Withholding Tax on Cross-Border Payments
Written and reviewed by the International Tax Accountants editorial team. Last reviewed 29 July 2026.
Withholding tax is tax that the payer deducts from a cross-border payment and accounts for to HM Revenue and Customs, rather than tax the recipient pays later. For a United Kingdom business making payments abroad, the duty to withhold can arise on some payments and not others, and getting it wrong exposes the payer, not only the recipient.
The two payments that most often carry a United Kingdom duty to deduct are yearly interest and royalties. Dividends paid by United Kingdom companies are treated differently. Understanding which category a payment falls into is the first step, because the duty to deduct is a matter of law, not choice.
The duty to deduct falls on interest and on royalties, dividends sit outside it, and treaty relief now operates differently since the loss of the European directive route. A deduction taken here often gives rise to double-taxation relief in the other country, where the same income is taxed again.
Interest and the Duty to Deduct
Where a United Kingdom business pays yearly interest to a person outside the United Kingdom, there is a duty to deduct income tax at the basic rate, currently 20%, under section 874 of the Income Tax Act 2007. The payer accounts for the tax deducted to HM Revenue and Customs.
The basic-rate deduction can be reduced, sometimes to nil, under the relevant double taxation treaty, but only where the treaty applies and the correct procedure is followed. The rate to write into any agreement should be described as the basic rate, currently 20%, rather than treated as a permanently fixed figure.
Royalties Paid Abroad
Royalties are the second category. A duty to deduct income tax at the basic rate, currently 20%, applies to certain royalty payments under section 906 of the Income Tax Act 2007. As with interest, the payer deducts the tax and accounts for it.
The treaty position matters here too. Where a treaty covers the royalty, it can reduce the rate below the basic rate or remove the deduction entirely, provided the recipient qualifies under the treaty and the process is followed correctly.
Why Dividends Are Different
The United Kingdom does not levy withholding tax on dividends paid by United Kingdom companies. The duty to deduct in Part 15 of the Income Tax Act 2007 is imposed on interest and royalties, not on dividends, so a United Kingdom company paying a dividend abroad does not deduct United Kingdom tax from it.
This is a genuine difference in treatment rather than a relief that has to be claimed. It means the analysis for a dividend is not the same as for interest or a royalty, and the three should not be treated as a single category when a group plans its cross-border payments.
Treaty Relief After Brexit
Before Brexit some intra-group interest and royalty payments could be paid free of withholding under the European Union Interest and Royalties Directive. That relief ceased for payments made on or after 1 June 2021, so the directive route is no longer available. You can identify the applicable agreement from the United Kingdom tax treaties published by HM Revenue and Customs.
Relief from United Kingdom withholding now depends solely on the relevant double taxation treaty. A group that once relied on the directive should check that a treaty gives the same or a similar reduction, and should follow the treaty procedure, because the automatic directive relief is gone.