Tom – studying and working abroad for a year (no foreign taxes paid)

In the period 6 April to 15 September 2019, (during Tom’s second year of university and into the summer holidays) he works as a temp around his studies. He earns income of £5,120 and has no tax deducted at source under PAYE (he earns too little to trigger any deductions). On 18 September 2019 he moves to Germany to spend his third academic year at Dusseldorf University (he comes home for a month at Christmas). In the period 18 September 2019 to 5 April 2020, he earns the equivalent of £7,500 in Germany from an evening/weekend job. He has no German taxes to pay due to the availability of a nil rate band which his earnings fall into.

Per the Statutory Residency Test, Tom is considered UK tax resident throughout 2019/20 as he was present in the UK for more than 183 days. This means he is taxable in the UK on his worldwide income. His 2019/20 UK tax calculation would look like this:

Income       £5,120 + £7,500 =	£12,620
Less personal allowance	(£12,500)
Taxable Income	£120.00
Tax thereon @ 20%	£24.00
Foreign tax credit	(-)
(less PAYE)	(-)
Tax due	£24.00

Tom has had no tax deducted at source in either country, yet his income when totalled together exceeds the personal allowance. Therefore Tom has to pay £24 to HMRC and will need to complete a tax return to report the foreign income.

In 2020/21, assuming Tom continues to work in Germany for the beginning part of the tax year and then returns to the UK at the end of August 2020 to take up his fourth year of university, he will again be UK tax resident and a similar reconciliation will need to occur at the end of the 2020/21 tax year to identify the UK tax position on the German income. 

If Tom starts working in the UK after his return then it would be a good idea to state on his new starter information (previously known as form P46) ‘this is now my only job, but since last 6 April, I have had another job’ to reflect the fact that he was working in Germany in the first part of the tax year.

Provided he does this then he should not be given the benefit of the unused personal allowance since the start of the tax year to set fully against his UK earnings for the remainder of the year. This means it will be available to set against his German income when he does the reconciliation and the likelihood of there being a significant underpayment of tax at the end of the tax year is reduced.

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