The tax legislation requires the deduction of tax from yearly interest that arises in the UK. This typically refers to interest that is subject to Income Tax or Corporation Tax.

The legislation requires the deduction of tax from yearly interest, if:

• paid by a company, a local authority, a firm in which a company is a partner, or
• paid by any person to another person whose usual ‘place of abode’ is outside the UK.

The tax must be deducted by the person or entity making the payment at the savings rate in force for the tax year in which the payment is made. In practice, the main circumstances where tax is deducted are where a company makes a payment of interest to an individual or other non-corporate person, or where interest is paid by a person (individual, trustee or corporate) to another person whose usual place of abode is outside the UK.

However, some exclusions apply. For example, interest paid by deposit takers, interest paid to a bank or building society, interest paid from UK public revenues or under the former Mortgage Interest Relief At Source (MIRAS) scheme. Companies, local authorities and ‘qualifying firms’ (a firm which includes a company or local authority as a partner) are also exempt from the requirement to deduct tax from interest paid to certain recipients.

It is important to note that statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998, is not classified as yearly interest and does not fall under these rules.

The remittance basis of taxation for non-UK domiciled individuals (non-doms) was replaced with the new Foreign Income and Gains (FIG) regime from April 2025. This new regime is based on tax residence rather than domicile. Under the new rules, nearly all UK-resident individuals must report their foreign income and gains to HMRC, regardless of whether they had previously claimed remittance basis or are claiming relief under the FIG regime.

Former remittance basis users not eligible for the new FIG relief are now taxed on newly arising foreign income and gains in the same way as other UK residents. However, they will still be taxed on any pre-6 April 2025 FIG that is remitted to the UK.

A key feature of the new regime is the 4-year FIG relief. This is available to new UK residents who have not been UK tax resident in any of the 10 preceding tax years. These individuals can opt in to receive full tax relief on their FIG for up to four years. Claims must be made via a self-assessment return, with deadlines falling on 31 January in the second tax year after the relevant claim year. The FUG relief lasts for a maximum of 4 consecutive years starting from when a person first became a UK tax resident. Claims can be made selectively in any of the four years, but any unused years cannot be rolled over.

The types of foreign income which are eligible for relief includes:

• profits of a trade carried on wholly outside the UK
• profits of an overseas property business
• dividends from non-UK resident companies
• interest, such as interest paid on a foreign bank account

An individual’s ability to qualify for the 4-year FIG regime will be determined by whether they are UK resident under the Statutory Residence Test (SRT).