Foreign Tax Credit Relief Explained UK

Foreign Tax Credit Relief (FTCR) Explained

Foreign Tax Credit Relief (FTCR) allows UK taxpayers to avoid being taxed twice on the same income when it's earned abroad. If you've paid tax on foreign income or gains in another country and that income is also taxable in the UK, you may be able to offset the overseas tax against your UK tax bill.

This relief is designed to prevent double taxation—a situation where the same income is taxed in two countries.

What Is Foreign Tax Credit Relief?

FTCR is a mechanism that reduces the UK tax payable on foreign income by the amount of tax already paid to another country on that same income. Instead of excluding the income entirely, the UK includes it in your total taxable income, but allows a credit for the foreign tax already paid.

It applies to both individuals and companies with international income, including dividends, interest, royalties, employment income, and capital gains.

How Is It Calculated in the UK?

The amount of relief is limited to the lower of:

• The actual foreign tax paid, and

• The UK tax due on the same income

Here’s an example:
You receive £10,000 in interest income from a country where 15% tax has already been deducted (£1,500). The same £10,000 is taxable in the UK, where your tax rate on interest is 20% (£2,000). You’ll be allowed to deduct the £1,500 already paid abroad from your UK liability, meaning you’ll only pay an extra £500 to HMRC.

However, if the foreign tax rate is higher than the UK rate, you won’t get a refund of the difference. FTCR only relieves tax up to the UK amount payable on that income.

How Much Relief Will I Get?

The relief you get will depend on:

• The nature of the foreign income

• The amount of foreign tax paid

• Your UK tax rate on that income

• Any applicable Double Taxation Agreement (DTA) between the UK and the other country

You must keep records showing the foreign income received and the tax deducted abroad. This will be essential when calculating how much credit can be claimed.

When Can You Make the Claim?

You claim FTCR when you complete your Self Assessment tax return. The deadline is usually 31 January following the end of the tax year.

For individuals, this means including foreign income and the associated tax paid in the “Foreign” section of the tax return. For companies, it’s reported through Corporation Tax filings.

Claims must be made within four years of the end of the relevant tax year.

How Can I Claim It?

To claim FTCR, you need to:

1. Report the foreign income on your Self Assessment return or Corporation Tax return

2. Include the amount of foreign tax paid

3. Keep evidence such as foreign tax certificates, payslips, or withholding statements

HMRC may request proof of the foreign tax deducted, so retain all documentation. If you're unsure about eligibility or calculation, professional advice is recommended—especially if multiple countries are involved.

What Is Double Tax?

Double tax happens when the same income is taxed by both the country where it was earned and the country where the individual or company is resident (in this case, the UK). This can occur with:

• Dividends from overseas companies

• Employment income earned abroad

• Property income from foreign rentals

• Interest or royalties from overseas sources

Without relief, you'd be paying two sets of tax on the same income. FTCR helps to reduce or eliminate this.

How Does a Double Taxation Agreement Affect FTCR?

Double Taxation Agreements (DTAs) are treaties between countries that determine how and where income should be taxed. The UK has DTAs with over 130 countries.

A DTA often:

• Sets out which country has taxing rights over specific income

• Caps the rate of foreign tax that can be applied

• Determines eligibility for FTCR or exemption (where foreign income is not taxed at all in the UK)

If a DTA exists and provides full exemption for certain income, you wouldn’t need FTCR because the income isn’t taxed in the UK. But where income is still taxable in both countries, the DTA ensures you won’t be taxed twice for more than the higher of the two tax rates.

Conclusion

Foreign Tax Credit Relief is a vital tool for anyone earning income across borders. It ensures UK residents aren’t unfairly penalised by being taxed twice on the same income. Whether you're an individual with overseas interest or a business with international operations, understanding how FTCR works—and how to claim it—can make a significant difference to your tax bill. Always check whether a double taxation agreement applies and keep accurate records to support your claim.