HMRC Self Assessment foreign tax credit relief on US dividends

milleniumaire

I'm in the process of completing my self assessment using the HMRC online system.  I would appreciate some help in understanding the tax calculation for the tax on my US dividends as I may not be entering this data correctly.

I have received £2,174 gross US dividend, with 15% withholding tax taken off (£326) giving me a net dividend of £1,848.

In the Dividends from foreign companies section of the Foreign section of the tax return, I enter the following details:

Country:  USA
Amount of income:  £2174
Foreign tax:               £327
Special Withholding Tax:  <blank>
Maximum foreign tax credit relief:  15%  (same figure as the % of withholding tax I was charged)

Later, as part of "View your calculation", there's a section that shows the above details under "Calculating your foreign tax credit relief".  On the next page it shows:

Foreign tax credit relief against UK Income Tax:  £191

I'm asked if I want to use this figure.  Why wouldn't I?  I assume HMRC have calculated it correctly, otherwise what is the point in providing it?  This figure appears to have been calculated as 8.75% of £2174.  8.75% is the basic rate tax rate for dividends.  Why not 15% of £2174 so that it offsets the withholding tax I've already paid?

As well as the above US dividend, I have received £30,627 dividends from UK companies, so £32,801 total dividends (UK and foreign).

My tax calculation shows the following for dividends:

Basic rate at nil rate:                            £500.00   x 0%                   £0.00
Basic rate:                                       £32,301.00   x 8.75%       £2,826.33
minus Foreign Tax Credit Relief:                                                 £191.00

So, it would appear that the £2174 foreign dividend has been taxed at 8.75%, giving a UK tax of £191, the same as the calculated Foreign Tax Credit Relief, meaning they cancel each other out.  So, I'm not charged any more tax on the foreign dividend through my self assessment.

So, I'm a little confused.  I've already paid £327 tax and my dividend tax on the self assessment is essentially £0 for this foreign dividend due to the foreign tax credit relief, but I've still paid the tax at 15%, which is 6.25% more than the UK tax rate.  I had assumed it would be reduced to 8.75% but this doesn't seem to be the case.

Is this correct?  I had assumed that some of that 15% tax would be reduced through self assessment i.e. 6.25% of it, but that doesn't seem to be the case.

Obviously, by claiming the Foreign Tax Credit Relief I am avoiding paying an additional £191 tax (8.75% of £2174) IN ADDITION TO the £327 withholding tax that I've already paid, so claiming the Foreign Tax Credit Relief is beneficial, just not has much as I expected.

Where/how is the 15% maximum foreign tax credit relief figure that I entered actually used?

eskbanker

FTCR is capped at the amount of tax you'd have been liable to pay on that income at UK rates, so if that's 8.75% then that's the maximum relief you can claim - if some of your dividend income had been taxable at higher rate then you'd have been eligible for more relief of up to 15%.

phlebas192

My understanding is that you can't claim back more than the tax you would have paid if it were a UK dividend. So that's 8.75% for a basic rate tax payer. OTOH, if you were a higher rate tax payer then you could claim back the full 15% since that is less than the 33.75% higher rate for UK dividends (but you would also be liable for the extra 18.75% tax payable to HMRC). On the third hand, if the shares were in an ISA then you couldn't claim back any of the tax since there is no UK tax payable within an ISA.

Yes, this is confusing and I don't think I've ever really got my head around it so I could be wrong!

poseidon1

milleniumaire said:

I'm in the process of completing my self assessment using the HMRC online system.  I would appreciate some help in understanding the tax calculation for the tax on my US dividends as I may not be entering this data correctly.

I have received £2,174 gross US dividend, with 15% withholding tax taken off (£326) giving me a net dividend of £1,848.

In the Dividends from foreign companies section of the Foreign section of the tax return, I enter the following details:

Country:  USA
Amount of income:  £2174
Foreign tax:               £327
Special Withholding Tax:  <blank>
Maximum foreign tax credit relief:  15%  (same figure as the % of withholding tax I was charged)

Later, as part of "View your calculation", there's a section that shows the above details under "Calculating your foreign tax credit relief".  On the next page it shows:

Foreign tax credit relief against UK Income Tax:  £191

I'm asked if I want to use this figure.  Why wouldn't I?  I assume HMRC have calculated it correctly, otherwise what is the point in providing it?  This figure appears to have been calculated as 8.75% of £2174.  8.75% is the basic rate tax rate for dividends.  Why not 15% of £2174 so that it offsets the withholding tax I've already paid?

As well as the above US dividend, I have received £30,627 dividends from UK companies, so £32,801 total dividends (UK and foreign).

My tax calculation shows the following for dividends:

Basic rate at nil rate:                            £500.00   x 0%                   £0.00
Basic rate:                                       £32,301.00   x 8.75%       £2,826.33
minus Foreign Tax Credit Relief:                                                 £191.00

So, it would appear that the £2174 foreign dividend has been taxed at 8.75%, giving a UK tax of £191, the same as the calculated Foreign Tax Credit Relief, meaning they cancel each other out.  So, I'm not charged any more tax on the foreign dividend through my self assessment.

So, I'm a little confused.  I've already paid £327 tax and my dividend tax on the self assessment is essentially £0 for this foreign dividend due to the foreign tax credit relief, but I've still paid the tax at 15%, which is 6.25% more than the UK tax rate.  I had assumed it would be reduced to 8.75% but this doesn't seem to be the case.

Is this correct?  I had assumed that some of that 15% tax would be reduced through self assessment i.e. 6.25% of it, but that doesn't seem to be the case.

Obviously, by claiming the Foreign Tax Credit Relief I am avoiding paying an additional £191 tax (8.75% of £2174) IN ADDITION TO the £327 withholding tax that I've already paid, so claiming the Foreign Tax Credit Relief is beneficial, just not has much as I expected.

Where/how is the 15% maximum foreign tax credit relief figure that I entered actually used?

Simple answer, your foreign credit cannot exceed the rate you would have been charged had it been a UK dividend. I assume you are a basic rate tax payer so only get the benefit of 8,75%. I am a higher rate tax payer liable to 33.75% so can claim  the full 15%. 

milleniumaire

Thanks everyone for your answers.  I understand now.  So much for a tax treaty between the UK and US given the US still take more withholding tax than a UK basic rate earner would pay on the same gain.

Dazed_and_C0nfused

Can you clarify why you think you should be able reduce your UK tax liability on your UK dividends with the additional tax you paid abroad?

eskbanker

milleniumaire said:

So much for a tax treaty between the UK and US given the US still take more withholding tax than a UK basic rate earner would pay on the same gain.

I think you have unrealistic expectations tbh - if there was no tax treaty then you'd be taxed twice on that income!  Such treaties can't reasonably be expected to harmonise tax treatment across different jurisdictions, which are obviously subject to unilateral change at any time....

milleniumaire

I had incorrectly assumed the purpose of a tax treaty was to pay the same tax abroad as at home, but I see this isn't the case.  That's why I miss-understood the calculations in the self assessment.

milleniumaire

Dazed_and_C0nfused said:

Can you clarify why you think you should be able reduce your UK tax liability on your UK dividends with the additional tax you paid abroad?

I never thought this.  The whole point of my post was about the tax on US dividends, not UK dividends.

Dazed_and_C0nfused

milleniumaire said:

Dazed_and_C0nfused said:

Can you clarify why you think you should be able reduce your UK tax liability on your UK dividends with the additional tax you paid abroad?

I never thought this.  The whole point of my post was about the tax on US dividends, not UK dividends.

So what would have happened to the additional foreign tax credit if you had been able to benefit from it 🤔

EdSwippet

eskbanker said:
... if there was no tax treaty then you'd be taxed twice on that income!

Unilateral relief covers cases where there is no tax treaty. From HMRC:

INTM151060 - Double taxation: concept and principles: UK legislation - unilateral relief

TIOPA10/S18 allows unilateral tax credit relief to be given against United Kingdom taxes for foreign taxes imposed in a country with which the UK has no double taxation agreement.

Unilateral relief under S18 can only be given by way of credit for foreign tax payable under the law of the relevant country. Part of the income cannot be taken out of assessment. In broad terms credit is limited to amount that would be due if a treaty were in existence.