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International Manual

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UK residents with foreign income or gains: income tax: Examples of calculation of credit for foreign tax

Example 1 - Foreign source income only - UK Income Tax liability at lower rate only (INTM165040, note 1)

A single person is assessable for 1995-96 on interest of £5,500 from a foreign company. Foreign withholding tax of £550 has been deducted from the interest.

The computation is

     
     
Income £5,500  
Less PA £3,525  
  £1,975  
     
Tax on £1,975 at 20%   £395.00
Less credit for foreign tax   £395.00
Net UK tax   NIL

Foreign tax of £155.00 is unrelieved and is neither deductible nor repayable.

Example 2 - One foreign source - UK liability at lower and basic rate only (INTM165040, note 3)

For 1995-96 an individual’s total income (without deduction of foreign tax for which credit is claimed) consists of

   
   
UK earned income £10,000
Foreign interest (Foreign tax 300) £2,000
Total income £12,000
   
PA due = 3,525  

Work out the credit allowable for the foreign tax on the foreign interest as follows

     
     
Total income £12,000  
Less PA £3,525  
  £8,475  
Tax thereon (3,200 at 20%, 5,275 at 25%)   £1958.75(a)
     
Total income £12,000  
Less foreign interest £2,000  
Reduced total income £10,000  
Less PA £3,525  
  £6,475  
     
Tax on 6,475 (3,200 at 20%, 3,275 at 25%)   £1458.75(b)
     
Tax at marginal rate for foreign interest (a)-(b)   £500.00

Since the tax at the marginal rate (500) exceeds the foreign tax on the foreign interest (300) credit is limited to 300. BUT a full computation would not be needed here, since the UK source income absorbs all the personal allowances and liability on the foreign source income is clearly at basic rate only. The marginal rate for the foreign interest is therefore 2,000 at 25 per cent (see INTM165040, note 9).

   
   
Tax on total income as in (a) above £1958.75
Less credit for foreign tax £300.00
Net liability £1658.75

Example 3 - One foreign source - UK liability at higher rates (INTM165040, note 3)

For 1995-96 an individual’s total income (without deduction of foreign tax for which credit is claimed) consists of

   
   
UK earned income £26,000
Foreign royalties (Foreign tax 800) £2,000
Total income £28,000
   
PA due = 3,525.  

Work out the credit allowable for the foreign tax on the foreign royalties as follows

     
     
Total income £28,000  
Less PA £3,525  
  £24,475  
     
Tax on 3,200 at 20%   £640.00
Tax on 21,100 at 25%   £5,275.00
Tax on 175 at 40%   £70.00
    £5,985.00(a)
     
Total income £28,000  
Less foreign royalties £2,000  
Reduced total income £26,000  
Less PA £3,525  
  £22,475  
Tax on 22,475 (3,200 at 20%, 19,275 at 25%)   £5458.75(b)
     
Tax at marginal rate for foreign royalties (a)-(b)   £526.25

Since the foreign tax on the foreign royalties (800) exceeds the tax at the marginal rate (526.25) credit is limited to 526.25.

Computation of liability

   
   
Tax on total income as in (a) above £5,985.00
Less credit for foreign tax £526.25
Net liability £5,458.75

Example 4 - More than one foreign source - no higher rate liability (INTM165040, note 4)

For 1995-96 an individual’s total income (without deduction of foreign tax for which credit is claimed) consists of

UK earned income £7,000  
     
Foreign dividend (A) £500 (Foreign tax 100)
Foreign dividend (B) £400 (Foreign tax 60)
Foreign dividend (C) £200 (Foreign tax 50)
     
Total income £8,100  
     
PA due = 3,525.    

i. Dividend (C) has borne the highest rate of foreign tax and INTM165040, note 5 explains why it is therefore considered first in computing the tax credit relief available to the taxpayer. Other items of foreign income are considered in sequence with more highly taxed items considered before less highly taxed items. Work out the credit allowable on foreign dividend (C)

Total income   £8,100  
       
Less PA   £3,525  
    £4,575  
Tax thereon      
UK earned income £3200 at 20% £640.00  
  £275 at 25% £68.75  
Foreign dividends £1100 at 20% £220.00 £928.75(a)
       
Total income   £8,100  
Less foreign dividend (C)   £200  
Reduced total income   £7,900  
Less PA   £3,525  
    £4,375  
Tax thereon      
UK earned income £3200 at 20% £640.00  
  £275 at 25% £68.75  
Foreign dividends £900 at 20% £180.00 £888.75(b)
Tax at marginal rate for dividend (C)     £40.00

As the tax at the marginal rate (40) is less than the foreign tax on dividend (C) (50) credit is limited to 40. (ii) Work out the credit on foreign dividend (A) as follows

Total income less dividend      
       
C) brought forward from (i) above   £7900  
Less foreign dividend (A)   £500  
       
Reduced total income   £7,400  
Less PA   £3,525  
    £3,875  
       
Tax thereon      
UK earned income £3,200 at 20% £640.00  
  £275 at 25% £68.75  
Foreign dividends £400 at 20% £80.00 £788.75(c)
       
Tax as in (i) on total income b/f (b)   £888.75  
Less Tax on reduced total income (c)   £788.75  
Tax at marginal rate for dividend (A)   £100.00  

As tax at the marginal rate (100) equals the foreign tax on dividend (A), credit of 100 is allowable. Work out the credit allowable on foreign dividend (B) as follows

Total income less dividends A) and (C) brought forward from (ii) above £7,400
   
Less foreign dividend (B) £400
Reduced total income £7,000
Less PA £3,525
  £3,475
Tax thereon      
       
UK earned income £3,200 at 20% £640.00  
  £275 at 25% £68.75 £708.75(d)
       
Tax as in (ii) on total income b/f (c)   £788.75  
Less Tax on reduced total income (d)   £708.75  
Tax at marginal rate for dividend (B)   £80.00  

As tax at the marginal rate (80) exceeds the foreign tax on dividend (B) (60), credit is limited to 60.

Computation of liability

Tax on total income as in (a) above   £928.75
     
Less credit for foreign tax    
Dividend (A) £100.00  
Dividend (B) £60.00  
Dividend (C) £40.00 £200.00
     
Net liability   £728.75

Example 5 - More than one foreign source - liable at lower, basic and higher rates (INTM165040, note 4)

For 1995-96 an individual’s total income (without deduction of foreign tax for which credit is claimed) consists of

UK earned income £15,000  
     
Foreign dividend £5,000 (Foreign tax 1,250)
Foreign rental income £8,000 (Foreign tax 3,200)
Total income £28,000  
     
PA due = 3,525.    

i. The foreign rental income has borne the highest rate of foreign tax and INTM165040, note 5 explains why it is therefore considered first in computing the tax credit relief available to the taxpayer.

Work out the credit allowable for the foreign tax on the foreign rental income as follows

Total income   £28,000  
       
Less PA   £3,525  
    £24,475  
       
Tax thereon      
UK earned income   £3,200 at 20% £640.00
    £8,275 at 25% £2,068.75
Foreign rental income   £8,000 at 25% £2,000.00
Foreign dividend   £4,825 at 20% £965.00
    £75 at 40% £70.00
      £5,743.75(a)
Total income   £28,000  
Less rental income   £8,000  
Reduced total income   £20,000  
Less PA   £3,525  
    £16,475  
       
Tax thereon      
UK earned income 3,200 at 20% £640.00  
  8,275 at 25% £2,068.75  
Foreign dividend 5,000 at 20% £1,000.00 £3,708.75(b)
       
Tax at marginal rate on foreign rental income (a)-(b)     £2,035.00

Since the foreign tax on the foreign rental income (3,200) exceeds the tax at the marginal rate (2,035), credit is limited to 2,035. Work out the credit for the foreign tax on the foreign dividend as follows

Total income less foreign rental income b/f from (i) above   £20,000  
       
Less foreign dividend   £5,000  
Reduced total income   £15,000  
Less PA   £3,525  
    £11,475  
Tax thereon      
UK earned income £3,200 at 20% £640.00  
  £8,275 at 25% £2,068.75  
    £2,708.75(c)  
Tax as on total income b/f (b)     £3,708.75
Less Tax on reduced total income (c)     £2,708.75
      £1,000.00

Since the tax at the marginal rate (1,000) is less than the foreign tax on the foreign dividend (1,250) credit is limited to 1,000.

Computation of liability

Tax on total income as in (a) above   £5,743.75
     
Less credit for foreign tax    
Foreign rental income £2,035.00  
Foreign dividend £1,000.00 £3,035.00
     
Net liability   £2,708.75

Example 6 - Interest paid under deduction of tax (INTM165040, note 7)

For 1995-96 an individual’s total income (without deduction of foreign tax for which credit is claimed) consists of

UK interest £800  
     
Foreign dividend (A) £2,300 (Foreign tax 575)
Foreign dividend (B) £2,900 (Foreign tax 435)
Total income £6,000  

He pays interest at £1,000 gross under deduction of tax. PA due = £3,525.

i) Dividend (A) has borne the highest rate of foreign tax and INTM165040, note 5 explains why it is therefore considered first in computing the tax credit relief available to the taxpayer. Work out the credit allowable for the foreign tax on foreign dividend (A) as follows.

Total income £6,000  
     
Less PA £3,525  
  £2,475  
     
Tax on 2,475 at 20%   £495.00(a)
Total income £6,000  
Less foreign dividend (A) £2,300  
Reduced total income £3,700  
Less PA (restricted, see Re121) £2,700  
  £1,000  
     
Tax on £1,000 at 25% (see Re 121)   £250.00(b)
     
Tax on total income of above (a)   £495.00
Less Tax on reduced total income (b)   £250.00
     
Tax at marginal rate for foreign dividend (A)   £245.00

Since the tax at the marginal rate (245.00) is less than the foreign tax on dividend (A) (575) credit is limited to 245.00. Work out the credit for the foreign tax on foreign dividend (B) as follows.

Total income less dividend (A) brought forward from (i) above £3,700  
     
Less foreign dividend (B) £2,900  
Reduced total income £800  
     
Tax on 800 at 25%   £200.00(c)

(Note: No personal allowances or lower rate band are available because charges exceed income and there is a notional liability under ICTA88/S350 of 200 at 25 per cent.)

Tax as in (i) on total income b/f (b) £250.00
   
Less Tax on reduced total income (c) £200.00
Tax at marginal rate for dividend (B) £50.00

Since the tax at the marginal rate (£50) is less than the foreign tax on dividend (B) (435), credit is limited to £50.

Calculation of total credit  
   
Dividend (A) £245.00
Dividend (B) £50.00
  £295.00

But the credit allowable must not exceed the total income tax liability for the year less any tax on charges. Therefore, restrict the credit as follows

Tax on total income (a) £495.00
   
Less Tax on charges (£1,000 at 25%) £250.00
Credit allowable £245.00

Example 7 - More than one foreign source including foreign pension. Liable at higher rates (INTM165040, note 8)

For 1995-96 an individual’s total income (without deduction of foreign tax for which credit is claimed) consists of

UK earned income £10,600  
     
Foreign pension £4,000 (Foreign tax 900)
Foreign interest £5,000 (Foreign tax 750)
Foreign rental income £9,000 (Foreign tax 1,800)

A one-tenth deduction from the foreign pension is due under ICTA88/S65 (2); personal allowances of 3,525 are due.

i) The foreign pension has borne the highest rate of foreign tax and INTM165040, note 5 explains why it is therefore considered first in computing the tax credit relief available to the taxpayer. Other items of foreign income are considered in sequence with more highly taxed items considered before less highly taxed items.

Work out the credit for the foreign tax on the foreign pension as follows.

Total income   £28,600
     
Less ICTA88/S65 (2) deduction £400  
PA £3,525 £3,925
    £24,675
     
Tax on £3,200 at 20%   £640.00
Tax on £21,100 at 25%   £5,275.00
Tax on £375 at 40%   £150.00
    £6,065.00 (a)
Total income   £28,000  
       
Less foreign pension   £4,000  
Reduced total income   £24,600  
Less PA   £3,525  
    £21,075  
       
Tax thereon £3,200 at 20%   £640.00
  £17,875 at 25%   £4,468.75
      £5,108.75(b)
       
Tax on total income (a)     £6,065.00
Less tax on reduced total income (b)     £5,108.75
       
Tax at marginal rate on foreign pension     £956.25

ii) Since the tax at the marginal rate (956.25) exceeds the foreign tax on the foreign pension (900) credit is limited to the foreign tax of 900. Do not restrict the credit to nine-tenths of the foreign tax. Work out the credit allowable on foreign rental income as follows.

Total income less foreign pension brought forward from (i) above £24,600
   
Less foreign rental income £9,000
Reduced total income £15,600
Less PA £3,525
  £12,075
Tax thereon 3200 at 20% £640.00
     
  8875 at 25% £2,218.75
    £2,858.75(c)
     
Tax as in (i) on total income b/f (b)   £5,108.75
Less Tax on reduced total income (c)   £2,858.75
Tax at marginal rate on rental income   £2,250.00

iii. Since the tax at the marginal rate (2,250) exceeds the foreign tax on foreign rental income (1,800) credit is limited to 1,800. Work out the credit allowable on foreign interest as follows

Total income less foreign income brought forward from (ii) above   £15,600
     
Less foreign interest   £5,000
Reduced total income   £10,600
Less PA   £3,525
    £7,075
     
Tax thereon 3200 at 20% £640.00
  3875 at 25% £968.75
    £1,608.75(d)
Tax as in (ii) above on total income b/f (c)   £2,858.75
Less Tax on reduced total income (d)   £1,608.75
Tax at marginal rate on foreign interest   £1,250.00

Since the tax at the marginal rate (1,250) exceeds the foreign tax on foreign interest (750) credit is limited to 750. But it would not be necessary to do the full calculations at (ii) and (iii) above since it is clear after calculation (i) that the UK source income has absorbed all the personal allowances and it is only the foreign pension which is charged at higher rates. The marginal rate on the foreign interest and rental income is 14,000 at 25 per cent = 3,500.

Computation of liability

Tax on total income as in (i)   £6,065.00
     
     
Less credit for foreign tax    
foreign pension £900.00  
foreign rental income £1,800.00  
foreign interest £750.00  
    £3,450.00
    £2,615.00