Withholding tax in the United Kingdom is a tax collection mechanism where the payer deducts tax from certain payments before transferring the remaining amount to the recipient. The deducted amount is sent directly to HM Revenue & Customs, which administers UK taxes under legislation such as the Income Tax Act 2007.
UK withholding tax commonly applies to cross-border payments including interest, royalties, and some property income distributions paid to overseas individuals or companies.
Businesses making international payments may also need to consider Double Taxation Agreements, which can reduce or eliminate withholding tax rates.
Understanding UK withholding tax rules helps businesses, investors, and non-resident recipients manage tax obligations, avoid penalties, and claim treaty relief or refunds where tax has been over-withheld.
What is Withholding Tax? A Simple Definition
Withholding tax (often abbreviated to WHT) is a type of Income Tax or Corporation Tax that is collected at the point a payment is made, rather than at the end of the tax year through a return.
The payer, whether that is a company, a bank, or another organisation, deducts the tax from the gross amount and passes it directly to HMRC on behalf of the recipient.
Think of it this way: if a UK company owes £10,000 in interest to an overseas lender and the applicable withholding tax rate is 20%, it will pay the lender £8,000 and send £2,000 to HMRC. The lender receives the net amount, and HMRC collects the tax without waiting for anyone to file a return.
Withholding Tax in the UK – Quick Summary (2026)Standard WHT rate: 20% on interest and royalties Dividends: Generally paid gross, no WHT for most shareholders REIT / PAIF distributions: 20% (increasing to 22% from 6 April 2027) Tax treaties: Can reduce WHT on interest and royalties to 0%–10% Reporting form for companies: CT61 (filed quarterly to HMRC) Current tax year: 6 April 2025 to 5 April 2026 |
What is Withholding Tax and How Does It Work?
Withholding tax works by placing the responsibility for collecting and remitting tax on the payer rather than the recipient. Here is the basic process:
- A payment is made, for example, interest on a loan, a royalty for using intellectual property, or a distribution from a property fund.
- The payer checks whether withholding tax applies to that payment under UK law or the relevant double taxation treaty.
- If it does, the payer deducts the correct percentage and pays the net amount to the recipient.
- The deducted amount is reported to HMRC using form CT61 and paid across within 14 days of the end of each quarter.
- The recipient can then either accept this as their final tax liability or claim relief under a tax treaty if they are entitled to a reduced rate.
What Types of Payments Does Withholding Tax Apply to in the UK?
Not every payment attracts withholding tax. In the UK, it primarily applies to the following:
- Interest payments: When a UK company pays interest on a loan or debt to someone based overseas, it must deduct 20% withholding tax unless an exemption or treaty applies.
- Royalties: Payments for the use of intellectual property such as patents, trademarks, copyrights, and brand names are subject to 20% WHT under UK domestic law, regardless of where the recipient is based.
- Property Income Distributions (PIDs): Distributions from Real Estate Investment Trusts (REITs) and Property Authorised Investment Funds (PAIFs) are currently subject to 20% WHT. This rate is set to increase to 22% for distributions made on or after 6 April 2027.
- Certain annual payments: Some ‘qualifying annual payments’ may also attract WHT depending on their nature. These cases can be complex and specialist advice is recommended.
It is worth noting that ordinary dividends paid by UK companies are generally not subject to withholding tax. Most UK dividends are paid gross, meaning the full amount goes to the shareholder with no tax deducted at source, which is one reason the UK has traditionally been seen as an attractive location for holding companies.
How Do UK Income Tax Rates Relate to Withholding Tax?
To understand why 20% is the standard withholding tax rate in the UK, it helps to look at the UK’s Income Tax bands. For the 2025 to 2026 tax year (running from 6 April 2025 to 5 April 2026), HMRC sets the following rates for England, Wales, and Northern Ireland:
| Band | Taxable Income | Tax Rate |
| Personal Allowance | Up to £12,570 | 0% |
| Basic Rate | £12,571 to £50,270 | 20% |
| Higher Rate | £50,271 to £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
The standard Personal Allowance is £12,570. This is the amount of income you can earn tax-free. If your adjusted net income exceeds £100,000, this allowance reduces by £1 for every £2 over that threshold, disappearing completely at £125,140.
The withholding tax rate of 20% mirrors the basic rate of Income Tax. HMRC sets it at this level so that overseas recipients are broadly taxed in line with a basic rate UK taxpayer. The recipient can then claim credit for the tax already withheld when they file their own return in their home country, or apply for a refund if a double taxation treaty entitles them to a lower rate.
If you live in Scotland, different Income Tax rates and bands apply to non-savings, non-dividend income. The withholding tax rules, however, apply UK-wide and are not affected by Scottish Income Tax rates.
What are the Current UK Withholding Tax Rates?
The table below sets out the standard UK withholding tax rates for common payment types, alongside what may apply once a double taxation treaty is in place. These figures are correct for the 2025 to 2026 tax year.
| Payment Type | UK Domestic WHT Rate | With Double Tax Treaty |
| Interest | 20% | Often 0%–10% |
| Royalties | 20% | Often 0%–10% |
| Dividends (standard) | 0% (paid gross) | N/A (generally no WHT) |
| REIT / PAIF distributions | 20% (rising to 22% from 6 April 2027) | May vary by treaty |
These rates can change depending on the specific double taxation agreement the UK holds with the recipient’s country of residence. The UK has one of the world’s largest networks of tax treaties covering over 130 countries, so the applicable rate will often be lower than the domestic standard rate.
Who Needs to Pay Withholding Tax in the UK?
Withholding tax in the UK is not something most employees or self-employed sole traders will ever deal with directly. It tends to affect businesses that make payments to overseas parties, or individuals who receive certain types of investment income. Below is a straightforward breakdown of who it affects.
| Scenario | WHT Applicable? |
| UK company paying interest to overseas lender | Yes – 20% unless treaty reduces it |
| UK company paying royalties to overseas IP holder | Yes – 20% unless treaty reduces it |
| UK company paying dividends to overseas shareholder | Generally no – dividends paid gross |
| UK REIT paying property income distributions | Yes – 20% (22% from April 2027) |
| Sole trader receiving bank interest on savings | Tax deducted at source by bank in some cases |
Does It Apply to Sole Traders and Freelancers?
For most self-employed people in the UK, withholding tax is not a day-to-day concern. If you are a sole trader working with UK clients, your income is reported through Self Assessment and taxed in the normal way, withholding tax does not typically apply to service fees or consultancy income.
However, if you are a freelancer or creative who licenses intellectual property, such as a photographer licensing images, a software developer licensing code, or a writer licensing their work, and you receive royalties from overseas, the foreign payer may deduct withholding tax in their country before the money reaches you. In that case, you can often claim relief or a tax credit through a double taxation treaty.
Does Withholding Tax Affect Small Business Owners?
If you run a small limited company that borrows money from an overseas lender, pays royalties to a foreign IP holder, or receives a licence fee from abroad, withholding tax rules may apply. You will need to:
- Check whether the payment type is subject to UK withholding tax.
- Identify whether a double taxation treaty reduces the rate.
- Deduct the correct amount and report it to HMRC using form CT61.
- Ensure the filing and payment deadlines are met, CT61 is due within 14 days of each quarterly end date.
Getting this wrong can result in penalties and interest from HMRC, so if you are unsure whether a payment you are making or receiving falls under withholding tax rules, it is worth speaking to an accountant before you make the payment.
What are Double Taxation Treaties and How Do They Affect Withholding Tax?
A double taxation treaty (DTT) is an agreement between two countries that determines how income is taxed when it flows between them. The purpose is to prevent the same income being taxed in full in both countries — once by the country it originates from, and again by the country the recipient lives in.
For withholding tax, a DTT can reduce or even eliminate the amount deducted at source. For example, under the domestic UK rules, a royalty payment to a US company would attract 20% withholding tax. However, under the UK–US double taxation treaty, that rate may be reduced significantly, depending on the circumstances.
| Important: Treaty Relief is Not Automatic
You cannot simply apply a lower treaty rate without following HMRC’s process. The recipient must provide a Certificate of Tax Residence from their home country’s tax authority. For interest payments, HMRC clearance is required before paying gross or at a reduced rate. For royalties, you can apply a treaty rate if you reasonably believe you are entitled to it, but you remain liable if that belief turns out to be wrong. Always check the specific treaty and, where in doubt, seek professional advice before making the payment. |
Post-Brexit, the EU Interest and Royalties Directive no longer applies to payments between UK companies and EU-based entities. This means you can no longer rely on EU-wide exemptions for these flows, you must instead look to the specific bilateral treaty between the UK and the relevant EU country.
Does Withholding Tax Apply to Savings Interest in the UK?
For most individuals, savings interest in the UK is no longer taxed at source by banks. Banks stopped deducting basic rate tax from savings interest in April 2016.
Since then, interest is paid gross (in full), and any tax owed is collected through your tax return or via an adjustment to your tax code.
That said, the tax you owe on savings interest still depends on your overall income. For the 2025 to 2026 tax year:
- Basic rate taxpayers can receive up to £1,000 of savings interest tax-free through the Personal Savings Allowance.
- Higher rate taxpayers can receive up to £500 of savings interest tax-free.
- Additional rate taxpayers (income over £125,140) receive no Personal Savings Allowance.
- Lower earners may benefit from the Starting Rate for Savings — if your non-savings, non-dividend income is below £17,570, you may receive up to £5,000 of interest tax-free.
- All interest earned within an ISA is entirely tax-free.
If you receive interest from an overseas bank or investment, the foreign institution may deduct withholding tax in their country before the money reaches you. You can usually claim relief on this in your UK Self Assessment tax return.
Can I Claim Back Withholding Tax in the UK?
Yes, in many cases you can reclaim withholding tax, either in full or in part. How you do this depends on whether you are reclaiming tax withheld by a UK payer or tax withheld by an overseas payer.
Reclaiming Withholding Tax Deducted in the UK
If you are an overseas business or individual and a UK payer has deducted withholding tax from a payment to you, you can make a claim for relief under the relevant double taxation treaty. The process typically involves:
- Obtaining a Certificate of Tax Residence from your home country’s tax authority, confirming you are a resident entitled to treaty benefits.
- Submitting a claim to HMRC using the appropriate treaty relief form. HMRC has specific forms for different countries and payment types.
- HMRC will review the claim and, if approved, will either authorise future payments to be made at the reduced rate or refund any tax overpaid.
Reclaiming Foreign Withholding Tax Through Your UK Tax Return
If you are a UK resident who has had withholding tax deducted by an overseas payer, for example, a US company that deducted 30% on a dividend you received, you can often claim relief through your UK Self Assessment tax return. This is done through the Foreign Tax Credit Relief section of your return.
The amount you can reclaim is usually limited by the lower of the foreign tax withheld and the equivalent UK tax that would apply to that income. You will not typically get a full refund of the overseas tax — but you will avoid being taxed twice on the same income.
What If You Have Been Taxed Too Much?
If you believe you have had too much withholding tax deducted, either in the UK or overseas, the first step is to identify whether a double taxation treaty applies and what rate it sets. If you were entitled to a lower rate and the full domestic rate was applied, you can submit a reclaim.
In the UK, this is done through your Self Assessment return or by contacting HMRC directly. Overseas, you would need to follow the reclaim process in that country, which can vary.
Keeping clear records of all payments received, certificates of tax residence, and any correspondence with HMRC or foreign tax authorities is essential for reclaims to be processed efficiently.
How Do UK Companies Report and Pay Withholding Tax to HMRC?
If your UK company makes payments that are subject to withholding tax, such as interest or royalties paid to non-residents, you are required to report and pay the deducted tax to HMRC using form CT61.
- CT61 is filed quarterly, covering the periods ending 31 March, 30 June, 30 September, and 31 December.
- The return and payment are due within 14 days after the end of each quarter, so 14 April, 14 July, 14 October, and 14 January respectively.
- Even if you have applied a reduced treaty rate rather than the full 20%, you still need to file a CT61 and include those payments.
- Failing to file on time or paying late will trigger interest charges and potential penalties from HMRC.
If you are unsure whether a payment you are making requires a CT61 submission, always check with a qualified accountant before the payment is made. HMRC will not generally accept ignorance as a reason for non-compliance, and the liability for any underpaid withholding tax falls on the payer, not the recipient.
What are the Most Common Withholding Tax Mistakes UK Businesses Make?
For business owners who are new to cross-border payments, withholding tax is one of the easier areas to get wrong. Here are the most frequent issues we see:
- Assuming dividends are always exempt: While ordinary dividends are generally paid gross, REIT and PAIF distributions are not. Always check the type of income before assuming no withholding applies.
- Applying a treaty rate without the correct paperwork: Paying at a reduced treaty rate without first obtaining a Certificate of Tax Residence from the recipient leaves the payer exposed if HMRC later challenges it.
- Missing CT61 deadlines: These quarterly deadlines are easy to overlook, especially for smaller businesses. Set reminders well in advance of each due date.
- Not accounting for post-Brexit changes: The EU Interest and Royalties Directive no longer applies to UK-EU payments. Businesses that previously relied on EU exemptions for intra-group flows need to check their treaty position.
- Confusing withholding tax with payroll taxes: PAYE is a separate system. Withholding tax on interest and royalties is reported through CT61, not through your payroll.
Summary – Key Points About Withholding Tax in the UK
- Withholding tax is deducted at source by the payer and passed directly to HMRC.
- The standard UK rate is 20% for interest and royalties paid to non-residents.
- Most dividends are paid gross, withholding tax does not generally apply to them.
- REIT and PAIF property income distributions attract 20% WHT, rising to 22% from 6 April 2027.
- Double taxation treaties can reduce the rate to as low as 0%, but relief is not automatic and requires proper documentation.
- UK companies report withholding tax to HMRC quarterly via form CT61.
- Overseas recipients who have had UK WHT deducted can claim relief through HMRC.
- UK residents who have had foreign WHT deducted can claim relief through Self Assessment.
Not Sure How Withholding Tax Applies to Your Business?
Withholding tax rules can be complex, especially when international payments are involved. At Micro Entity Accounts, we help UK business owners and self-employed individuals understand their tax obligations, claim back what they are owed, and stay on the right side of HMRC. Whether you need help with a CT61 filing, treaty relief claims, or general tax advice, we are here to make things straightforward.
Disclaimer: The content on MicroEntityAccounts is for informational purposes only and do not constitute tax or financial advice. We recommend consulting a certified tax professional or the HM Revenue and Customs Dept (HMRC) for accurate guidance. MicroEntityAccounts is not responsible for any decisions made based on the information provided.
