Max – studying and working abroad for a year (foreign taxes paid)

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In the period 6 April 2020 to 1 July 2020, Max works part-time in a bar in the UK. He earns income of £2,500 and has tax deducted at source under PAYE of £500 (he was on an ‘emergency’ 0T tax code meaning tax was deducted at a flat rate of 20%). Once the summer term finishes, he moves to France to spend his third academic year working as a language assistant (he comes home for a few weeks at Christmas to see his family). In the period 15 July 2020 to 5 April 2021, he earns the equivalent of £13,000 in France and pays French taxes of £560.

Per the Statutory Residency Test, Max is considered UK tax resident throughout 2020/21 as he has his only home in the UK for all or part of the year (albeit his parent’s home), even though he has less than 183 days of physical presence in the UK. This means he is taxable in the UK on his worldwide income, even though he has paid tax in France on his language assistant earnings.

The UK will give a foreign tax credit to avoid double taxation on the language assistant earnings.

His 2020/21 UK tax calculation would look like this:

Income £2,500 + £13,000 =	£15,500
Less personal allowance	£(12,500)
Taxable Income	£3,000
Tax thereon @ 20%	£600
Foreign tax credit	(£560)
Residual liability	£40
(less PAYE)	(£500)
Refund	£440

In the calculation above, the availability of the personal allowance means that Max does not have to pay tax on any of his UK earnings. The tax liability arises on the French income, part of which exceeds his personal allowance. The foreign tax credit serves to extinguish most of the UK tax liability on his French earnings – but not all. Max is therefore entitled to most of the UK PAYE he paid on his pre-departure earnings back – as the rest is offset against the £40 shortfall.

Max will need to complete a tax return to report the foreign income so that HMRC can make the relevant adjustment to the refund amount. If, while Max is preparing his tax return, HMRC accidentally issue the full £500, this does not override the need to complete a tax return. Max must still file his tax return and pay £40 back to HMRC to keep everything correct.

It is worth noting that usually foreign taxes would need to be paid at a rate at least equivalent to the UK tax rate due on the foreign income (usually 20%) to fully extinguish any UK tax liability. However, in this example Max has some of his personal allowance available to use against his French income, meaning the effective UK tax rate on it is lower than 20% and the relatively small amount of French tax he paid nearly covers the UK tax liability on the French income.

For more information and examples involving foreign tax credits in slightly different circumstances, see Tom and Mark.