INTM165050 - UK residents with foreign income or gains: income tax: Examples of calculation of credit for foreign tax
Example 1 - Foreign source income only - UK Income Tax liability at lower rate only (INTM165040, note 1)
Example 2 - One foreign source - UK liability at lower and basic rate only (INTM165040, note 3)
Example 3 - One foreign source - UK liability at higher rates (INTM165040, note 3)
Example 4 - More than one foreign source - no higher rate liability (INTM165040, note 4)
Example 5 - More than one foreign source - liable at lower, basic and higher rates (INTM165040, note 4)
Example 6 - Interest paid under deduction of tax (INTM165040, note 7)
Example 7 - More than one foreign source including foreign pension. Liable at higher rates (INTM165040, note 8)
Example 1 - Foreign source income only - UK Income Tax liability at lower rate only (INTM165040, note 1)
A single person is assessable for 1995-96 on interest of £5,500 from a foreign company. Foreign withholding tax of £550 has been deducted from the interest.
The computation is
| - | Amount | Amount |
|---|---|---|
| Income | £5,500 | - |
| Less PA | £3,525 | - |
| - | £1,975 | - |
| Tax on £1,975 at 20% | - | £395.00 |
| Less credit for foreign tax | - | £395.00 |
| Net UK tax | - | NIL |
Foreign tax of £155.00 is unrelieved and is neither deductible nor repayable.
Example 2 - One foreign source - UK liability at lower and basic rate only (INTM165040, note 3)
For 1995-96 an individual’s total income (without deduction of foreign tax for which credit is claimed) consists of
| - | Amount |
|---|---|
| UK earned income | £10,000 |
| Foreign interest (Foreign tax 300) | £2,000 |
| Total income | £12,000 |
| PA due = 3,525 | - |
Work out the credit allowable for the foreign tax on the foreign interest as follows
| - | Amount | Amount |
|---|---|---|
| Total income | £12,000 | - |
| Less PA | £3,525 | - |
| - | £8,475 | - |
| Tax thereon (3,200 at 20%, 5,275 at 25%) | - | £1958.75(a) |
| Total income | £12,000 | - |
| Less foreign interest | £2,000 | - |
| Reduced total income | £10,000 | - |
| Less PA | £3,525 | - |
| £6,475 | - | |
| Tax on 6,475 (3,200 at 20%, 3,275 at 25%) | - | £1458.75(b) |
| Tax at marginal rate for foreign interest (a)-(b) | - | £500.00 |
Since the tax at the marginal rate (500) exceeds the foreign tax on the foreign interest (300) credit is limited to 300. BUT a full computation would not be needed here, since the UK source income absorbs all the personal allowances and liability on the foreign source income is clearly at basic rate only. The marginal rate for the foreign interest is therefore 2,000 at 25 per cent (see INTM165040, note 9).
| - | Amount |
|---|---|
| Tax on total income as in (a) above | £1958.75 |
| Less credit for foreign tax | £300.00 |
| Net liability | £1658.75 |
Example 3 - One foreign source - UK liability at higher rates (INTM165040, note 3)
For 1995-96 an individual’s total income (without deduction of foreign tax for which credit is claimed) consists of
| - | Amount |
|---|---|
| UK earned income | £26,000 |
| Foreign royalties (Foreign tax 800) | £2,000 |
| Total income | £28,000 |
| PA due = 3,525. | - |
Work out the credit allowable for the foreign tax on the foreign royalties as follows
| - | Amount | Amount |
|---|---|---|
| Total income | £28,000 | - |
| Less PA | £3,525 | - |
| - | £24,475 | - |
| Tax on 3,200 at 20% | - | £640.00 |
| Tax on 21,100 at 25% | - | £5,275.00 |
| Tax on 175 at 40% | - | £70.00 |
| - | - | £5,985.00(a) |
| Total income | £28,000 | - |
| Less foreign royalties | £2,000 | - |
| Reduced total income | £26,000 | - |
| Less PA | £3,525 | - |
| - | £22,475 | - |
| Tax on 22,475 (3,200 at 20%, 19,275 at 25%) | - | £5458.75(b) |
| Tax at marginal rate for foreign royalties (a)-(b) | - | £526.25 |
Since the foreign tax on the foreign royalties (800) exceeds the tax at the marginal rate (526.25) credit is limited to 526.25.
Computation of liability
| - | Amount |
|---|---|
| Tax on total income as in (a) above | £5,985.00 |
| Less credit for foreign tax | £526.25 |
| Net liability | £5,458.75 |
Example 4 - More than one foreign source - no higher rate liability (INTM165040, note 4)
For 1995-96 an individual’s total income (without deduction of foreign tax for which credit is claimed) consists of
| - | Amount | - |
|---|---|---|
| UK earned income | £7,000 | - |
| Foreign dividend (A) | £500 | (Foreign tax 100) |
| Foreign dividend (B) | £400 | (Foreign tax 60) |
| Foreign dividend (C) | £200 | (Foreign tax 50) |
| Total income | £8,100 | - |
| PA due = 3,525. | - | - |
i. Dividend (C) has borne the highest rate of foreign tax and INTM165040, note 5 explains why it is therefore considered first in computing the tax credit relief available to the taxpayer. Other items of foreign income are considered in sequence with more highly taxed items considered before less highly taxed items. Work out the credit allowable on foreign dividend (C)
| - | - | Amount | Amount |
|---|---|---|---|
| Total income | - | £8,100 | - |
| Less PA | - | £3,525 | - |
| - | - | £4,575 | - |
| Tax thereon | - | - | - |
| UK earned income | £3200 at 20% | £640.00 | - |
| - | £275 at 25% | £68.75 | - |
| Foreign dividends | £1100 at 20% | £220.00 | £928.75(a) |
| Total income | - | £8,100 | - |
| Less foreign dividend (C) | - | £200 | - |
| Reduced total income | - | £7,900 | - |
| Less PA | - | £3,525 | - |
| - | - | £4,375 | - |
| Tax thereon | - | - | - |
| UK earned income | £3200 at 20% | £640.00 | - |
| - | £275 at 25% | £68.75 | - |
| Foreign dividends | £900 at 20% | £180.00 | £888.75(b) |
| Tax at marginal rate for dividend (C) | - | - | £40.00 |
As the tax at the marginal rate (40) is less than the foreign tax on dividend (C) (50) credit is limited to 40. (ii) Work out the credit on foreign dividend (A) as follows
| - | - | Amount | Amount |
|---|---|---|---|
| Total income less dividend | - | - | - |
| C) brought forward from (i) above | - | £7900 | - |
| Less foreign dividend (A) | - | £500 | - |
| Reduced total income | - | £7,400 | - |
| Less PA | - | £3,525 | - |
| - | - | £3,875 | - |
| Tax thereon | - | - | - |
| UK earned income | £3,200 at 20% | £640.00 | - |
| - | £275 at 25% | £68.75 | - |
| Foreign dividends | £400 at 20% | £80.00 | £788.75(c) |
| Tax as in (i) on total income b/f (b) | - | £888.75 | - |
| Less Tax on reduced total income (c) | - | £788.75 | - |
| Tax at marginal rate for dividend (A) | - | £100.00 | - |
As tax at the marginal rate (100) equals the foreign tax on dividend (A), credit of 100 is allowable. Work out the credit allowable on foreign dividend (B) as follows
| - | Amount |
|---|---|
| Total income less dividends A) and (C) brought forward from (ii) above | £7,400 |
| Less foreign dividend (B) | £400 |
| Reduced total income | £7,000 |
| Less PA | £3,525 |
| - | £3,475 |
| - | - | Amount | Amount |
|---|---|---|---|
| Tax thereon | - | - | - |
| UK earned income | £3,200 at 20% | £640.00 | - |
| - | £275 at 25% | £68.75 | £708.75(d) |
| Tax as in (ii) on total income b/f (c) | - | £788.75 | - |
| Less Tax on reduced total income (d) | - | £708.75 | - |
| Tax at marginal rate for dividend (B) | - | £80.00 | - |
As tax at the marginal rate (80) exceeds the foreign tax on dividend (B) (60), credit is limited to 60.
Computation of liability
| - | Amount | Amount |
|---|---|---|
| Tax on total income as in (a) above | - | £928.75 |
| Less credit for foreign tax | - | - |
| Dividend (A) | £100.00 | - |
| Dividend (B) | £60.00 | - |
| Dividend (C) | £40.00 | £200.00 |
| Net liability | - | £728.75 |
Example 5 - More than one foreign source - liable at lower, basic and higher rates (INTM165040, note 4)
For 1995-96 an individual’s total income (without deduction of foreign tax for which credit is claimed) consists of
| - | Amount | - |
|---|---|---|
| UK earned income | £15,000 | - |
| Foreign dividend | £5,000 | (Foreign tax 1,250) |
| Foreign rental income | £8,000 | (Foreign tax 3,200) |
| Total income | £28,000 | - |
| PA due = 3,525. | - | - |
i. The foreign rental income has borne the highest rate of foreign tax and INTM165040, note 5 explains why it is therefore considered first in computing the tax credit relief available to the taxpayer.
Work out the credit allowable for the foreign tax on the foreign rental income as follows
| - | - | Amount | Amount |
|---|---|---|---|
| Total income | £28,000 | - | |
| Less PA | - | £3,525 | - |
| - | - | £24,475 | - |
| Tax thereon | - | - | - |
| UK earned income | - | £3,200 at 20% | £640.00 |
| - | - | £8,275 at 25% | £2,068.75 |
| Foreign rental income | - | £8,000 at 25% | £2,000.00 |
| Foreign dividend | - | £4,825 at 20% | £965.00 |
| - | - | £75 at 40% | £70.00 |
| - | - | - | £5,743.75(a) |
| Total income | - | £28,000 | - |
| Less rental income | - | £8,000 | - |
| Reduced total income | - | £20,000 | - |
| Less PA | - | £3,525 | - |
| - | - | £16,475 | - |
| Tax thereon | - | - | - |
| UK earned income | 3,200 at 20% | £640.00 | - |
| - | 8,275 at 25% | £2,068.75 | - |
| Foreign dividend | 5,000 at 20% | £1,000.00 | £3,708.75(b) |
| Tax at marginal rate on foreign rental income (a)-(b) | - | - | £2,035.00 |
Since the foreign tax on the foreign rental income (3,200) exceeds the tax at the marginal rate (2,035), credit is limited to 2,035. Work out the credit for the foreign tax on the foreign dividend as follows
| - | - | Amount | Amount |
|---|---|---|---|
| Total income less foreign rental income b/f from (i) above | - | £20,000 | - |
| Less foreign dividend | - | £5,000 | - |
| Reduced total income | - | £15,000 | - |
| Less PA | - | £3,525 | - |
| - | - | £11,475 | - |
| Tax thereon | - | - | - |
| UK earned income | £3,200 at 20% | £640.00 | - |
| - | £8,275 at 25% | £2,068.75 | - |
| - | - | £2,708.75(c) | - |
| Tax as on total income b/f (b) | - | - | £3,708.75 |
| Less Tax on reduced total income (c) | - | - | £2,708.75 |
| - | - | - | £1,000.00 |
Since the tax at the marginal rate (1,000) is less than the foreign tax on the foreign dividend (1,250) credit is limited to 1,000.
Computation of liability
| - | Amount | Amount |
|---|---|---|
| Tax on total income as in (a) above | - | £5,743.75 |
| Less credit for foreign tax | - | - |
| Foreign rental income | £2,035.00 | - |
| Foreign dividend | £1,000.00 | £3,035.00 |
| Net liability | - | £2,708.75 |
Example 6 - Interest paid under deduction of tax (INTM165040, note 7)
For 1995-96 an individual’s total income (without deduction of foreign tax for which credit is claimed) consists of
| - | Amount | - |
|---|---|---|
| UK interest | £800 | - |
| Foreign dividend (A) | £2,300 | (Foreign tax 575) |
| Foreign dividend (B) | £2,900 | (Foreign tax 435) |
| Total income | £6,000 | - |
He pays interest at £1,000 gross under deduction of tax. PA due = £3,525.
i) Dividend (A) has borne the highest rate of foreign tax and INTM165040, note 5 explains why it is therefore considered first in computing the tax credit relief available to the taxpayer. Work out the credit allowable for the foreign tax on foreign dividend (A) as follows.
| - | Amount | Amount |
|---|---|---|
| Total income | £6,000 | - |
| Less PA | £3,525 | - |
| - | £2,475 | - |
| Tax on 2,475 at 20% | - | £495.00(a) |
| Total income | £6,000 | - |
| Less foreign dividend (A) | £2,300 | - |
| Reduced total income | £3,700 | - |
| Less PA (restricted, see Re121) | £2,700 | - |
| - | £1,000 | - |
| Tax on £1,000 at 25% (see Re 121) | - | £250.00(b) |
| Tax on total income of above (a) | - | £495.00 |
| Less Tax on reduced total income (b) | - | £250.00 |
| Tax at marginal rate for foreign dividend (A) | - | £245.00 |
Since the tax at the marginal rate (245.00) is less than the foreign tax on dividend (A) (575) credit is limited to 245.00. Work out the credit for the foreign tax on foreign dividend (B) as follows.
| - | Amount | Amount |
|---|---|---|
| Total income less dividend (A) brought forward from (i) above | £3,700 | - |
| Less foreign dividend (B) | £2,900 | - |
| Reduced total income | £800 | - |
| Tax on 800 at 25% | - | £200.00(c) |
(Note: No personal allowances or lower rate band are available because charges exceed income and there is a notional liability under ICTA88/S350 of 200 at 25 per cent.)
| - | Amount |
|---|---|
| Tax as in (i) on total income b/f (b) | £250.00 |
| Less Tax on reduced total income (c) | £200.00 |
| Tax at marginal rate for dividend (B) | £50.00 |
Since the tax at the marginal rate (£50) is less than the foreign tax on dividend (B) (435), credit is limited to £50.
| Calculation of total credit | Amount |
|---|---|
| Dividend (A) | £245.00 |
| Dividend (B) | £50.00 |
| - | £295.00 |
But the credit allowable must not exceed the total income tax liability for the year less any tax on charges. Therefore, restrict the credit as follows
| - | Amount |
|---|---|
| Tax on total income (a) | £495.00 |
| Less Tax on charges (£1,000 at 25%) | £250.00 |
| Credit allowable | £245.00 |
Example 7 - More than one foreign source including foreign pension. Liable at higher rates (INTM165040, note 8)
For 1995-96 an individual’s total income (without deduction of foreign tax for which credit is claimed) consists of
| - | Amount | - |
|---|---|---|
| UK earned income | £10,600 | - |
| Foreign pension | £4,000 | (Foreign tax 900) |
| Foreign interest | £5,000 | (Foreign tax 750) |
| Foreign rental income | £9,000 | (Foreign tax 1,800) |
A one-tenth deduction from the foreign pension is due under ICTA88/S65 (2); personal allowances of 3,525 are due.
i) The foreign pension has borne the highest rate of foreign tax and INTM165040, note 5 explains why it is therefore considered first in computing the tax credit relief available to the taxpayer. Other items of foreign income are considered in sequence with more highly taxed items considered before less highly taxed items.
Work out the credit for the foreign tax on the foreign pension as follows.
| - | Amount | Amount |
|---|---|---|
| Total income | - | £28,600 |
| Less ICTA88/S65 (2) deduction | £400 | - |
| PA | £3,525 | £3,925 |
| - | - | £24,675 |
| Tax on £3,200 at 20% | - | £640.00 |
| Tax on £21,100 at 25% | - | £5,275.00 |
| Tax on £375 at 40% | - | £150.00 |
| - | - | £6,065.00 (a) |
| - | - | Amount | Amount |
|---|---|---|---|
| Total income | - | £28,000 | - |
| Less foreign pension | - | £4,000 | - |
| Reduced total income | - | £24,600 | - |
| Less PA | - | £3,525 | - |
| - | - | £21,075 | - |
| Tax thereon | £3,200 at 20% | - | £640.00 |
| - | £17,875 at 25% | - | £4,468.75 |
| - | - | - | £5,108.75(b) |
| Tax on total income (a) | - | - | £6,065.00 |
| Less tax on reduced total income (b) | - | - | £5,108.75 |
| Tax at marginal rate on foreign pension | - | - | £956.25 |
ii) Since the tax at the marginal rate (956.25) exceeds the foreign tax on the foreign pension (900) credit is limited to the foreign tax of 900. Do not restrict the credit to nine-tenths of the foreign tax. Work out the credit allowable on foreign rental income as follows.
| - | Amount |
|---|---|
| Total income less foreign pension brought forward from (i) above | £24,600 |
| Less foreign rental income | £9,000 |
| Reduced total income | £15,600 |
| Less PA | £3,525 |
| - | £12,075 |
| - | - | Amount |
|---|---|---|
| Tax thereon | 3200 at 20% | £640.00 |
| - | 8875 at 25% | £2,218.75 |
| - | - | £2,858.75(c) |
| Tax as in (i) on total income b/f (b) | - | £5,108.75 |
| Less Tax on reduced total income (c) | - | £2,858.75 |
| Tax at marginal rate on rental income | - | £2,250.00 |
iii. Since the tax at the marginal rate (2,250) exceeds the foreign tax on foreign rental income (1,800) credit is limited to 1,800. Work out the credit allowable on foreign interest as follows
| - | - | Amount |
|---|---|---|
| Total income less foreign income brought forward from (ii) above | - | £15,600 |
| Less foreign interest | - | £5,000 |
| Reduced total income | - | £10,600 |
| Less PA | - | £3,525 |
| - | - | £7,075 |
| Tax thereon | 3200 at 20% | £640.00 |
| - | 3875 at 25% | £968.75 |
| - | - | £1,608.75(d) |
| Tax as in (ii) above on total income b/f (c) | - | £2,858.75 |
| Less Tax on reduced total income (d) | - | £1,608.75 |
| Tax at marginal rate on foreign interest | - | £1,250.00 |
Since the tax at the marginal rate (1,250) exceeds the foreign tax on foreign interest (750) credit is limited to 750. But it would not be necessary to do the full calculations at (ii) and (iii) above since it is clear after calculation (i) that the UK source income has absorbed all the personal allowances and it is only the foreign pension which is charged at higher rates. The marginal rate on the foreign interest and rental income is 14,000 at 25 per cent = 3,500.
| Computation of liability | Amount | Amount |
|---|---|---|
| Tax on total income as in (i) | - | £6,065.00 |
| Less credit for foreign tax | - | - |
| foreign pension | £900.00 | - |
| foreign rental income | £1,800.00 | - |
| foreign interest | £750.00 | - |
| - | - | £3,450.00 |
| - | - | £2,615.00 |