The United States taxes its citizens on worldwide income. However, if you live and work outside of the US (such as in the UK), you may be able to exclude some of your income from US taxation by using the Foreign Earned Income Exclusion (FEIE). In this blog, we learn about a parallel UK tax program called UK Overseas Workday Relief that allows US citizens to exclude foreign earned income from UK taxation.
What is Overseas Workday Relief?
Overseas Workday Relief is a tax program in the UK that allows a resident taxpayer to categorize more earnings as foreign than may otherwise be permitted. When paired with the remittance basis of taxation this can be advantageous for reducing your UK tax liability. There is no upper limit on days or amount that can be excluded; the more you work outside of the UK, the higher the potential savings.
If you have not read our blog post about resident, non-domiciled remittance basis taxation in the UK please read that first. This tax benefit is only available for UK residents taxed under the remittance basis system.
What income is considered foreign?
Once you become a UK tax resident, all of your earnings from your UK-based job(s) are considered UK source income. If you travel from London to Paris to work on a project for a week, the earnings are still considered UK source. Yes, the work is physically completed outside of the UK, but it is related to your local position.
Overseas Workday Relief flips the equation by saying duties performed outside the UK (even if they are for your UK-based position) are foreign earnings.
Why is foreign income advantageous?
If you are taxed under the remittance basis tax system, foreign income is advantageous because it is tax free in the UK! This can be extremely beneficial for someone working at a UK office but spending a material amount of time physically working outside the UK in Europe, the Middle East, or elsewhere. A larger percentage of their wages would be considered foreign and would be free from UK taxation so long as they are not remitted to the country (i.e., transferred to the UK for spending).
How do you qualify for Overseas Workday Relief?
First: You need to be a non-domiciled taxpayer taxed on the remittance basis.
Second: This exclusion is only available for the first three years you are a UK tax resident. (You can claim it again if you move away for 3 years and then move back.)
What does this all mean?
If you’re an American working out of your company’s UK office but traveling a lot for work, Overseas Workday Relief could help reduce your UK tax bill. By tracking the number of workdays you’re outside of the country you could increase the amount of earnings considered foreign. As long as the earnings are not remitted to the UK, they won’t be subject to taxation in the country. However, this benefit is only available to people newly moving to the UK and only lasts for the first three years of residency.
Do you have questions? Leave them in the comments below!
Resources and Tax Forms:
- UK Overseas Workday Relief: https://www.gov.uk/government/publications/rdr4-overseas-workday-relief-owr/overseas-workday-relief-rdr4
