What is a double taxation agreement?

Updated on 13 November 2017

You may have to pay taxes in both the UK and another country if you are resident here and have income and gains abroad. This is called ‘double taxation’. We explain how this may apply to you. 

What is double taxation?

Different countries have their own tax laws. The fact that you pay tax in one country does not necessarily mean you do not need to pay tax in another.

If you are resident in two countries at the same time or are resident in a country that taxes your worldwide income and have income and gains from another (and that country taxes it on a ‘source’ basis) you may have to pay tax on the same income in both countries. This is known as ‘double taxation’.

For example, an individual who is resident in the UK, but has rental income from a property in another country, will probably have to pay tax on the rental income in both the UK and that other country. This is a common situation for migrants who have come to the UK to work to find themselves in, however you should remember that in practice, the remittance basis helps to prevent double taxation where you are a UK resident with foreign income and gains abroad.

Another common situation when double taxation occurs is where an individual who is not resident in the UK but who has UK source income, remains tax resident in their home country.

Double taxation can also arise if you are resident in two countries at the same time, see our dual residence section for an example.

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What are double taxation agreements?

The UK has ‘double taxation agreements’ with many countries to try to make sure that people do not pay tax twice on the same income. If there is a double taxation agreement, this may state which country has the right to collect tax on different types of income. For an example of this, see the example in our dual residence section.

Alternatively, they may allow a set-off of tax paid in one country against tax due in the other. If you are a UK tax resident (including UK ‘treaty’ resident), the UK will generally give a ‘credit’ for overseas tax paid on overseas source income. If you are tax resident in another country that country may give credit for UK tax paid on UK source income (for an example of this, see the section below on 'What is the position for double taxed UK employment income?').

There is more information on foreign tax credit relief in HMRC’s Helpsheet HS263 ‘Calculating Foreign Tax Credit Relief on the GOV.UK website.

In another scenario, a double tax agreement may provide for income that is not exempt from tax to be charged at a reduced rate. You can find out more about this in HMRC’s Helpsheet HS304 ‘non-residents – relief under double tax agreements' on GOV.UK.  

The method of double taxation ‘relief’ will depend on your exact circumstances, the nature of the income and the specific wording of the treaty between the countries involved. Unfortunately there are no hard and fast rules.

This means that migrants to and from the UK may have to take into account two or three sets of tax laws: the tax laws of the UK; the tax laws of the other country; and any double taxation agreement between the UK and the other country.

It is also possible for there to be more than two countries involved, for example a national of one country may be living in the UK and have foreign income from a second country.

You should finally be aware that some countries do not have a double tax treaty with the UK. If that is the case, you may still be able to claim unilateral tax relief in respect of the foreign tax you have paid.

You will probably need to seek some professional advice if you find yourself in a ‘double taxation’ situation.

There is a list of the current double taxation agreements on the GOV.UK website.

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What is unilateral relief?

Even if there is no double taxation agreement, tax relief may be available, by means of a tax credit.

For example, if you pay tax at 15% on your foreign income in the country in which the income arises, then you may still have to pay tax in the UK if you are resident here. If the UK tax rate is 20%, you would only have to pay 5% of tax in the UK, as you would be given relief (or a ‘foreign tax credit’) for the 15% of tax paid overseas.

There is more information on foreign tax credit relief in HMRC's Helpsheet HS263 'Calculating Foreign Tax Credit Relief' on the GOV.UK website.

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What is the position for double taxed UK employment income?

If you come to the UK and have UK employment income that is also taxed in your home country, you will pay the UK tax; your home country should give you double tax relief by giving a credit for UK taxes paid.

The credit will probably be restricted to the lower of the UK taxes suffered and the home country tax liability on the same income, meaning that you will always end up paying at the higher of the two rates.

Example

Mark leaves Germany in August 2017 for a five month working holiday to the UK. He works in various bars, earns the equivalent of £12,500 and pays tax in the UK of £200.

Under UK rules, he is not resident, so he is taxable in the UK on his UK source income only. Mark remains resident in Germany, and so taxable on his worldwide income there. The double tax treaty tells Mark that the UK has the main right to tax the income and that if Germany also wants to tax it then the foreign tax credit method should be used, to avoid double tax.

If Mark’s German tax liability on the £12,500 is £1,500 (once converted from EUR), the foreign tax credit of £200 will reduce his German liability to £1,300.

In such situations, you may need to seek professional advice from a tax adviser in the country concerned.

If the tax authorities in your home country refuse to give the double tax relief, you should contact HMRC for help. You can also find out how to get help in our ‘getting help section’.

There are a couple of things to note about double taxed UK employment income:

  1. Anyone who is classed as a tax resident of the UK can normally earn a certain amount of money each year, without paying any UK income tax – the personal allowance (some non-residents can have it too – for example, if you are a UK or European Economic Area (EEA) national). As the personal allowance is so generous (for 2017/18 it is £11,500) it is possible that any UK employment income will fall within it, meaning there is no double tax.
  2. Whilst you will normally have tax deducted by your UK employer, you may be entitled to reclaim some or all of this back from HMRC. This is an important point because UK withholding tax amounts may not represent the true final tax liability. 

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Special situations, for example teachers and students

Certain types of visitors to the UK receive special treatment under the terms of a double tax agreement, such as students (as described in our guidance here) or teachers or overseas government officials.

For more information you should see chapter 10 in HMRC’s RDR1 booklet. You could also try contacting HMRC’s Residency unit, or finding a tax adviser to help you by visiting our ‘getting help section’.

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