U.S. Income Tax Return Preparation, Advice and Planning for American Expatriates Living in the United Kingdom (England)




Our UK Phone Number: 020 3129 8742

At Taxes for Expats we have been preparing U.S. tax returns for Americans living in the U.K. for over 20 years.  We have many clients living in the U.K. and know how to integrate your U.S. taxes with the British taxes you already pay. Any income tax you pay in Britain can be claimed against the tax liability on your U.S. return on the same income.  We are  also very familiar with such local UK issues as PAYE, Forms P60 & P11D, ISAs, SSAS and how they impact your US tax obligations.


As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of whether you already pay taxes in your residence country. 


We offer professional tax services. That means we figure out the best and most optimal way to file your U.S. tax return and avail you of all possible exclusions and deductions. But just as importantly - avoid the errors that would allow IRS to disallow your return and levy fines & penalties on top. You can also do them yourself - not that we recommend it. For more information please see IRS


The expatriate Foreign Earned Income Exclusion can only be claimed if you file your tax return on a timely basis. It is not automatic if you fail to file and can even be lost.




As an American expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You can not file using the British fiscal year for U.S. tax purposes). You must, however, pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.

There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. They are called informational returns because they result in no tax due. However - if you do not file these form or file them late the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.

If you are self employed under the U.S.- U.K. social security agreement (known as the Totalization Agreement) you must either pay U.S. social security or pay the social security equivalent in the UK if you are self employed. If you are a bona-fide employee you do not have to worry about paying U.S. social security on your wages either in the U.K.

By working with a qualified expatriate tax preparer you can minimize and even eliminate your US tax bill. We have helped hundreds of US expats – over 90 of them have already left us a positive review on independent web sites. Let us also help you with your U.S. tax returns, U.S. tax planning and other U.S. tax and legal concerns. We look forward to solving your tax concerns.

Below we include some information on the U.K. Tax System for American expatriates.

U.K. Taxes

Much like the U.S., U.K. also has a progressive income tax system. British income tax is taken from your salary, much like the way it's done back home. There is nothing for you to fill out unless you are self employed. Her Majesty Revenue & Customs - HMRC - will calculate the tax due unless you are a company director or work for yourself. In that case you'll have to file tax return called Self Assessment. It will include both Pay As You Earn (PAYE) and National Insurance Contributions. If you are staying in the U.K. temporarily, the rules are complicated - more information can be found on the HMRC web site.

Some families are also entitled to tax credits similar to Earned Income Credit. In the U.K. these are called Child Tax Credit and Working Tax Credits. These are based on family income, can supplement a large portion of child care costs, payments made directly via direct deposits, with annual returns required.

Comparison of Income Tax Rates

U.K.
Rate 2010-11 2011-12
Starting rate for savings: 10%* £0-£2,440 £0- £2,560
Basic rate: 20% £0-£37,400 £0- £35,000
Higher rate: 40% £37,401-£150,000 £35,001-£150,000
Additional rate: 50% Over £150,000 Over £150,000


You are able to exclude £7,475 of your income as a personal allowance. Note that this will be reduced by £1 for every £2 of income over £100,000, regardless of age.

US Income Brackets and Tax Rates

Marginal Tax Rate Single Married Filing Jointly or Qualified Widow(er) Married Filing Separately Head of Household
10% $0 - $8,375 $0 - $16,750 $0 - $8,375 $0 - $11,950
15% $8,376 - $34,000 $16,751 - $68,000 $8,376 - $34,000 $11,951 - $45,550
25% $34,001 - $82,400 $68,001 - $137,300 $34,001 - $68,650 $45,551 - $117,650
28% $82,401 - $171,850 $137,301 - $209,250 $68,651 - $104,625 $117,651 - $190,550
33% $171,851 - $373,650 $209,251 - $373,650 $104,626 - $186,825 $190,551 - $373,650
35% $373,651+ $373,651+ $186,826+ $373,651+

VAT

Unlike the US in the U.K. there is no sales tax. Instead there is something called a Valued Added Tax (VAT) an it's already calculated in the price of goods. What it means is that the price you see is the price you pay at the till or checkout. Right now the VAT is set at 20% (having been raised from 17.5% in January 2011). It is applied to most goods/services except children's clothes, fresh food products and books/magazines. For more information please see the HMRC Web Site or this article from the Telegraph.

Council Tax

Council Tax is the British equivalent of property tax. It is paid by tenants/residents and not landlords of rented property. You can find more information about U.K. Taxes at Direct.gov.uk.

Who is considered a UK Resident?

In the United Kingdom you are defined as a resident by the rules set out by the HMRC. In short, your residency is determined by your long-term intentions and the number of days you actually spend in the country. For the purpose of this exercise each day is counted if you are in the UK at midnight.

·    If you are in the UK and do not intend to stay for more than two years, you are a resident for the tax year if 183 or more days are spent in the UK.  If you spend less than 183 days in the UK, you will not be considered a resident for tax purposes.
  • If over the last four tax years you have spent 91 days or more on average per year in the UK, you will be considered a resident for tax purposes. You would be considered a resident for tax purposes from the date of your arrival if you intended to spend more than 91 days, on average per year, in the UK.
  • If you come to the UK and expect to stay for two years or more, you are considered a tax resident from the first day that you arrive.

There are also two types of residents: Ordinarily and not ordinarily.
·    Resident and ordinarily resident – When you come to the UK and expect to stay for three years or more. This can be proven by purchasing or leasing property available for three years or more.
·    Resident and not ordinarily resident – When you have been outside the UK and intend to come to the UK for at least two years, but less than three years.

What is a Domicile?

For UK tax purposes, domicile is important for determining how you are taxed on your worldwide income. Domicile is defined where a person has their long-term, permanent home. It is different from citizenship or residence.
Your domicile or origin is the same domicile as your father’s domicile at the time of birth.  If your father changed domicile while you were still a dependent, your domicile will also have changed. You can, however, change your domicile. In order to do so, you must cut links with your previous domicile, move to a new jurisdiction and have a permanent home in that jurisdiction.  It is difficult to acquire domicile of choice compared to domicile of origin, and the responsibility to prove that your domicile has changed lies on you.
Most expats in the UK are considered non-UK domiciled.

UK Tax Due Date

The tax year in the UK is different from the tax year for the US – April 6th through April 5th.  Tax returns need to be filed with the HMRC before October 31st of the tax year if they are being filed by paper.  If you are e-filing, you have until January 31st of the year following the tax year. HMRC does not offer extensions.  For payment, the UK has a withholding system (PAYE) that will go through your employer’s payroll.  For non-wage income that does not have withholding, payments are due on January 31st of the tax year.  Payments must be completed by the 31st of July following the tax year.

Social Security in the UK

As a general rule of thumb, expatriates are going to be required to pay into the UK’s National Insurance once you have taken up employment (or are self-employed).  This is required in order to cover the costs of health insurance, welfare, pension plans, workers compensation and unemployment insurance, as well as other social programs currently in place in the UK.  Per the US-UK Social Security Agreement, you will be required to pay Social Security to the country you are working in.  However, if your employer sends you to the UK for five years or less, you will continue to be covered by the US and exempt from coverage in the UK. If you are self-employed, you will pay to the country in which you reside.

Is Foreign Income Taxed Within the UK?

The tax paid on worldwide income will depend on your residency and domicile status in the UK.  If you are considered a resident in the UK, you are taxed on all of your investment income, no matter the location.
If you are a resident but not domiciled in the UK, you are able to file using the remittance basis for both foreign income and capital gains. If you are a resident and domiciled, but are not ordinarily resident, you can use remittance only for your foreign income – not capital gains.  Remittance basis allows you to elect to be liable to pay UK tax on investment income remitted in the UK.  Income must be remitted if it is brought to the UK or paid to you in the UK. It is good to contact a tax advisor regarding overseas bank accounts in order to avoid costly mistakes for non-UK domiciled residents.

US – UK Tax Treaty

The US-UK tax treaty is useful for defining the terms for situations when it is unclear to which country taxes should be paid.  The country that receives the tax payment is usually determined by the taxpayer’s resident status in each country.  It is in place to help relieve double taxation of dual citizens while also being available to explain any tax matters that may be unclear.

Other Taxes in the UK

In addition to income tax on salaries paid, there are other forms of income that are taxed in the UK.
1. Non-cash compensation is considered taxable.  This includes housing stipends, relocation expenses, meal and clothing allowances, commuting costs, club memberships, education reimbursement or home leave payments.  There are exceptions, but in general, expats can expect to pay taxes on non-cash compensation in the UK, including national insurance.

2. Any capital gains are also going to be taxed, including the sale of your only or main residence, life insurance policies, corporate bonds, motor cars, gifts of assets to charity, gains from ISA accounts, and UK government bonds.  If you are a resident or ordinarily resident and domiciled in the UK, this includes worldwide capital gains.  If you are not domiciled, it will only be on capital gains earned in the UK, allowing for election by the remittance basis for overseas gains.

3. For estate taxes, you can expect to pay inheritance tax to worldwide assets if you are domiciled in the UK.  HMRC deems you responsible for inheritance taxes if you have been resident in the UK for 17 or more of the last 20 years.  In the case that you are domiciled in the US, you are only responsible for inheritance on assets located inside the UK.