Foreign tax credit relief and other relief when you're taxed abroad

If you live in the UK but receive income from another country, such as a foreign pension, rental property, interest or overseas dividends, you may find that tax has already been deducted before the income reaches you.

This article covers the basic principles - see here on how to manage this in untied.

We also suggest you look at HMRC guidance (this links to the 2025/26 content - and there may be more recent content).

Basic principles

To prevent the same income being taxed twice, UK tax rules generally give you a choice between two forms of relief:

• Foreign Tax Credit Relief (FTCR); or
• Deduction relief, where the foreign tax is treated as an expense when calculating your taxable income.

For FTCR we are generally talking about the same type of tax as you'll be charged in the UK - so sales and local taxes may be considered an expense but wouldn't be subject to Foreign Tax Credit Relief.

Spoiler - FTCR is usually the better approach, but it depends on your situation and remember this is information not advice.

The main choice: a tax credit vs an expense deduction

You cannot claim both forms of relief for the same foreign tax on the same item of income, so you would want to choose the method that works for you. Different choices may be available for different sources of foreign income.

Option 1: Foreign Tax Credit Relief (FTCR)

This is usually the most valuable option.

Rather than reducing your taxable income, FTCR reduces your UK tax bill pound-for-pound. HMRC effectively treats the foreign tax already paid as a payment towards your UK liability.

However, the credit is capped. You can claim relief only up to the lower of:

• the foreign tax paid; or
• the UK tax attributable to that particular income.

If the foreign tax rate is higher than the UK rate, any excess foreign tax generally cannot be used against other UK income and HMRC will not refund the difference.

Option 2: Deduction Relief (treating tax as an expense)

Alternatively, you can deduct the foreign tax from your gross foreign income before calculating your UK tax liability.

This treats the foreign tax as a deductible expense when working out the amount of income subject to UK tax.

Example 1: When the UK tax rate is higher than the foreign tax paid

Imagine you are a UK higher-rate taxpayer paying tax at 40% and receive £10,000 of foreign income. The foreign country has already deducted 30% tax (£3,000), leaving you with £7,000.

Foreign Tax Credit Relief

Step 1: UK taxable income = £10,000

Step 2: UK tax at 40% = £4,000

Step 3: Foreign tax credit = (£3,000)

Step 4: Final UK tax payable = £4,000 − £3,000 = £1,000

Total tax suffered: £3,000 foreign tax + £1,000 UK tax = £4,000

Cash retained: £10,000 − £4,000 = £6,000

Deduction Relief

Step 1: Taxable income = £10,000 − £3,000 = £7,000

Step 2: UK tax at 40% = £2,800

Step 3: No tax credit available

Final UK tax payable: £2,800

Total tax suffered: £3,000 foreign tax + £2,800 UK tax = £5,800

Cash retained: £10,000 − £5,800 = £4,200

Result

In this scenario, FTCR leaves you £1,800 better off than deduction relief.

Example 2: When the foreign tax rate is higher than the UK rate

Now consider a UK basic-rate taxpayer paying tax at 20%.

You receive £10,000 of foreign income, but the foreign country withholds tax at 35%, meaning £3,500 is deducted before payment.

The UK tax on that income is only £2,000, so the FTCR cap becomes important.

Foreign Tax Credit Relief

Step 1: UK taxable income = £10,000

Step 2: UK tax at 20% = £2,000

Step 3: Available credit = lower of:

• foreign tax paid (£3,500); or
• UK tax attributable to the income (£2,000)

Therefore the credit is restricted to £2,000.

Step 4: Final UK tax payable = £2,000 − £2,000 = £0

Total tax suffered: £3,500

Cash retained: £6,500

Deduction Relief

Step 1: Taxable income = £10,000 − £3,500 = £6,500

Step 2: UK tax at 20% = £1,300

Step 3: No tax credit available

Final UK tax payable: £1,300

Total tax suffered: £3,500 foreign tax + £1,300 UK tax = £4,800

Cash retained: £5,200

Result

Even though £1,500 of foreign tax cannot be used as a credit, FTCR still produces the better answer.

By eliminating the UK tax entirely, FTCR leaves you £1,300 better off than deduction relief.

When deduction relief may be better

While Foreign Tax Credit Relief will usually produce the lowest overall tax bill, there are circumstances where deduction relief may be the better choice.

This is most likely where:

• you have little or no UK tax liability;
• your business or property business is making losses;
• the available foreign tax credit cannot be fully utilised; or
• the foreign tax credit would otherwise provide little practical value.

In these situations, a foreign tax credit may provide little immediate benefit because there is insufficient UK tax against which it can be set.

By contrast, deduction relief treats the foreign tax as an expense. This may reduce taxable income or increase losses available for relief, potentially producing greater value in a future tax year.

As a result, while FTCR is normally the preferred option for profitable activities, deduction relief should not be overlooked where losses or low levels of UK tax are involved.

Self-employment income: consultants, freelancers and performers

If you are self-employed and earn money from overseas clients, you may find that foreign tax is deducted before you are paid.

Performers

Many countries have special tax rules for visiting entertainers and sportspeople.

Unlike many other forms of self-employment income, performers are often taxable in the country where the performance takes place, even if they are based in the UK. As a result, withholding tax on overseas appearances, tours and performances is common.

This can lead to the same income being taxed both overseas and in the UK unless relief is claimed.

Example

A UK-based musician performs overseas and earns £20,000.

The overseas venue deducts 15% withholding tax (£3,000) before payment.

The musician still reports the full £20,000 as business income on their UK tax return and can normally claim relief for the foreign tax suffered, subject to the usual limits - either as FTCR or as deduction relief.

A treaty warning

For consultants and other professionals, withholding tax is sometimes deducted even when a Double Taxation Treaty suggests the foreign country may not have had taxing rights.

Where this happens, the best outcome may be to reclaim the tax from the overseas authority rather than rely entirely on UK relief.

Before claiming relief, it is worth checking whether the foreign tax was actually chargeable under the relevant treaty.

Choice of relief

For profitable businesses, FTCR will usually produce the best outcome because it gives pound-for-pound relief against UK tax.

Deduction relief may occasionally be preferable where a self-employed business is making losses or where there is insufficient UK tax against which a foreign tax credit can be used.

Overseas property income

If you own rental property overseas, the country where the property is located will usually tax the rental profits because the property sits within its borders. At the same time, the UK taxes UK residents on their worldwide income.

Capital gains

Similar principles apply to capital gains, where you can either claim FTCR, or use foreign tax paid to reduce the size of your gain.

Double tax agreements (DTAs)

The UK has also negotiated Double Taxation Agreements which may apply. You may also see them referred to as Double Taxation Treaties, or using shorthand DTA or DTT.

These are international agreements designed to prevent the same income being taxed twice. Many treaties restrict the amount of tax the foreign country is entitled to charge UK residents.

For example, a country's domestic law may impose withholding tax of 30%, but the treaty may limit the rate to 15%.

A common trap

Suppose a treaty limits foreign tax to 15%, but 30% is deducted because treaty benefits were not claimed.

Many taxpayers assume that the full 30% can then be claimed as relief in the UK. Unfortunately, that is not usually the case.

UK relief is generally restricted to the amount of foreign tax that was properly chargeable under the treaty.

HMRC will usually expect the taxpayer to seek repayment of the excess tax from the foreign tax authority rather than obtain UK relief for amounts that could have been reduced or recovered overseas.

As a result, it is often worth claiming treaty benefits and paying the right foreign tax upfront wherever possible rather than trying to recover excess tax later.

Performers and overseas social security

Some performers, musicians, actors and sportspeople work temporarily in other countries and would normally rely on an A1 certificate to remain within their home social security system while working abroad.

If an A1 certificate is unavailable, delayed or not accepted by the overseas authorities, local social security contributions may be deducted from the performer's income alongside any local withholding tax.

Overseas social security is not usually eligible for Foreign Tax Credit Relief. Foreign Tax Credit Relief is designed for foreign taxes. Overseas social security contributions are generally treated separately and are not usually eligible for Foreign Tax Credit Relief. Different rules may apply where social security agreements exist between the UK and the overseas country concerned.

It means that where foreign social security has been deducted, it should generally be recorded using separate tags to foreign withholding tax so that the two amounts can be identified individually.

Do you need help?

Getting your foreign figures wrong can end up with administration and paperwork for two tax authorities.

untied does not give advice. We do have specialist accountants in our network who are familiar with foreign tax interaction, and can make introductions if this will help our users.