residence Test or contact HMRC here. 


Need More Help?

Just fill in your details here if you need help in making Tax Residency and Foreign Income application or wish to discuss some other matters. 

Lanop Accountants and Tax Advisers for Small and Medium Businesses 

We are your local Chartered Accountants and Tax Advisers based in Putney, Harley Street and Battersea. We are expert XERO Accounting advisors and trusted business advisors in Wandsworth Borough. 

While we are based in South West London and Central London, our clientele is quite global, and our staff is currently working remotely to serve our clients through active Zoom accounts all over UK. 

As always, you can reach out to us anytime to discuss any financial issues you may have in this coronavirus pandemic. 

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Aurangzaib Chawla

At Lanop, I am providing my services as the Managing Partner and Tax Specialist. My expertise includes helping medium and small-scale businesses in their accountancy and legal requirements, business start-up support, strategic review, payroll system review and implementation, VAT and tax compliance to cloud accounting. I am also an expert in financial reporting, identifying and monitoring risks, strategic business development, client retention, market acquisition and deals closure by carefully planning my sales cycle. 

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