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

In the period 6 April to 31 August 2018, (during Max’s second year of university and into the summer) he works part-time in a bar. He earns income of £5,500 and has tax deducted at source under PAYE of £1,110 (he was on a basic rate (BR) tax code meaning tax was deducted at a flat rate of 20%). On 20 September 2018 he moves to France to spend his third academic year working as a language assistant (he comes home for three weeks at Christmas). In the period 20 September 2018 to 5 April 2019, he earns the equivalent of £13,000 in France and pays French taxes of £1,300.

Per the Statutory Residency Test, Max is considered UK tax resident throughout 2018/19 as he was present in the UK for more than 183 days. This means he is taxable in the UK on his worldwide income. We would expect Max to be non-resident (or treaty non-resident) in France, meaning that he is only taxable in France on his French source income.

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

His 2018/19 UK tax calculation would look like this:

Income £5,500 + £13,000 =	£18,500.00
Less personal allowance	(£11,850.00)
Taxable Income	£6,650.00
Tax thereon @ 20%	£1,330.00
Foreign tax credit	(£1,300)
Residual liability	£30
(less PAYE)	(£1,110)
Refund	£1,080

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 £30 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 £1,110, Max must repay £30 of it to HMRC as soon as possible to keep everything neat and tidy.

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.