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I am registered with HMRC in the UK as a sole trader for the 2014/15 tax year. During that year I worked for a Japanese company as an employee in Japan for a few months.

Looking at my payslips I have worked out I only paid about 3% tax on my Japanese income. (I'm assuming this is because I only worked for a few months and I was part time.)

When calculating the foreign tax credit relief it states

You claim either (whichever is smaller):

  • the foreign tax paid (or allowed by treaty)
  • the UK tax due

-- https://www.gov.uk/government/publications/calculating-foreign-tax-credit-relief-on-income-hs263-self-assessment-helpsheet/hs263-calculating-foreign-tax-credit-relief-on-income-2015

The amount of foreign tax paid is about 3% but the amount allowed by the treaty is 10% (Scroll down to Japan in this PDF to see the treaty allowance)

I take it I have to use 3% when calculating my tax relief or can I use 10%?

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Reading through the examples on the HS263 helpsheet, looking at the linked worksheet, and looking at HMRC's detailed manuals (written for their internal use, but publicly available), everything points to the credit being for the foreign tax actually paid - all the examples refer to that rather than the treaty allowance.

I suspect that the treaty allowance is just a backstop to ensure that the credit can't get too high. The purpose of these agreements is to save you from being taxed twice on the same income, so that you only pay the maximum of the taxes in the two countries rather than the sum of the taxes. There's no reason for them to want to give you a discount.

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The grammar is confusing, but the intent looks straightforward to be the smallest rather than smaller of the three things listed:

  • Foreign tax paid
  • Tax allowed by treaty
  • UK tax due

I'm not a tax expert though, especially in the UK.

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