One of the most wonderful benefits that comes with a freelance career, is the chance to spread your professional wings. Not just in terms of the projects that you take on, either. The flexibility of freelancing allows you to get stuck in around the world – even without leaving the comfort of your own home.
Working with international clients can bring about incredible opportunities for career development – and travel. But, with that also comes added responsibilities around tax that you need to be aware of. In this article, we demystify what international freelancing means for tax.
- How international freelance income is taxed
- The difference between domicile and residency
- What a tax residence status is, and why it’s so important
- How to work out your tax residence status with a Statutory Residence Test (SRT)
- Reporting foreign income to HMRC
We’ll also share a few other tips to help make cross-continent collaboration as streamlined and uncomplicated as possible, specifically when it comes to matters of finance and tax.
How is foreign income taxed for UK freelancers?
Anything that you earn from overseas clients is classed by the government as foreign income or foreign earnings. The Gov.uk website defines this type of income as: “anything from outside England, Scotland, Wales and Northern Ireland”, noting also that “the Channel Islands and the Isle of Man are classed as foreign”.
How you pay tax on this income is dictated by your residency for tax purposes (or tax residence status).
Domicile and residency explained
Domicile is the country that you have the most substantial connection with, i.e., where your permanent home is.
When someone is born, they are automatically assigned the same domicile as their parents and this very rarely changes, even if the person moves overseas later in life. However, from the age of 16, a person can apply to change their domicile if they wish – providing they meet the required criteria.
Residency is more of a short-term concept which looks at your ‘temporary’ home, so it can change from year to year. HMRC use your residence status to determine where you spend most of your time. In turn, this helps them to establish where you should be paying your taxes.
Domicile: long term
Residence: short term
According to HMRC guidelines, you are considered a UK resident for tax purposes if:
- You’re present in the UK for 183 days or more per tax year
- Your only home was in the UK. (You must have owned, rented, or lived in this home for at least 91 days in total, and spent a minimum of 30 days there per tax year)
What is my tax residence status?
Your tax residence status helps to determine which country (or countries) you should pay tax in, including income tax on foreign income.
For example, someone who is not a UK tax resident won’t need to pay UK tax on their foreign earnings, only on their UK income.
On the other hand, UK residents typically pay UK tax on all their income, be it from the UK or overseas. However, there are specific rules for UK residents whose domicile is abroad.
Why is a tax residence status so important?
It’s important to establish your tax residence status for two main reasons:
- So that you pay the right taxes at the right time, and avoid running into trouble with HMRC.
- So that you don’t end up paying tax twice, in two different countries.
If you have paid tax on your foreign income in both countries – the UK and the country where the income is coming from – don’t worry. It’s usually something which can be resolved.
How do I check my tax residence status?
To find out your residence status for tax purposes, you’ll need to take the Statutory Residence Test (SRT).
This test enables you to work out your tax status for the year so that you can pay your taxes in the right country.
It takes various factors into account, such as your connection with the UK, and how many days you spent in the UK during the tax year.
How to report foreign income to HMRC
If you are a UK resident and earn money from foreign income, you can simply report this on your Self Assessment return, and pay tax as normal. There is a ‘foreign’ section on the Self Assessment return for this purpose.
Make sure to include any income that has already been taxed in another country, so that you can apply to claim Foreign Tax Credit Relief. HMRC will confirm whether you’re eligible for this type of tax relief when they evaluate your Self Assessment.
Other advice for international freelancers
Here are a few tips and reminders to help you safeguard your finances when freelancing for clients in other countries.
Consider foreign exchange rates
Don’t forget that currency exchange rates fluctuate! This could mean that your final invoice amount looks different from your original quote, so consider what this means for your billing. You might decide to ask for payment, or part-payment up front, for example.
It’s usually a good idea to put your quote or invoice together in your local currency unless your client specifically requests otherwise. Just remember to let your client know that they’re at the mercy of the exchange rate not you. Bookkeeping software, such as Pandle, has built-in invoicing and currency conversion features, which will help enormously.
Use a money transfer account
Popular transfer services like Wise and PayPal are a great tool to have in your arsenal as an international freelancer. They help reduce transfer fees, boost security, and speed up the payment process.
Speak to an accountant
If you’d like some professional guidance from a qualified expert, speak to an accountant who will be well-equipped to steer you in the right direction when it comes to foreign income tax. It doesn’t hurt to ask!