Question

Bob lives in the UK, but works in both Germany and in the UK. In 2019 he earned 40,000 euros in Germany, and 30,000 euros in the UK. In Germany the income tax rate is 45%.

2.1.   How much tax would be due from Bob in the UK on his annual income for 2019 if the UK income tax rate was 20% and any double taxation would be eliminated using ordinary credit?

2.2.   How much tax would be due from Bob in the UK on his annual income for 2019 if the UK income tax rate was 50% and any double taxation would be eliminated using ordinary credit?

2.3.   How much tax would be due from Bob in the UK on his annual income for 2019 if the UK income tax rate was 20% for income up to 40,000 euros and 30% for income above 40,000 euros, and any double taxation would be eliminated using exemption with progression?

Answer 1

2.1	Calculation of Tax due from Bob in 2019
	Earnings in Germany	€                     40,000
	Earnings in UK	€                     30,000
	Total Earnings	€                     70,000
	Tax in Resident Country (UK) @20%	€                     14,000
	Less: Ordinary Tax Credit	€                       8,000
	Tax due in UK	€                       6,000
	Workings:
	Calculation of Ordinary Tax Credit
	Tax on Income Earned in Germany@45%	€                     18,000
	Tax on Income Earned in Germany@20%	€                       8,000
		€                       8,000
	Ordinary Tax Credit allow deduction of the foreign source tax
	from tha tax calculated on the worldwide income to provide relief from double taxation.
	Hence Ordinary Tax Credit is lower of:
	Rate of tax payable in Resident Country   or
	Rate of tax payable in Country where Income is earned.
	In our case Tax rate in UK is 20% which is less than Tax rate In Germany i.e 45%
	Hence Tax Credit is calculated on Euros 40000 @ 20%.
2.2	Calculation of Tax due from Bob in 2019
	Earnings in Germany	€                     40,000
	Earnings in UK	€                     30,000
	Total Earnings	€                     70,000
	Tax in Resident Country (UK) @50%	€                     35,000
	Less: Ordinary Tax Credit	€                     18,000
	Tax due in UK	€                     17,000
	Workings:
	Calculation of Ordinary Tax Credit
	Tax on Income Earned in Germany@45%	€                     18,000
	Tax on Income Earned in Germany@50%	€                     20,000
		€                     18,000
	In our case Tax rate in UK is 50% wheres Tax rate In Germany is 45%
	Hence Tax Credit is calculated on Euros 40000 @ 45%.
2.3	Calculation of Tax due from Bob in 2019
	Earnings in Germany	€                     40,000
	Earnings in UK	€                     30,000
	Total Earnings	€                     70,000
	Tax in Resident Country (UK) on Euros 30000@30%	€                       9,000
	Tax in Germany on Euros 40000 @45%	€                     18,000
	Tax due in UK	€                       9,000
	In case of Exemption with Progression method Tax is calculated on income
	earned in Home Country at the rate applicable to worldwide Income.
	Tax Rate in UK
	Income Earned	Tax Rate
	Upto Euros 40000	20%
	Above Euros 40000	30%
	In our Case Total Income(Worldwide) Earned by Bob is Euros 70000 for which applicable rate in UK
	is 30%. Hence in the given method Income earned in UK would be taxable at 30% even
	Income earned in home country falls in lower tax bracket.