A UK Business Guide to Withholding Tax Limits
If your business operates across borders, you are likely to encounter the concept of withholding tax. This is a tax that is deducted at source – meaning it is taken out of certain types of payments before the recipient receives the funds. Common examples include interest payments, royalties, and dividends made from a UK company to a non-UK resident.
In practice, withholding tax is a mechanism used by governments to ensure they collect tax on income that leaves their jurisdiction. For UK businesses, this means that when making certain payments abroad, you may need to deduct tax and pay it directly to HMRC rather than paying the full amount to the overseas recipient.
But how do withholding tax limits actually work in the UK, and when do they apply? The rules are shaped not only by UK legislation but also by a network of double taxation treaties, which can reduce or even eliminate the amount of withholding tax due.
This post will cover:
- The basics of withholding tax and when it applies in the UK.
- The standard UK withholding tax rates.
- How double taxation agreements affect the limits.
- The reporting and compliance obligations for UK businesses.
- Practical steps to manage withholding tax efficiently.
By the end, you will understand both the UK’s standard withholding tax limits and how to navigate the complexities of international tax rules, helping your business stay compliant while avoiding unnecessary tax leakage.
Tip: Even if a double taxation treaty reduces withholding tax to zero, UK businesses must usually follow formal HMRC procedures to apply that reduced rate. Simply assuming no tax is due is a common mistake.
Useful resource: HMRC guidance on withholding tax
What is Withholding Tax?
Withholding tax is a mechanism used by governments to make sure tax is collected on income that is paid across borders. Instead of waiting for the recipient to declare and pay tax in their home country, the payer deducts the tax at source and pays it directly to the local tax authority.
In the UK, withholding tax usually applies when a UK business makes certain types of payments to a person or company that is not resident in the UK for tax purposes.
Common situations where UK withholding tax applies
- Dividends paid to overseas shareholders: Although most UK dividends are not subject to withholding tax, special rules can apply if anti-avoidance provisions are triggered or if the payment is routed through specific jurisdictions.
- Interest payments on loans to overseas entities: For example, a UK company paying interest to a foreign lender may have to deduct withholding tax at the basic rate of 20 percent, unless a double taxation treaty provides for a reduced rate.
- Royalties for the use of intellectual property: If a UK business pays royalties to a foreign company for trademarks, patents, or software rights, withholding tax may be due at 20 percent unless a treaty relief applies.
Example
A UK software company pays £50,000 in royalties to a US company for the use of its technology. Without a treaty, the UK company must deduct £10,000 (20 percent) and pay it to HMRC, sending only £40,000 to the US company. If the UK-US double taxation treaty applies and reduces the rate to 0 percent, the full £50,000 can be paid without deduction but only if the correct claim procedure is followed with HMRC.
Tip: Many UK businesses mistakenly assume that because a treaty exists, they can automatically apply the reduced withholding tax rate. In reality, HMRC usually requires an application for treaty relief before the lower rate can be used.
Useful links: HMRC guidance on payments to overseas companies
Withholding Tax Limits in the UK
Unlike some countries that apply a flat withholding tax rate across all cross-border payments, the UK has different rules depending on the type of payment being made. The key limits are:
Dividends
- No withholding tax is applied to dividends paid by UK companies to overseas shareholders.
- This makes the UK an attractive holding company location in international tax planning.
- However, anti-avoidance rules (such as the controlled foreign companies regime) may apply in certain circumstances.
Interest
- The default withholding tax rate on interest paid to non-UK residents is 20 percent.
- This applies to payments on loans, bonds, or other financing arrangements.
- The rate can be reduced or eliminated if the UK has a double taxation treaty with the recipient’s country, and the treaty conditions are met.
Royalties
- Royalties paid to overseas recipients are generally subject to 20 percent withholding tax.
- This covers payments for intellectual property such as trademarks, patents, software, and franchise rights.
- As with interest, treaty relief can reduce this rate, sometimes to 0 percent.
The Role of Double Taxation Treaties
The UK has signed more than 130 double taxation treaties worldwide, many of which provide reduced rates or full exemptions from withholding tax on interest and royalties. The exact rate depends on the terms of the treaty with the recipient’s country.
Example:
- A UK company pays royalties to a French company. Under the UK–France treaty, the withholding tax rate may be reduced to 0 percent.
- The same UK company pays royalties to a company in a jurisdiction without a treaty. In that case, the full 20 percent rate applies.
Tip: Even when a treaty provides for a reduced rate, businesses usually need to apply to HMRC in advance (for example, using the DT-Company form) before making payments at the lower rate. Otherwise, the UK payer must deduct the full 20 percent.
Useful links:
