# Foreign Tax Paid question on UK Self Assessment



## blah2014 (Apr 1, 2014)

Hi there. I live in the UK but have earned interest on savings accounts in the US. I am filing a self assessment and it is asking me what foreign tax I paid on the earned interest. Since they don't take tax out when you earn the interest and it all gets factored into the 1040, I don't know what number to use. 

Should I just apply a percentage based on what my total tax/total income for the year was or something along those lines? I'm not sure what numbers to use with the total income, adjusted gross income, tax and total tax. Or should I use the tax bracket percentage that I fall into?

Thanks in advance!


----------



## BBCWatcher (Dec 28, 2012)

First of all, check the U.S.-U.K. tax treaty to see if you can claim treaty relief on that income.

Second, are you sure you owe any U.S. tax on that interest? That'd be fairly unusual. You'd need a _lot_ of interest (or other income) to surpass your personal exemption and standard deduction.

Have you consulted HMRC's HS263 yet? That should walk you through how to run the Foreign Tax Credit Relief calculation.


----------



## blah2014 (Apr 1, 2014)

Thank you. It's extra complicated because it's the year we moved. We have self-employment income from the US before the move and then UK income after the move. We did do the Foreign Tax Credit on the UK earned income when we filed the US taxes, but we still owed the US a lot for the US earned income. 

And, if I am reading it correctly, the US-UK tax treaty says that the UK can tax the US earned interest but that the US cannot tax it. Am I reading that right? Seems odd.

I think that in the future when all the income is earned in the UK, it will be more clear. We will be able to take the Foreign Tax Credit when we file the US taxes and because the UK rates are higher, we should be fine. And, we won't have paid US tax on the US earned interest and just the UK will tax that (again, seems odd). But, this transition year is tough to sort out 

Add to that the fact that the tax year calendars are different and it's even tricker. But, we did pay US tax on the US earned interest for this year. So, I will keep reading the docs to try to figure out what numbers to put where to avoid overpaying.


----------



## BBCWatcher (Dec 28, 2012)

blah2014 said:


> And, if I am reading it correctly, the US-UK tax treaty says that the UK can tax the US earned interest but that the US cannot tax it. Am I reading that right? Seems odd.


I don't think you are. The tax treaty generally has a "savings clause," and so the U.S. is typically going to have first crack at taxing such income.

One basic principle to keep in mind is that you don't get to "ping pong" the foreign tax credits. Let's suppose, for example, you have $100 of U.S. source interest income under consideration. The U.S. gets first crack at taxing it, and let's suppose that's $10 in tax. On the U.K. side you then report $100 of income and $10 of foreign tax credit, and let's suppose the U.K. then adds another $10 of tax, after the credit. (Obviously on the U.K. side everything is translated into pounds, but let's keep dollars throughout for purposes of this example.) Unfortunately you cannot then take that $10 of "extra" U.K. tax and pull it back to the U.S. side to take a foreign tax credit there -- not as I understand it, anyway. (I'm sure somebody will chime in if I'm not characterizing things correctly.)

Yes, agreed, even without the "ping pong" this can still be a bit tricky to calculate on both sides of the Atlantic, especially during the transition year. If you have a tax situation and/or income level that's sufficiently complicated/high this _might_ be the year you hire a pro to work the numbers for you.


----------



## Bevdeforges (Nov 16, 2007)

> And, if I am reading it correctly, the US-UK tax treaty says that the UK can tax the US earned interest but that the US cannot tax it. Am I reading that right? Seems odd.


As BBC has said, I don't think you've understood this one correctly. In very general terms, the tax treaties usually grant first taxing rights to the country that is the source of the income. So US source interest would normally be taxed first and foremost by the IRS, with some allowance or credit for taxes paid in your country of residence.

There are a few "peculiarities" in the UK tax treaty, but the ones I'm aware of have mostly to do with pensions and US Social Security. (And I admit that reading the actual treaties will definitely make your head spin!) 

Safest thing to do might be to take the conservative approach and report your US interest as received (i.e. before any allowances taken out for taxation, since you're not having US tax withheld on it - as you would do if you were a foreigner with US investments). Just make sure it is clearly labeled as "foreign" interest from the US. I would assume that any tax this might generate on your UK taxes would be refundable as an overpayment, based on the treaty provisions. (This sort of thing often happens in your first year abroad.)

And, depending on your circumstances and what you're doing in the UK, you could try asking your employer (usually the HR department) for help with the tax forms. They are often willing to help, at least the first time or two through.
Cheers,
Bev


----------



## blah2014 (Apr 1, 2014)

Again, thank you for your help. I thought my interpretation didn't sound right  I read this within the instructions of the software I am using to file the UK Self Assessment and it is what confused me:

"Countries with Double Taxation Agreements with the UK - rates of withholding tax for the year ended 5 April 2014
This table shows the maximum rates of tax those countries with a Double Taxation Agreement with the UK can charge a UK resident on payments of dividends, interest, royalties and management/technical fees. The table only includes agreements which are currently in force.
USA Dividends 15% Interest 0%"

So, I read that as the max the US can charge a UK resident on interest is 0%. I have tried to read the actual tax treaties but haven't been able to make any sense of them. I guess I will try again!

We will be reaching out to our employer's HR department to see if they can help too.

Thanks!


----------



## BBCWatcher (Dec 28, 2012)

In all the tax treaties with the U.S. there's a catch all "savings clause" that you must also look at. You might call that clause the "Just kidding!" clause since, for U.S. citizens at least, it overrides most of the line item provisions in the treaty.


----------

