Treatment of overseas salary

How to deal with overseas salary paid to UK person after he moved back to the UK

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Hi there

My client is UK born and bred but moved to California in 2017 to work as a director of XYZ Inc (US company).

In August 2022 he returned to the UK and qualifies for split-year treatment under case 4 (only home became his new flat in the UK).

When he returned to the UK he started working for XYZ Ltd (the wholly owned UK sub of XYZ Inc) in November 2022. XYZ Inc paid him final salary payments in September and October 2022 to his US bank account. From November 2022 he was employed by the UK sub and paid normally for a UK employee (i.e. subject to PAYE/NIC).


Question - how should the final US salary payments in Sept and Oct 2022 be treated on his 22/23 self assessment? As this is after his return to the UK and he's claiming split year, they were paid at a time he was UK resident therefore taxable on his worldwide earnings. Would I report them as 'foreign income' and claim credit for the US federal tax deducted (I know he can't get a tax credit for the California state tax also deducted).

I think there's a question mark over whether XYZ Inc should have registered for UK PAYE for Sept / Oct 2022 as he was working in the UK at that time. However it did not and the company is now being liquidated and so I think that is what it is.



Replies (5)

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By David Treitel
15th Jan 2024 19:19

The United Kingdom has the primary right to charge tax on income attributable to days worked in the UK. The UK will therefore charge tax on employment income for September and October 2022. As a UK based US tax professional, I would have expected the client to have reported the income as UK source in the 2022 Federal & State tax returns. If this did not happen, I'd be happy to assist the client amending the 2022 US tax returns.

In calculating UK taxable income - including reporting any US pension contributions to HMRC- you may wish to be aware that amounts reported on US paystubs can sometimes be net of some pre-US deductions including items such as deferred compensation and employee contributions to any US pension plan, and would not include employer contributions to any US pension plan.

Thanks (2)
Replying to David Treitel:
By musicman
15th Jan 2024 20:12

Thank you. This makes sense. I’ll speak to him and come back to you.

Thanks (0)
By FactChecker
15th Jan 2024 19:50

Going off-piste ... but it does sound a little as if:
- XYZ Inc (US company) is 'owned' by your client;
- XYZ Ltd is the wholly owned UK sub of XYZ Inc;
- XYZ Inc is now being liquidated.

So not sure where that leaves XYZ Ltd or your client?

Thanks (1)
Replying to FactChecker:
By musicman
15th Jan 2024 20:12

Thanks, but he didn’t own the Inc. Both the Inc and Ltd are being liquidated.

Thanks (0)
16th Jan 2024 00:53

musicman wrote:

I think there's a question mark over whether XYZ Inc should have registered for UK PAYE for Sept / Oct 2022 as he was working in the UK at that time.

... or indeed XYZ Ltd if that company had been a 'UK Host' in receipt of his services, but as you say likely moot now if both are being liquidated and the relevant income is being returned under SA - although possibly not if the UK liquidation is a solvent one ...

Question - ought a relevant repayment of US deductions from UK-source income received during the UK Part of the split year not be claimed from the US rather than being sought from UK by way of double taxation relief (as David indicates above) ?

DTR is essentially there to give relief where both countries are entitled to tax the same income, not to circumvent repayment by the country which taxed non-source income on a witholding basis over which another has the sole/primary taxing rights.

An application in US to refund tax on non-US source income sounds like the right way to go about this ...

Thanks (1)