Working as a freelancer for clients abroad is an attractive prospect. It opens doors to exciting new opportunities, expands your network, and means you won’t be facing the same competition over and over again.
Not to mention the travel potential – customer meetings don’t sound too bad when they book a vacation abroad, right? It’s not all glamor and jet setting, however. With foreign customers comes the complication of communicating about time zones and the tax implications.
Fortunately, there are rules and regulations in place to ensure that freelancers don’t pay taxes in more than one place, but like most tax regulations, you need to have your wits about you.
In this article we cover:
- What counts as foreign income (foreign income)?
- What is a legal residence test and why is it important for freelancers with clients overseas?
- An explanation of your tax residence and what it means
- What to do if you are taxed in more than one place
First, let’s clarify what falls under the term foreign income for UK freelancers.
What counts as foreign income?
The website Gov.uk defines foreign income as: “anything outside of England, Scotland, Wales and Northern Ireland” and adds that “the Channel Islands and the Isle of Man are classified as foreigners”.
So, as a freelancer working in the UK, any money you receive from sources outside of England, Scotland, Wales or Northern Ireland will be considered overseas income, as will any money you receive from the Channel Islands or the Isle of Man.
According to the UK government, overseas income includes:
- Salary from a job abroad
- Foreign investment income (e.g. dividends or savings interest)
- Rental income from real estate abroad
- Foreign pensions
However, this article is all about the income you get from freelancing through clients in countries outside the UK.
Knowing how to pay the required income tax on that overseas income all depends on your tax residence – so let’s take a closer look at what that means now.
What is a tax residence status?
In short, your tax residence determines which country you should pay income tax to. For example, a UK freelancer pays income tax to HM Revenue & Customs (HMRC).
Whether or not you are subject to foreign income tax depends on your residency status in the UK. If you are not classified as a UK tax resident, you will typically not have to pay tax on foreign income.
However, if you are a UK resident, you will have to pay tax on your overseas income – unless your permanent residence is overseas. In order to determine your tax residence, you must take the statutory residence test.
What is a Legal Residence Test?
A Statutory Residence Test (SRT) determines your residency status, which is largely determined by how many days in a UK tax year you spend in the country.
To be classified as a UK resident you must either:
- Spend 183 days or more in the UK during the tax year.
- Have your only UK home (that you have owned, rented or lived in for at least 91 days and that you have lived for at least 30 days during the tax year).
You will be classified as non-UK resident if you either:
- You have lived in the UK for less than 16 days (or 46 days if you were not classified as a UK resident in the previous three tax years).
- Worked overseas full-time and spent less than 91 days in the UK, of which you did not work more than 30.
If you think you need to pay tax on foreign income, don’t worry, it couldn’t be easier. You just paste it into your self-assessment tax return to HMRC.
If you enter or leave the UK during the tax year, you are subject to what is known as ‘split year treatment’. This means that you will only have to pay income tax on foreign income during the time you have been resident in the UK.
However, the two-year treatment does not apply if you lived abroad for less than a full tax year before returning to the UK.
What if I am taxed in more than one country?
As mentioned earlier, there are preventive measures in place to keep you from being taxed in more than one place. Should this situation arise, the problem can (very likely) be solved – so do not worry!
If you find that you have been taxed by the country you are being paid from as well as the UK government, you may be eligible for a Foreign Tax Credit (FTCR). With FTCR, you can get all or part of your foreign taxes back in the form of tax breaks.
How much you can claim back will depend on the parameters of the UK “double taxation treaty” with the country you are being paid from.
Reasons you may not get the full amount of foreign tax back are:
- If a lower amount is specified in the country’s double taxation treaty.
- If your UK income is subject to a lower tax rate.
These are just the basics of FTCR and hopefully you won’t face a double taxation scenario, but if you do, be sure to check out the HMRC website and there is a whole lot of additional information to help you out.
Are you ready to use your freelance expertise worldwide? Good with you! We’re right behind you and cheer you on all the way! Find more guides and advice for freelancers from connoisseurs.