Double Taxation of UK Income When Contracting Overseas
One of the easily overlooked pitfalls for international contractors is the potential for double taxation of income when contracting overseas. A contractor may think that the income they earn at home is separate from any income earned abroad, but unfortunately, tax authorities don’t see it that way.
Some contractors might try to keep their two sources of income separate, and simply not report it in both jurisdictions. However, many countries have agreements for automatic sharing of income and tax information so that strategy is unlikely to succeed. One way or another, you will be paying tax on all of your income, it just depends on where and how much.
Case Example: UK Resident Contracting in Germany
To illustrate the issue more clearly take the scenario of a UK resident who is contracting with a client in Germany. Until March of the current tax year, the contractor was earning income with a UK client, and when that engagement finished they moved to Germany to begin the new project.
If the contractor stays in Germany longer than 183 days cumulatively in the year, then they become a German tax resident and liable for taxes, but not just on the German income. They will also have to declare on their German tax return the income that they earned in the UK before arriving in Germany. At the same time, they must report their German income when they file their UK tax return.
This is just one example, and the same rules will apply in most foreign countries. Essentially, cross-border taxation is a two-way street that you have to find a way to navigate as an international contractor.
Do You Have to Pay UK Tax on Foreign Income?
Yes, you do have to pay UK tax on any income earned working abroad, unless you already paid tax in the foreign country. Most contractors are aware of this and know that their foreign income is not exempt from UK income tax.
In that case, you can claim tax relief from paying twice if there is a double taxation treaty in place between the two countries. Regardless, you need to report the foreign income on your UK return, but that is only half the equation when you have dual-source income.
Do You Pay Foreign Tax on UK Income?
Likewise, if you are a tax resident in a foreign country you are also liable for taxes on the UK income earned that tax year. This may come as a surprise to some contractors as it seems unfair that income earned previously in the year at home is now taxed in their new work location. The reason is that once you are a tax resident in a foreign country, that status applies for the entire tax year, not just the time working abroad.
Double Tax Treaties (DTT) Offer Relief
This type of tax is retroactive to the beginning of the tax year, but there are solutions in place for international contractors. One thing you can do is apply for tax relief under a DTT before you are taxed, showing that you will be paying UK taxes on the amount.
Here are a few things to know about DTTs:
- The DTT will spell out which country you pay tax in and apply for relief in
- It will also set out how much tax relief is available
- You can either apply for relief before taxation or for a refund of paid taxes
- If the tax rates in the two countries are different, you pay the higher rate
- Sometimes the tax year starts on different dates, so that has to be accommodated
Countries That Have a DTT with the UK
There are DTTs between the UK and most developed countries where a contractor may be working, so it is unlikely you will be double taxed if you follow the right procedures and filing rules. You can find a complete updated listing of countries with a UK DTT here.
What a contractor needs to do is look at the specific tax treaty for the country they will be working in and understand the rules before they begin work. This may be quite a task and we can assist you at Contractor Taxation by suggesting an umbrella company to work with in the destination. They can compute the correct taxes for you and help in filing for tax relief before the start of work.
This is a valuable service when you consider the complexity of cross-border taxation, DTTs and how to maximize your after-tax income. We can also assist with work permits, facilitating payment and setting up your contract. Please contact us with your questions about double taxation and your international contracts.