Tax guide for Americans in the UK
Moving to the United Kingdom is a thrilling adventure for American expats, but it also comes with a new set of responsibilities, particularly understanding the UK tax system.
Whether you're moving for work, love, or adventure, it's important to grasp the implications of your residency status on your taxes.
This guide aims to explain the UK tax system to Americans living across the pond, so you can meet your obligations without paying more than you have to.
Table of contents
- Resident vs. non-resident of UK
- Who can be considered a resident of the UK
- Types of taxation in the UK
- Tax rate in the UK compared to the US
- Taxable vs non-taxable income in the UK
- Filing income tax returns in the UK
- Social Security in the UK
- UK pension system
- Tax deductions for expats in the UK
- Tax advantages for expats
- The tax treaty between the US and UK
- Most popular tax forms for US expats
- UK tax forms for US expats
Resident vs. non-resident of UK
The first thing you need to be aware of is that your tax status in the UK is one of the most important factors in determining your tax liability. The UK tax system classifies individuals as either resident or non-resident, with different tax consequences..
- Residents are typically taxed on their worldwide income, which means that income earned both inside and outside the UK is subject to UK taxes.
- Non-residents are usually taxed only on their UK-sourced income. This means that if you are considered a non-resident, only the income that you earn within the UK will be taxed by the UK government.
Who can be considered a resident of the UK
The Statutory Residence Test (SRT) is the decisive framework used to determine tax residency in the UK. You're considered a UK resident for tax purposes if you meet any of the following conditions:
- you spend 183 days or more in the UK during the tax year
- have a home in the UK
- carry out full-time work in the UK
If your situation is less clear-cut, your residency may be determined by the 'sufficient ties test'. This involves a combination of factors such as family, accommodation, work, and the number of days you've spent in the UK.
Domicile is a legal term used in the UK to determine a person's permanent home and is not necessarily the same as residency. For tax purposes, your domicile can significantly impact your exposure to UK inheritance tax (IHT) on your worldwide assets.
There are three types of domicile under UK law:
- Domicile of origin: This is usually the domicile of your father at the time of your birth and is assigned to you automatically.
- Domicile of choice: As an adult, you can acquire a domicile of choice by moving to a new country with the intention of living there permanently or indefinitely, renouncing your domicile of origin.
- Deemed domicile: For tax purposes, you can be deemed domiciled in the UK if you have been a UK resident for at least 15 of the previous 20 tax years, or if you have had a domicile of choice in the UK and returned to it after a period of absence.
For American expatriates, determining whether the UK is considered to be their domicile is crucial as it affects their UK tax obligations. Those domiciled in the UK are generally subject to UK tax on their worldwide income and gains.
Conversely, those who are not domiciled in the UK have the option of being taxed on a remittance basis, which means they only pay UK tax on the income they remit to the UK.
Types of taxation in the UK
The UK tax system is comprehensive and includes various forms of tax to which residents and non-residents may be subject.
In order to ensure that they remain compliant while optimizing their tax obligations, an understanding of these taxes is essential for American expats.
Personal income tax rates
Income tax in the UK is levied on various forms of income, including wages, pensions, benefits, and rental income. The rates are progressive, meaning that the rate of tax increases as income increases.
The personal income tax rates for the 2023/2024 tax year are as follows:
|Band||Tax rate (%)||Taxable income 22/23 (GBP)||Taxable income 23/24 (GBP)|
|Starting rate for savings*||0||0-5,000||0-5,000|
|Additional rate||45||150,000 and above||125,140 and above|
*The 0% starting rate applies exclusively to income from savings. If income from other sources, which is considered first in the tax calculation, exceeds this threshold, then the 0% rate will not be applicable.
Personal Allowance decreases by £1 for every £2 of income above £100,000, and there is no Personal Allowance for income over £125,140.
Alternative Minimum Tax (AMT)
Unlike the United States, the UK does not have a system akin to the Alternative Minimum Tax.
The AMT in the US is designed to ensure that individuals and corporations that benefit from certain exclusions, deductions, or credits pay at least a minimum amount of tax.
In the UK, the tax system is structured differently, and there are no parallel calculations to ensure a minimum tax level. Instead, the UK employs anti-avoidance legislation and rules to address tax base erosion and ensure that taxpayers contribute their fair share to the treasury.
Local income taxes
The UK does not have local or state income taxes as the United States does. Instead, the income tax is collected by the central government, Her Majesty's Revenue and Customs (HMRC).
Capital Gains Tax (CGT)
Capital Gains Tax in the UK is a tax on the profit when you sell (or 'dispose of') something (an 'asset') that has increased in value. It's the gain you make that's taxed, not the amount of money you receive.
As of the tax year 2023/2024, the tax-free allowance for capital gains is £12,300, which means you only have to pay CGT on gains that exceed this amount.
CGT rates on most taxable gains for the 2023/2024 tax year are as follows:
- Basic Rate Taxpayers: 10% on gains they make above the annual exempt amount.
- Higher and Additional Rate Taxpayers: 20% on gains they make above the annual exempt amount.
Higher rates of CGT can apply to the sale of certain types of assets, such as residential property not covered by Private Residence Relief, with an 18% rate for Basic Rate taxpayers and 28% for Higher Rate taxpayers.
Entrepreneurs' Relief may also apply, offering a lower CGT rate of 10% on qualifying assets for eligible individuals, with a lifetime limit of £1 million of gains.
Value-Added Tax (VAT)
Value-added tax, or VAT, is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale.
The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in the product that have already been taxed.
In the UK, the standard VAT rate is 20%, applied to most goods and services. There are also reduced rates for certain items - 5% for home energy and sanitation, for example - and a zero rate for essential items like food and children's clothing.
Businesses with a taxable turnover above a certain threshold must register for VAT and charge this tax on their goods and services.
Inheritance Tax (IHT)
Inheritance tax in the UK is a tax on the estate (the property, money, and possessions) of someone who has died.
The standard IHT rate is 40%, charged only on the portion of the estate that is above the threshold of £325,000. There is a reduced rate of 36% if the estate qualifies for a reduction due to a charitable donation.
There are also several exemptions and reliefs that can significantly reduce the IHT liability, such as the transfer of a threshold to a surviving spouse, making the effective threshold for married couples and civil partners up to £650,000.
In addition, the residence nil-rate band (RNRB) - an additional threshold - may apply if the deceased left a home, or an interest in a home, to their children or grandchildren. This can potentially increase the IHT threshold further.
Property taxes in the UK are varied and can be complex, depending on the type and value of the property owned.
Stamp Duty Land Tax (SDLT)
SDLT is payable on the purchase of property or land over a certain price in England and Northern Ireland. The tax rate varies depending on the value of the property, whether the property is residential or commercial, and whether the buyer is a first-time buyer or owns multiple properties.
Annual Tax on Enveloped Dwellings (ATED)
ATED is a tax payable by companies that own UK residential property valued above a certain threshold.
It's designed to discourage the enveloping of high-value residential properties in corporate structures to avoid or minimize taxes.
The charge applies to dwellings valued at more than £500,000 and is payable annually. There are reliefs and exemptions available, for example, for property rental businesses, properties open to the public, and properties being developed for resale by a developer.
Luxury and excise taxes
In the UK, luxury items are often subject to higher rates of Value-Added Tax (VAT), and certain goods that are considered harmful to health or the environment may also carry excise duties.
These goods include:
- hydrocarbon oils (like petrol and diesel)
The rates for these excise taxes are set by the UK government and vary depending on the product. For example, alcohol duties are calculated based on the type and strength of the drink, while tobacco duties are charged per 1,000 cigarettes and by weight for other tobacco products.
Net wealth tax
The UK does not currently impose a net wealth tax. Unlike some other countries, the UK does not calculate a tax based on the net value of all the assets owned by an individual.
However several other taxes can indirectly affect an individual's wealth, such as property tax, capital gains tax, and inheritance tax.
The UK does not have a specific gift tax. Instead, gifts given during a person's lifetime can be subject to Inheritance Tax if the giver dies within seven years of making the gift and their estate is above the IHT threshold.
There are various exemptions, such as small gifts of up to £250 per person per year, gifts between spouses or civil partners, and gifts out of surplus income.
Larger gifts may potentially be taxed on a sliding scale known as 'taper relief' if the donor does not survive the seven years.
Stamp taxes in the UK are a form of tax on legal documents and include Stamp Duty Land Tax (SDLT), Stamp Duty, and Stamp Duty Reserve Tax (SDRT).
- Stamp Duty is payable on paper-based transactions for shares and securities. The rate is generally 0.5% of the value of the shares.
- SDRT is charged on electronic share transactions and is also set at 0.5%.
These taxes are designed to be paid by the purchaser or transferee of the shares or securities.
National Insurance Contributions (NICs)
National Insurance Contributions are taxes paid by employees, employers, and the self-employed to fund various social security benefits.
NICs are not the same as income tax but are often collected in the same manner, such as through payroll for employees. The type and level of NIC you pay depend on your employment status and how much you earn.
- Class 1 NICs are paid by employees earning above a certain threshold and are deducted by the employer.
- Class 2 and Class 4 NICs are paid by self-employed individuals, with the amount depending on profits.
- Class 3 NICs are voluntary contributions that can be paid to fill or avoid gaps in your National Insurance record.
NICs contribute to entitlements such as the State Pension, unemployment benefits, and the National Health Service (NHS).
For American expats, it's important to understand how paying NICs affects your entitlement to these benefits and how it interacts with US Social Security contributions, especially in light of the totalization agreement between the US and the UK.
Taxation of children
In the UK, children are taxed independently of their parents. This means that they are entitled to their own personal allowances and tax bands. For the tax year 2023/2024, this personal allowance is the same as for adults, allowing for income up to £12,570 to be earned tax-free.
Investment income generated for children is also subject to tax, but there are specific rules, such as the £100 rule, which states that if a child earns more than £100 in interest or dividends from money given by a parent, that income will be taxed as the parent's income.
Tax rate in the UK compared to the US
When comparing tax rates between the UK and the US, it's important to consider that both countries have progressive tax systems where the rate increases as income increases.
However, the UK has a higher starting point for taxing income, with a personal allowance of £12,570 where no tax is paid for the 2023/2024 tax year. In contrast, the US standard deduction for a single filer for the same year is $12,950.
The basic income tax rate in the UK is 20%, which is relatively low compared to the US marginal tax rates, which can start at 10% and go up to 37%. However, the UK's higher and additional tax rates of 40% and 45% kick in at lower levels of income compared to the US top rates.
It's also worth noting that the UK does not have state or local income taxes, which can significantly increase the overall tax burden in the US, depending on the state of residence.
Conversely, the UK has VAT, which is a consumption tax that can affect the overall cost of living, whereas sales tax rates in the US vary by state and are generally lower.
Taxable vs non-taxable income in the UK
In the UK, most forms of income are subject to taxation, including wages, pensions, benefits, and profits from self-employment.
However, there are several types of income that are not taxable or exempt.
- Certain state benefits, like disability living allowance and child benefits, are tax-free.
- Interest on savings is tax-free up to a certain threshold for basic rate taxpayers, and there is a personal savings allowance that varies depending on the individual's income tax band.
- The first £2,000 of dividend income is tax-free, with rates increasing for dividend income above this allowance
- Winnings from lotteries, pools, and games are not taxable.
- Certain grants and payments made to support individuals during the coronavirus pandemic were made tax-exempt.
- Income from ISAs (Individual Savings Accounts) and certain government bonds is tax-exempt.
Filing income tax returns in the UK
Filing income tax returns in the UK is a process that most taxpayers need to manage annually. The system, known as Self Assessment, is used by HM Revenue and Customs (HMRC) to collect Income Tax from individuals who have not had their tax automatically deducted from their wages, pensions, or savings.
When are UK taxes due?
In the UK, the tax year runs from April 6th to April 5th of the following year. The deadlines for submitting and paying taxes are as follows:
- Paper tax returns: Must be filed by midnight on October 31st following the end of the tax year.
- Online tax returns: Must be filed by midnight on January 31st following the end of the tax year.
- Payment of tax owed: Any tax due must also be paid by midnight on January 31st following the end of the tax year.
There is also a payment on-account system for those with substantial income not taxed at source, such as self-employment income. This involves making advance payments towards the next year's tax bill, with payments due by January 31st and July 31st.
How to file a tax return in the UK
To file a tax return in the UK, you can:
- Register for and use the HMRC Self Assessment online service.
- Complete a SA100 tax return form and send it to HMRC.
For those unfamiliar with the UK tax system, it may be beneficial to hire a tax advisor or accountant to assist with the filing process.
Penalties for late or incorrect filing
HMRC imposes penalties for late filing and payment, which can include:
A £100 immediate penalty for missing the filing deadline, which increases over time if the return is more than three months late.
Interest on the unpaid tax from the due date until the date of payment, plus additional penalties if the payment is more than 30 days late.
For incorrect filings, if HMRC believes there is a lack of reasonable care in completing the returns, penalties can range from 0% to 30% of the extra tax due.
If HMRC believes the taxpayer has deliberately underestimated their tax, the penalty can be between 20% and 70%, and if they believe the taxpayer has deliberately underestimated their tax with concealment, the penalty can be between 30% and 100%.
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Social Security in the UK
Social security in the UK is a comprehensive system designed to provide assistance to individuals and families with their living costs.
This system is funded through National Insurance Contributions (NICs), which are paid by those who are working and by employers.
The UK's social security system covers various benefits, including state pension, unemployment benefits, sickness and disability allowances, and maternity and paternity pay.
Benefits for expats in the UK
American expats living and working in the UK may be entitled to certain social security benefits, depending on their NICs record and their current circumstances. Some of the key benefits include:
- State pension: Expats who have paid sufficient NICs for a minimum number of qualifying years are eligible for the UK state pension upon reaching the state pension age.
- Jobseeker’s allowance: This is available to those who are actively seeking work but currently unemployed. The eligibility depends on NICs and is subject to conditions such as attending regular interviews.
- Statutory sick Pay: Employees who are too ill to work may be eligible for this payment for up to 28 weeks, provided they meet the qualifying conditions.
- Statutory maternity/paternity/adoption pay: Expats who are expecting a child or are adopting may be eligible for these benefits, which provide support for those taking time off work for their new child.
- Healthcare: Through NICs, expats contribute to the National Health Service (NHS), which provides access to healthcare services.
UK pension system
The UK pension system is a mix of state, occupational, and personal pensions, providing a variety of options for retirement savings. The State Pension is a regular payment from the government most people can claim when they reach State Pension age.
To qualify for the full State Pension, you generally need to have 35 years of National Insurance Contributions (NICs).
Expats who have not made enough contributions may still claim a partial State Pension or may be able to make voluntary contributions to increase the amount they can receive.
Besides the State Pension, individuals can contribute to personal or workplace pensions, which offer tax relief on contributions. The pension income is then partially tax-free, with 25% typically being withdrawable as a tax-free lump sum, and the remainder being subject to income tax.
Also read. UK Pension system for expats
Tax deductions for expats in the UK
Expats in the UK can take advantage of various tax deductions that can reduce their taxable income.
For employment expenses, expats can claim deductions for costs that are exclusively related to their work and not reimbursed by their employer. This can include:
- Travel and subsistence: If you travel for work, you may be able to claim for public transport costs, hotel accommodation if you need to stay overnight, and meals on work trips.
- Uniforms, work clothing, and tools: Costs for repairing or replacing specialist clothing or tools for work can be claimed.
- Professional fees and subscriptions: If you must pay fees to belong to a professional body or to subscribe to a trade or professional journal, these can be deductible if they are necessary for your job.
- Working from home: If you are required to work from home, you may be able to claim a proportion of your heating, electricity, and internet bills.
Personal deductions in the UK tax system allow individuals to reduce their taxable income, thereby lowering their tax liability. These deductions can include:
- Charitable donations: Donations made to charity through Gift Aid allow the charity to claim an extra 25p for every £1 donated. For higher-rate taxpayers, there is an additional tax relief, as they can claim back the difference between the basic rate of tax the charity reclaims and the rate of tax they pay.
- Maintenance payments: Qualifying maintenance payments to an ex-spouse or civil partner can be deductible if both parties are born before 6 April 1935.
- Blind person’s allowance: Individuals who are registered blind are entitled to an additional allowance on top of their personal allowance.
The marriage allowance in the UK is a tax benefit that allows lower earners to transfer a portion of their personal allowance to their spouse or civil partner.
To qualify for the marriage allowance, one partner's income must be below the standard personal allowance threshold, and the other must be a basic rate taxpayer. This can reduce the couple's overall tax liability by allowing the higher earner to pay less tax on a portion of their income.
For the tax year 2023/2024, the marriage allowance permits the transfer of up to £1,260 of the lower earner's allowance, which could save a couple up to £252 in tax over the year.
This allowance is not automatically applied and must be claimed through HM Revenue and Customs (HMRC).
Business deductions are a crucial aspect of tax planning for self-employed expats and those running a business in the UK. These deductions can lower taxable profits and, consequently, the amount of tax owed. Common business deductions include:
- Office costs: Rent, utilities, and insurance for business premises.
- Travel expenses: Mileage, parking, train or bus fares related to business travel.
- Staff costs: Salaries, bonuses, and pension contributions for employees.
- Stock or raw materials: Costs of stock or raw materials necessary for the business.
- Financial Costs: Bank charges, interest on loans, and credit card charges for business expenses.
- Marketing and entertainment: Advertising costs and business entertainment expenses (though the latter has strict rules for deductibility).
In the UK tax system, if a business or self-employed individual makes a loss, this loss can be used to reduce the tax liability in several ways:
- If you have other income in the same tax year, you can offset the loss against it, reducing your overall taxable income.
- You can carry the loss back to the previous tax year (if you had taxable profits) and claim a refund on taxes paid in that year.
- If you can't use the entire loss in the current or previous tax year, you can carry it forward to offset against future profits.
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Tax advantages for expats
American expats living in the UK may be eligible for various tax advantages that can reduce their tax burden.
These advantages are designed to prevent double taxation on the same income in both the US and the UK and to provide relief for taxes paid in the foreign country. Some of these tax advantages include:
- Foreign Earned Income Exclusion (FEIE): This allows US expats to exclude a certain amount of their foreign earnings from US taxable income.
- Foreign Tax Credit (FTC): US citizens can claim a credit for income taxes paid to a foreign government, which can reduce their US tax liability.
- Foreign Housing Exclusion: Expats can deduct a portion of their housing expenses when living abroad.
- Pension Contributions: Contributions to UK pension schemes may be deductible or eligible for tax relief, and the growth within these pensions is often tax-deferred.
The tax treaty between the US and UK
The tax treaty between the US and the UK is designed to prevent double taxation for individuals who would otherwise be subject to tax on the same income in both countries.
The treaty covers various forms of income and provides rules for determining which country has the right to tax specific income types.
Tax treaties benefit
The benefits of tax treaties for expats include:
- Residency tie-breaker rules: These rules help determine tax residency to avoid being considered a resident for tax purposes in both countries.
- Reduced withholding taxes: The treaty may reduce the rate of tax withheld on interest, dividends, royalties, and other passive income from sources within the treaty countries.
- Mutual Agreement Procedure (MAP): Taxpayers can request assistance from the competent authorities of both countries if they believe the actions of one or both countries result in double taxation.
- Pensions and social security payments: The treaty has specific provisions regarding the taxation of pensions and social security payments, which can often result in taxation only by the country of residence.
- Elimination of double taxation: The treaty provides mechanisms such as tax credits to eliminate double taxation.
Also read. Tax treaty between the US and UK
Totalization Agreement Between the US and UK
The Totalization Agreement between the US and the UK is designed to resolve issues of dual social security taxation and to help protect the benefit rights of individuals who have worked in both countries.
This agreement applies to US Social Security and the UK National Insurance contributions, which are the respective countries' programs for old age, survivors, and disability insurance.
Key aspects of the totalization agreement include:
- Avoiding dual contributions: It ensures that workers and their employers only need to pay social security contributions to one of the two countries, typically in the country where the work is being performed.
- Combining contributions: The agreement allows workers to combine their social security credits from both countries to qualify for benefits that they might not be eligible for in one country alone.
- Benefit payments: The agreement also covers the payment of social security benefits to those who reside in the other country, facilitating cross-border payments.
This agreement is particularly beneficial for expats who have not worked long enough in one country to qualify for social security benefits. By combining the periods of contributions made in both countries, expats can often meet the minimum eligibility requirements.
Most popular tax forms for US expats
US expats in the UK are required to file US tax returns and may need to file various forms depending on their circumstances. Some of the most commonly required tax forms include:
- Form 1040: The standard US individual income tax return.
- Form 2555: Used to claim the Foreign Earned Income Exclusion (FEIE).
- Form 1116: For claiming the Foreign Tax Credit (FTC).
- FBAR (FinCEN Form 114): Required if a US person has a financial interest in or signature authority over foreign financial accounts with an aggregate value exceeding $10,000 at any time during the calendar year.
- Form 8938: Statement of Specified Foreign Financial Assets, required if certain thresholds of foreign assets are met.
- Form 8833: Treaty-Based Return Position Disclosure, used to disclose positions taken on a tax return that are based on a tax treaty.
UK tax forms for US expats
While living in the UK, US expats may need to deal with various UK tax forms, depending on their circumstances. Some of the key forms include:
- Self Assessment tax return (SA100): This is the main tax form for individuals to report their income to HM Revenue and Customs (HMRC).
- Supplementary pages: Depending on the types of income, additional sections or 'supplementary pages' may need to be completed, such as SA105 for property income or SA109 for non-residents.
- P60: This form is provided by employers at the end of the tax year and summarizes the income and taxes deducted under PAYE (Pay As You Earn).
- P45: Given by an employer when employment ends, showing tax paid and employment income to date within the tax year.
- CT600: For those running a company, this is the Corporation Tax return form.