UK: All You Need to Know About ItsForeign Tax Relief and Tax Treaties  | LegaMart Articles
Tax relief - UK in Commercial and Business Law

UK: All You Need to Know About ItsForeign Tax Relief and Tax Treaties 

Introduction to Tax Relief

Any government program or policy effort aimed at lowering the amount of taxes paid by people or companies is known as tax relief.

It might be a general tax cut or a specialized program that benefits a certain set of taxpayers or helps the government achieve a specific objective. Tax relief is often obtained by deductions, credits, or exclusions, as well as the cancellation of a tax lien on rare occasions.

For example, the various changes and adjustments to the federal tax law implemented throughout time may frequently be traced back to the US government’s policy aims. Americans are urged to save for retirement by contributing to a retirement savings account that is tax-deferred.

Taxation income in UK
UK Income Tax rates and bands 2021/22 according to Free Agent website.

Tax penalties imposed on early withdrawals deter them from plundering those accounts. The tax code can even reveal the history of catastrophic disasters. When a hard-hit region is declared a disaster area, hurricane victims may be eligible for tax assistance to help offset the damage to private property.

Simply put, tax relief allows you to deduct certain expenditures from your gross income throughout the tax year, reducing the amount of money you owe in taxes. You can claim tax reliefs on top of any personal tax allowances you may be entitled to, basically allowing you to keep more of your earnings and pay less tax.

For more information about tax relief in other countries, see:
Foreign Tax Relief and Tax Treaties in Germany

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How does Tax Relief work?

In this UK, some expenditures, such as sending a gift, repaying a debt, or contributing to a pension, can be done without paying taxes. Your company, for example, deducts income tax from your compensation immediately and automatically.

You can also claim tax back from HMRC (Her Majesty’s Revenue and Customs) if you’re self-employed or earn income from another source. To do so, you’ll need to fill out a self-assessment tax return so that HMRC can figure out how much tax relief you qualify for.

Let’s take the example of job expenses. A lot of people are known to spend their own money in lieu of things related to their job. In case the employer does not pay you back entirely, you may be able to claim tax relief.

Let’s say a person spent £100 pounds at a tax rate of 20%. In that year, the tax relief that the person can claim would be £20.  You must retain records of your expenditures for some claims. You must claim the money spent within four years after the end of the tax year. If your claim is for the current tax year, HMRC will normally make adjustments through your tax code. And in the case of past tax years, HMRC will either make modifications through your tax code or grant you a tax refund.

Foreign Tax Relief in the UK

Before getting into this section, it is important to understand what foreign tax credit (FTC) is. A non-refundable tax credit for income taxes paid to a foreign government as a consequence of international income tax withholdings is known as a foreign tax credit. Essentially, anyone who works in a foreign nation or has investment income from a foreign source is eligible for the foreign tax credit.

Individuals have lately been affected by a variety of tax measures. The majority of tax revisions are announced in November/December and March of each year and then become law in the Finance Act the following July.

However, given the significance of Covid-19 and the resulting extraordinary economic impact, it is important to keep in mind that developments may occur outside of regular timeframes.

Residents of the United Kingdom can normally claim a credit for foreign taxes paid on abroad income or gains that are taxable in the UK.

This is either because of a tax treaty or because of UK unilateral relief. In some cases, the taxpayer can choose to have the overseas tax taken from his or her taxable income in the United Kingdom rather than receiving a credit for the foreign tax paid.

Tax Treaties

With over 100 nations, the United Kingdom has one of the biggest networks of tax treaties in the world. The goal of these agreements is to avoid double taxation of income or profits generated in one area and paid to citizens of another.

They function by splitting each country’s tax rights under its own rules over the same income and earnings. The Model Taxation Convention of the Organization for Economic Co-operation and Development (OECD) is used in the majority of treaties.

On October 1, 2018, the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) came into force in the United Kingdom, and it has had a significant influence on how taxpayers have utilized Double Taxation Treaties (DTTs) to which it applies.

It started to apply from 1 January 2019 to the UK’s DTTs with those territories that had already ratified before 1 October 2018, if they had covered tax arrangements. 

A perfect example would be the UK/Swiss agreement. HMRC and the Swiss tax authorities have entered into an agreement that allows the UK and Switzerland to work closely together, and there is a lot of information flow between the two nations.

The agreement imposes a historic charge of up to 34 percent of the amount in a Swiss account maintained by UK residents as of December 31, 2010, or December 31, 2012. 

Instead of establishing an assessment on the receiver, withholding tax (WHT) is a way of collecting tax at the source from the person who makes a payment. Revenue agencies, such as HMRC, can collect tax more efficiently by using withholding tax.

As per the aforementioned agreement, a WHT rate of up to 48 percent on Swiss accounts may apply to UK residents holding Swiss accounts. When it comes to inheritance tax, Swiss paying agents are required to withhold 40% of the tax or make a statement, among other things, when a relevant individual dies.

Case Study – US/UK Tax Treaty

One very important treaty of great significance to both countries is that between the United States and the United Kingdom. Most nations across the world have some type of income tax that citizens must pay. The United States is one of the few countries in the world that taxes citizens rather than residents.

As a result, some ex-pats have to pay taxes twice: once in the United States and again in their home country. A famous instance of this becoming a problem to many US citizens living in the UK was pension taxation. 

The United States-United Kingdom tax treaty—officially known as the “Convention between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains” aims to resolve the issue of double taxation between the two nations.

There are special clauses in the tax treaty that handle individual tax problems. While there are more than a dozen clauses, the Saving Clause is the one that potentially has the largest impact on Americans in the United Kingdom.

A Saving Clause can be found in several US tax treaties. The Saving Clause basically says that a government can tax its population as if the treaty didn’t exist at all. As a result, most treaty terms are rendered useless for Americans residing in the United Kingdom but remain in effect for U.K. nationals living in the United States.

This is one of the reasons you should learn about Foreign Tax Credit (FTC) so that you may use it to offset any British taxes you have paid if necessary. Because of the exclusions to the Saving Clause, FTC is typically possible. The paragraph immediately after the Saving Clause in most treaties describes the clause’s exclusions.

If you are interested in investing in the UK, read the article below:
UK, Best Place to Expand Your Business


It is indeed possible that your earnings and gains will be taxed in more than one nation. The United Kingdom has three options for guaranteeing that no one bears a double burden. The first is tax treaty relief, which can minimize or even eliminate double taxation.

Second, if no treaty exists, a person can seek ‘unilateral’ relief by deducting foreign tax from their UK tax. Finally, the individual can deduct the foreign tax from their income as an expense (known as relief by deduction), albeit this is often less efficient.

It is very vital to note that, before claiming relief for foreign taxes suffered, you should note that the individual can only make a claim if they have taken all reasonable steps to have their foreign liability reduced to a minimum.

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