For those whose careers mean they work in different territories, that can mean that your employers pay in local currency. And that’s all very well, but it can lead to some complications when it comes to tax.
If you’re a UK resident and earn in a foreign currency, you’ll still be liable for UK income tax on that income – and here’s the catch: you need to convert it into pounds sterling before you can know how much you’re going to pay.
The conversion rate you use can impact your tax bill. Thankfully, the tax people (HMRC) allow some flexibility. You can choose the exchange rate on:
- The day you receive the income (accrual basis). This is the most common approach.
- The day you convert the income into pounds sterling (remittance basis). This might be beneficial if the exchange rate has moved in your favour.
The onus is on you to use a “just and reasonable” rate. HMRC provides historical rates (in CSV and XML formats, no less) but you can also use rates from reputable sources like banks or financial institutions.
If you’ve already paid tax on your foreign income in the country where you earned it, you might be entitled to double taxation relief. This reduces your UK tax bill by considering the foreign tax paid. Treaties between the UK and other countries often dictate how this works, so you need to research the specific treaty applicable to your situation. Or get us to do that – that’s much simpler.
The way you declare your income depends on your employment status.
- Employed: If your employer pays you in a foreign currency, they might handle the conversion and tax implications before paying you in pounds sterling. However, it’s always wise to double-check and understand your tax obligations.
- Self-Employed: You’ll need to convert your foreign income on your self-assessment tax return using the chosen exchange rate and declare it as part of your self-employment profits.
Maintaining meticulous records of your foreign income, exchange rates used, and any foreign tax paid is crucial. This will make filing your tax return smoother and help in case of inquiries from HMRC.
However you do it, you’ll need to be aware of a number of additional considerations:
- Fluctuations in Exchange Rates: Currency fluctuations can impact your tax liability. Be mindful of this when choosing your exchange rate.
- Foreign Expenses: Expenses incurred in generating your foreign income might be deductible for UK tax purposes. However, specific rules apply, so seek professional advice.
- Foreign Property: Owning property abroad can lead to additional tax implications, such as Capital Gains Tax on any future sale.
Working across foreign countries is interesting and even glamorous, but it does cause some record-keeping, tax-paying grunt work. Which we’re probably better at. So, if you’re earning across the globe and being paid in dollars, euros, of Vietnamese dong, let us work it all out for you. Give us a call.
