As a freelancer, working for clients overseas is an appealing prospect. It opens doors to exciting new opportunities, extends your network, and means you’re not always up against the same competition time and time again.
Not to mention the travel potential – client meetings don’t sound so bad when they bookend a holiday abroad, right? It’s not all glamour and jet-setting though. With overseas clients comes the complication of communication across time zones and the tax implications.
Fortunately there are rules and regulations in place to ensure freelancers don’t paying tax in more than one place but as with most tax rules, you’ll need your wits about you.
In this article we’ll be covering:
- What is classed as foreign earnings (foreign income)?
- What a Statutory Residence Test is and why is it important to freelancers with clients overseas?
- An explanation of your tax residence status and what this means
- What to do if you’re taxed in more than one place
First, let’s clarify what falls under the umbrella of foreign income for UK freelancers.
What is classed as foreign earnings?
The Gov.uk website defines foreign income as: “anything from outside England, Scotland, Wales and Northern Ireland”, adding that “the Channel Islands and the Isle of Man are classed as foreign”.
So, as a freelancer working in the United Kingdom, any money you receive from sources outside of England, Scotland, Wales or Northern Ireland is classed as foreign earnings, as is any money received from the Channel Islands or the Isle of Man.
According to the UK government, foreign income encompasses any:
- Wages from an overseas job
- Foreign investment income (e.g. dividends or savings interest)
- Rental income from property overseas
- Overseas pensions
However, all we’re concerned about in this article is the income you’re generating from freelance work via clients in countries outside the UK.
Understanding how to pay the necessary income tax on these foreign earnings all comes down to your tax residence status – so now, let’s take a look at what this means in more detail.
What is a tax residence status?
In a nutshell, your tax residence status determines which country you should be paying income tax to. A UK freelancer, for example, will pay income tax to HM Revenue & Customs (HMRC).
Working out whether or not you need to pay tax on foreign income depends on your UK residence status. If you’re not classed as UK tax resident, you won’t typically be required to pay tax on foreign earnings.
However, if you are classed as UK resident, you will need to pay tax on your foreign income – unless your permanent home is overseas. To establish your tax residence status, you’ll need to take the Statutory Residence Test.
What is a Statutory Residence Test?
A Statutory Residence Test (SRT) determines what your residence status is, largely dictated by how many days of a UK tax year you spend in the country.
To be classified as UK resident you must either:
- Spend 183 days or more in the UK during the tax year.
- Have your only home in the UK (which you must have owned, rented or lived in for a minimum of 91 days and spent at least 30 days at during the tax year).
You will be classified as non-UK resident if you’ve either:
- Spent less than 16 days in the UK (or 46 days if you have not been classed as UK resident for the three tax years prior).
- Worked overseas full-time and have spent less than 91 days in the UK, of which you were working no more than 30.
If you think you are required to pay tax on foreign income, don’t worry because it couldn’t be any easier. You simply include it in your Self Assessment tax return to HMRC.
If you move in or out of the UK during the tax year, you’ll be covered by something called ‘split-year treatment’. This means you’ll only be pay income tax on foreign earnings during the time you were UK resident.
However, split-year treatment won’t apply if you’ve lived overseas for less than a full tax year before returning to the UK.
What happens if I’m taxed in more than one country?
As we mentioned earlier, there are preventative measures in place to stop you being taxed in more than one location. Should this situation arise, the problem can (very likely) be solved – so fear not!
If you find you have been taxed by the country where you’re being paid from as well as the UK government, you may be eligible to receive Foreign Tax Credit Relief (FTCR). FTCR will enable you to get all or some of your foreign tax back in the form of tax relief.
How much you’re able to claim back will depend on the parameters of the UK’s ‘double-taxation agreement’ with the country you’re being paid from.
Reasons why you might not get the full amount of foreign tax back are:
- If a smaller amount is outlined in the country’s double-taxation agreement.
- If you’re income would have been subject to a lower tax rate in the UK.
These are just the basics of FTCR and hopefully you won’t find yourself dealing with a double-tax scenario but if you do, head to the HMRC website where you’ll find a whole host of additional information to help you.
Ready to take your freelance expertise global? Good on you! We’re right behind you, cheering you on all the way! Find more guidance and advice for freelancers, from those in the know.