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HMRC internal manual

International Manual

UK residents with foreign income or gains: income tax: Limit of credit

Foreign tax is the minimum tax chargeable on the income (see INTM161250 and INTM164140 for claims to credit made after 21 March 2000). See INTM168000 onwards for rules to calculate the tax credit due where foreign tax is paid on income taken into account as a receipt of a trade.

  1. General rule

Credit for foreign tax on foreign income must not exceed the lesser of

  • the foreign tax attributable to the income and
  • UK Income Tax charged on that income.

If the foreign tax exceeds the UK tax the excess cannot either be deducted from the amount of income chargeable to UK tax nor can it be repaid (see INTM165050, example 1). Provisions introduced by FA2000 for using excess foreign tax apply only to income from foreign branches and dividends received by UK companies (dealt with at INTM164240)

  1. More than one source of income

Where a taxpayer has more than one source of income, his foreign source income is to be treated as forming the top slice of his total income so that the maximum amount of UK tax can be attributed to it. In this guidance the maximum amount of UK tax attributable to an item of foreign income is referred to as tax at the taxpayer’s marginal rate.

  1. Calculation of tax at marginal rate - one source of foreign income

a) Work out the Income Tax on the taxpayer’s total income (excluding tax on charges and before any reduction for credit for foreign tax) for the year of claim.

b) Deduct from (a) the amount of Income Tax which would be chargeable (excluding tax on charges) on his total income if it were reduced by the amount of foreign income for which credit for foreign tax is claimed. If the foreign income has been taken into account in the computation of any relief (for example, retirement annuity relief) then the amount of that relief, for the purpose of calculating tax credit relief only, should be recomputed to reflect the exclusion of the foreign income.

(a) - (b) = Tax at the taxpayer’s marginal rate. (See INTM165050, examples 2 and 3).

  1. Calculation of tax at marginal rate - more than one foreign source

The tax at the taxpayer’s marginal rate for each item of foreign income should be worked out separately. For the first item of foreign income make the calculation as in paragraph 3 above. For the second item deduct from (b) above the Income Tax chargeable (excluding tax on charges) on the income at (b) reduced by the amount of the second item of foreign income (c).

(b) - (c) = tax at the taxpayer’s marginal rate for the second item of foreign income (see INTM165050, examples 4 and 5).

Each subsequent item of foreign income should be dealt with in the same manner.

  1. Order of deduction of items of foreign income

These should be deducted in the order most favourable to the taxpayer’s claim. Normally this will mean that income bearing the highest rate of foreign tax should be taken first.

  1. Charges - overriding limit

The total credit to be allowed to an individual must not exceed the Income Tax on his total income less tax on any charges (see INTM165050, example 6).

  1. Foreign pensions

Where an individual’s foreign source pension is reduced by one tenth under ITEPA 2003/S575 (2), give credit for the full amount of foreign tax charged on such income against the UK Income Tax on the reduced amount. (See INTM165050, example 7.)

  1. Where full computations not necessary

Where it can be seen that the individual’s UK source income is sufficient to absorb all his personal allowances and he is chargeable at the lower rate only on his total income, his tax at the marginal rate on all items of foreign income will be the lower rate. Full computations will be needed where either the UK source income is insufficient to absorb all his personal allowances or he is liable at basic or higher rates.