Simple Tax Guide for Americans in the UK
At TFX we have been preparing U.S. taxes for Americans living in the U.K. for over 25 years. This makes us one of the most experienced firms in the business.
Regardless of where you live, you must file expat taxes in the US. How are these taxes affected if your choice is to reside within the United Kingdom? The UK is a very popular choice for American expatriates, with its many nationalities, English language, and a long held position of power in the world it provides a new experience without language barriers. It is vital to have an understanding of how living within the UK affects your United States expat taxes, and what taxes you must pay to the UK while living there.
US Expat Taxes - The United Kingdom
US citizens, as well as permanent residents, are required to file expatriate tax returns with the federal government every year regardless of where they reside. Along with the typical tax return for income, many people are also required to submit a return disclosing assets which are held in bank accounts in foreign countries by using FinCEN Form 114 (FBAR).
The United States is among only a few governments who tax international income earned by their citizens, as well as permanent residents, residing overseas. There are, however, some provisions that help protect from possible double taxation. These include:
- The Foreign Earned Income Exclusion. This exclusion allows one to exclude USD 108,700 (this amount is for 2021 taxes) in earned income from foreign sources.
- A tax credit allowing tax on remaining income to be reduced based on the taxes paid to foreign governments.
- An exclusion on foreign housing that allows additional exclusions from their income for some amounts paid to cover household expenses due to living abroad.
Preparing a quality tax return following proper tax planning should allow one to use these, as well as other strategies, in minimizing or possibly eliminating tax liability. Note that in most cases the filing of a tax return is required, even if taxes are not owed.
Tax Rates in the United Kingdom
The equivalent of the US Internal Revenue Service in the United Kingdom is the Her Majesty’s Revenue and Customs office (HMRC). This office is the primary collector of revenue for the UK government. They administer some regulatory systems (e.g., minimum wage), collect taxes, and pay some welfare.
National income tax rates for 2021-2022 from Her Majesty’s Revenue & Customs (HMRC), are:
Up to £12,570
£12,571 to £50,270
£50,271 to £150,000
Personal Savings Allowance
You may also get up to £1,000 of interest tax-free depending on which income band (see above) you’re in. This is your Personal Savings Allowance.
|Income Tax Band||Tax-Free Savings Income|
Some types of income are taxed differently. Lower income persons can request interest to be tax free, or get a refund for taxes they already paid for savings interest.
|Tax Year||Tax-Free Allowance|
6 April 2021 to 5 April 2022
6 April 2020 to 5 April 2021
6 April 2019 to 5 April 2020
Above this allowance the tax you pay depends on which income band (see above) you’re in . Add your income from dividends to your other taxable income when working this out. You may pay tax at more than one rate.
|Tax Band||Tax- rate on dividends overallowance|
You don’t pay tax on dividends from shares in an ISA (note - this is not the case for US tax - see below for US treatment of ISA accounts)
US taxes vs UK taxes
In absolute terms, you pay less income tax in the US. The highest rate of income tax in the US is 37% if you earn over $523k. In the UK, it’s 45% if you earn over £150k. In many US states, you also have to pay state taxes - some states pay nothing, but New York, for example, the state taxes can be an additional 8.8%. Nothing like that in the UK. Even after all that, the UK probably has a slightly higher tax burden (unless you own a large property in a high property tax state like NJ). But, remember, in the US, you’ve got to pay for healthcare on top of that. The tax you pay in the UK pays for the NHS. The social services you can avail of in the US are far more limited than those in the UK. And there’s far more ‘free’ cultural stuff in the UK that taxes pay for. In summary US citizen paying UK taxes will be higher compared to their home country.
US tax for UK residents
If a UK citizen living or working in the US passed either one of these two tests, they are subject to US taxation on their world wide income. The only exception are if they are working for British government, or if they are in the US on a teacher, training , or student visa.
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately beforehand, counting:
- All the days you were present in the current year, and
- 1/3 of the days you were present in the first year before the current year, and
- 1/6 of the days you were present in the second year before the current year.
Who Qualifies as a United Kingdom Resident?
UK residence status will affects whether or not you need to pay tax in the UK on your foreign income.
- Non-residents only pay tax on their UK income - they don’t pay UK tax on their foreign income.
- Residents normally pay UK tax on all their income, whether it’s from the UK or abroad. But there are special rules for UK residents whose permanent home (‘domicile’) is abroad (see below).
The HMRC defines residency requirements in the United Kingdom. In general, residency is determined by the longer term intentions of the taxpayers, along with the number of days they are physically in the United Kingdom. For purposes of counting days, being present means being in the United Kingdom at midnight.
The distinction between “resident” and “ordinarily resident” has disappeared and instead there is a “Statutory residence test”:
You’re automatically considered a resident if either:
- you spent 183 or more days in the UK in the tax year
- your only home was in the UK - you must have owned, rented or lived in it for at least 91 days in total - and you spent at least 30 days there in the tax year
You’re automatically non-resident if either:
- you spent fewer than 16 days in the UK (or 46 days if you haven’t been classed as UK resident for the 3 previous tax years)
- you work abroad full-time (averaging at least 35 hours a week) and spent fewer than 91 days in the UK, of which no more than 30 were spent working
When considering taxes in the UK, domicile is an important issue for factoring in worldwide income. A taxpayer’s domicile is the place where they have their permanent, long-term home. Domicile is different than residence, citizenship, or nationality.
A person’s domicile is identical to their father’s domicile as of their birth. If their father changed his domicile while they were still dependent, their domicile changes as well. Otherwise, this domicile remains unless they acquire a domicile that is different.
To do this, they must sever ties with their previous domicile, relocate to a different jurisdiction, and maintain a permanent residence in the new jurisdiction. Acquiring a domicile of your choice rather than the domicile of your origin is difficult. You must prove your domicile changed.
The majority of expatriates in the United Kingdom are classified as domiciled outside of the UK. HMRC is constantly making changes to the UK domicile and residence regulations, and in April, 2008 made the system much more complicated. Therefore, you will most likely want to contact an expert to determine your domicile while you live in the United Kingdom.
For more info on UK Domicile when moving to the UK, please see https://www.taxinnovations.com/personal/coming-to-the-uk/
When Are United Kingdom Taxes Due?
To be eligible to work within the United Kingdom, and therefore file tax returns, a taxpayer must apply for their National Insurance identification number. This is applied for through the Jobcentere Plus office. Residence permits, proof of any marriage or partnership, and identity proof is required.
It is not possible for married couples to file joint returns. Each person must submit their own returns as required for their personal income. There is an allowance that permits one spouse the ability to transfer personal allowance of theirs to one another.
The UK tax year is different than the US tax year. In the UK, it is the 6th of April through the 5th of April. Tax returns are to be submitted to the HMRC prior to the 31st of October if filing by paper.
If a taxpayer e-files, they have until the 31st of January of the next year. Extensions are not available. The United Kingdom uses a withholding process (PAYE) that goes through the employer’s payroll. Payment of taxes on income not from wages (and is not subject to withholding) is due on the 31st of January. All payments are required to be finished before July 31st in the next year.
Who is Required to Submit Tax Returns?
HMRC sends tax forms to each individual. If they determine a taxpayer has paid sufficient tax using payroll withholding, you may not receive a form, and don’t have to submit a return if there is no other income or applicable circumstances.
Other income, like investment income or self-employment income, requires a taxpayer to file their return and submit the taxes due on the income. Some cases that require the filing of a return include:
- Property rental income
- Profits from the sale of shares, second homes, and other capital gains
- Income from sources outside the UK while living in the United Kingdom
- Claiming child benefits if you or a partner’s income is over GBP 50,000
- Income of GBP 100,000 or more
Taxpayers may also choose to file in order to claim any deductions. Common deductions include donations, contributions to private pensions, and employment expenses exceeding GBP 2,500.
If tax forms are not received from the government, but you need one, register online. The process can take up to 14 days, since a PIN number must be mailed. If you register online, do it early to help avoid late penalties.
United Kingdom Social Security
Generally speaking, expats are required to participate in the United Kingdom’s National Insurance after they have started employment (including self-employment). This covers the cost of welfare, health insurance, pension plans, unemployment insurance, and workers compensation, along with other various social programs in the United Kingdom. There is an agreement between the US and the UK concerning Social Security. This agreement requires people to pay tax for Social Security in the country in which they are working. But, if you are sent to the United Kingdom by your employer for 5 years or fewer, you continue coverage in the US Social Security system on your United States expat taxes, with an exemption from coverage by the UK program. For the self-employed, they pay in the country they reside in.
Does the United Kingdom Tax Foreign Income?
The tax requirements on taxpayer worldwide income depend on UK domicile and residency status. If a taxpayer is a UK resident, they must pay taxes on total investment income, regardless of location. This is the same amount that is reported on US expatriate taxes.
A taxpayer who is a resident not domiciled within the UK is able to submit taxes using remittance basis on both their foreign income as well as capital gains. A taxpayer who is resident as well as domiciled, but is not considered ordinarily resident, is allowed to use remittance on foreign income, but not on capital gain income. Remittance basis means you can choose to pay United Kingdom tax on your income from investments remitted in UK. Your income is required to be remitted when the income is brought into the United Kingdom, or when paid in the United Kingdom to you. It is advisable to speak with a competent tax advisor about bank accounts overseas to help avoid expensive mistakes for taxpayers not domiciled in the United Kingdom.
Tax Treaty Between the US and UK
The tax treaty between the US & the UK is helpful for understanding situations where it is not clear which country you should pay taxes to. The country receiving tax payments is normally determined by residency status of the taxpayer in each of the countries. The treaty is meant to help prevent the double taxation on dual citizens, but also to explain tax issues that are not clear.
Along with income tax imposed on salaries, there are additional types of income taxed by the United Kingdom.
Compensation that is not in cash is taxable. Examples include relocation expenses, housing stipends, meal allowances, clothing allowances, club memberships, commuting costs, payments for home leave, and educational reimbursements. Exceptions exist, but generally speaking, expatriates can plan on paying taxes on all compensation, cash or non-cash, in the United Kingdom - including tax for national insurance.
Taxes are also imposed on capital gains, including sales of a second property being rented out or an investment property, corporate bonds, life insurance, cars, ISA account gains, asset gifts to charity, and United Kingdom government bonds.
- Sales of principle residences are exempt from tax as long as the properties have been lived in by the owners for the entire ownership period. If the property has not been lived in or as been rented out for the period of the ownership, then some principal private residence relief can be claimed, but not on the entire value of the property.
There are two separate capital gains tax rates which apply depending on the asset which is being disposed of:
- 28% for carried interest and disposals of second properties (such as rental or investment properties);
- 20% on all other assets;
Please note that gains on ISAs typically do not lead to tax being due in the UK. Gains on ISAs are not tax deferred in the U.S.
- As long as the individual is a Resident of the UK and they make contributions which are no greater than £20,000 each year, then any gains which arise from the disposal of such assets will not be subject to capital gains tax in the UK.
As mentioned earlier, the definition of “Ordinarily Resident” has now been abolished from April 2013 and onwards and that any individual who is a UK domicile who is Resident in the UK will be taxed on their worldwide income under the arising basis. However, there are some specific cases whereby individuals who are Not Resident in the UK can be subject to capital gains tax in the UK upon the disposal of an asset (such as a disposal of a property under the Non Resident Capital Gains Tax rules which have applied since April 2015).
If an individual is non-domiciled and Resident in the UK, then they are only subject to tax on any UK sited assets disposed of as well as any proceeds which have been remitted to the UK which have a capital gain element relating to it (this is only applicable if the asset was disposed of during the UK residency period).
Concerning estate taxes, expect to owe inheritance tax on worldwide assets when you have UK domicile. The HMRC considers inheritance tax payable for those who have been residents of the United Kingdom for at least 17 years out of the previous twenty years. If the taxpayer is domiciled within the United States, they are responsible only for inheritance taxes on their assets within the United Kingdom.
Save on Your United States Expat Taxes
Because of the many types of taxes imposed on foreign nationals in the United Kingdom, it is in a taxpayer’s best interest to understand and apply all available deductions, credits, and exclusions to their United States expat taxes. Along with this, one must understand the rules for residency and domicile to optimize their United Kingdom Self-Assessment. The best way to make tax filing hassle free is to understand the requirements.
Questions About United Kingdom Taxes?
Get expert advice. Contact us! We have an expert team to provide tax advice to expats, and give you all the information you need to know to file your United States expat tax return while living outside the country.
Overview of the UK Tax System
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.
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.
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. This will be the same income reported on your US expat taxes.
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.
For the 2018-2019 tax year, the national income rates from Her Majesty’s Revenue & Customs (HMRC) are as follows:
|Earnings in GBP (£)||Rate Applicable to Income Level (%)|
|Up to £11,850||Personal Allowance: 0%|
|£11,851 to £46,350||Basic rate: 20%|
|£46,351 to £150,000||Higher rate: 40%|
|Over £150,000||Additional rate: 45%|
* You don’t get a Personal Allowance on taxable income over £123,700.
The tax year in the UK is different from the US. It is 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. This is also different than the April deadline for US expat taxes.
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.
We use prorated amount of earnings and tax paid from two consecutive years covering full calendar year.
For example - to calculate figures for the 2018 US tax year, we take 3 months from the UK 2017-2018 tax year and 9 months from the UK 2018-2019 tax year. To do this we would normally use your paystubs or run the calculation for obtain these numbers.
There are three PAYE tax forms: P45, P60 and P11D:
- P45 - You get a P45 from your employer when you stop working for them. Your P45 shows how much tax you’ve paid on your salary so far in the tax year (6 April to 5 April).
- P60 - Your P60 shows the tax you’ve paid on your salary in the tax year (6 April to 5 April). If you’re working for your employer on 5 April they must give you a P60. They must provide this by 31 May, on paper or electronically.
- P11D - Your employer will send a P11D to HM Revenue and Customs (HMRC) if you get any ‘benefits in kind’ (eg company cars or interest-free loans). The P11D records how much each benefit is worth.
We would like you to provide us with every PAYE form that you receive (we ask for it on the Earned Income tab of the Tax Questionnaire).
Most taxpayers in the UK are taxed at source and so do not need to complete a Self Assessment Tax Return. ‘Taxed at source’ means that the money you receive has already had tax taken off, such as the wages you get from your employer when paid under the Pay As You Earn (PAYE) system, or UK bank interest taxed at source.
People who have income that has not been taxed at source, or not taxed at the correct rate, and on which tax is due, are required to inform HM Revenue & Customs about the income within six months of the end of the tax year in which the income is received (that is by 5 October following the end of the tax year). HMRC will then send you a notice to file a tax return, either by post or electronically.
Such income would include, for example, rental income, self-employed income, savings income for higher rate taxpayers, and occasional untaxed income like eBay sales or casual freelance earnings.
However - if you receive a notice to file a return from the HMRC - you must complete a return and submit it to HMRC. This is so even if you are an employee and all your income is taxed under PAYE.
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.
UK tax year is from 6 April to 5 April the following year.
You’ll need to send a tax return if, in the last tax year:
- you were self-employed - you can deduct allowable expenses
- you got £2,500 or more in untaxed income, eg from renting out a property or savings and investments - contact the helpline if it was less than £2,500
- your savings or investment income was £10,000 or more before tax
- you made profits from selling things like shares, a second home or other chargeable assets and need to pay Capital Gains Tax
- you were a company director - unless it was for a non-profit organisation (eg a charity) and you didn’t get any pay or benefits, like a company car
- your income (or your partner’s) was over £50,000 and one of you claimed Child Benefit
- you had income from abroad that you needed to pay tax on
- you lived abroad and had a UK income
- you got dividends from shares and you’re a higher or additional rate taxpayer - but if you don’t need to send a return for any other reason, contact the helpline instead
- your income was over £100,000
- you were a trustee of a trust or registered pension scheme
You can check whether you need to on this page . You usually won’t need to send a return if your only income is from your wages or pension.
If you get an email or letter from HM Revenue and Customs (HMRC) telling you send a return, you must send it - even if you don’t have any tax to pay.
If you submitted Self Assessment form for the period covered by the US tax year (ie either Jan 1 - Apr 5 or Apr6 - Dec31), please provide it (or both of them) to us.
We ask for it in the Question Do you have an annual tax summary (ie local W2) from any country outside of the U.S? in the tab Main | Basic Info of our Tax Questionnaire.
How to Report UK Income on our Tax Questionnaire
For income you earned while being employed:
You will need four pay-stubs for the year - all of them are for the calendar year for which you are filing US tax return (Jan-Feb-Mar and Dec). Add the amounts printed on line Total Payment for January, February and March. Then add the amount from line Taxable Pay YTD from the December paystub (because the UK tax year is Apr-Mar, the Gross to Date value on the December paystub will reflect your pay for Apr-Dec).
A simpler way is this. If your salary has not changed over the course of the year, you can simply multiply one monthly Total Payment amount by 12. Enter result on line Gross wages/salary earned with this employer question in the Main | Earned Income section.
For income earned from self-employment
Income from self-employment is a turnover of your unincorporated business. Report it on the Gross Income from Self-employment question of the Self-employment Tab. Note that Self-Employment Income tab is not displayed by default. To see it, answer Yes to the question Were you self-employed during the tax year (either abroad or in the US)? >Each type of income is reported as gross amount, before any deductions allowed in the UK (i.e. before contributions to National Insurance).
If you received redundancy pay, add gross amount as additional wages. Report other types of income (i.e. workplace pension, State pension, dividends, alimony, royalties, unemployment) on the respective lines of Pension or Other Income tabs of the tax questionnaire.
Similarly to income, tax also has to be reported separately for each type of income on which tax was paid. Add the amounts printed on line Tax (Section Deductions of paystub) for January, February and March. Then add the amount from line Tax Paid YTD from December paystubs. Enter the result on line Foreign income tax paid during the calendar year on wages of the Earned Income section of Tax Questionnaire.
If there was additional tax payment during the calendar year (i.e., HMRC issued tax bill for tax underpaid in the prior year), add that amount to the amount of tax withheld during the filing year.
Taxes on unearned income may be withheld by the payor (i.e.,bank withheld income from dividends) or you may owe tax upon completion of tax assessment form. Report each type of tax paid during the filing year in the respective section, even if it applied to income received in prior years.
Do not combine and report separately property tax in the Deductions section and stamp duty in the sale of home section..
Reporting of council tax depends on whether you are renting or owning a flat. If you are a renter, then council tax is a part of your housing expenses reported on the Physical Presence tab. If you are an owner paying council tax in between tenancy then report it as property tax on Rental Income worksheet.
We will take specific deductions allowed for UK residents by the US/UK treaty (i.e., we can deduct contributions made to employer pension scheme). You will report contributions to employer pension separately from the gross income and we will take this deduction if this improves your tax position (in some cases you may benefit from not taking this deduction now).
Further, section Deductions of TQ offers you questions related to various additional deductions Examples of such deductions are mortgage interest, alimony payments, investment advisor fees. Similarly to personal allowance in the UK, the U.S. tax system also applies a concept of “Standard deduction”: $6,300 per single person and $12,600 for married couple for 2015 tax year. For most UK residents filing U.S. tax return standard deduction option is more tax efficient than “itemized deductions” - grossing up individual deductions.
Report employer contributions and your own contributions to employer pension scheme on the Earned Income tab.
Contributions to ISA and SIPP do not need to be reported.
Report payouts from foreign pension of all types: National Insurance, employer pension, Bereavement Allowance (previously Widow's Pension) in section Pensions.
Report distributions from individual pension accounts, such as ISA as income from regular investment. Report interest and dividends as if you have received it from bank account or brokerage account.
National Insurance payment is not deductible from your salary. Contributions made to NI entirely on U.S tax return. Likewise, you do not “deduct” income tax - we need to report gross salary and then take foreign tax credit for income tax (not for the National Insurance tax).
Other example of non-deductible taxes is VAT.
UK Pension System
SIPP is an individual pension plan. UK pensions plans are IRS-qualified, whether it is employer-sponsored or individual plan. Therefore there is no need to report it as foreign trust. Income in SIPP can be deferred like income in a U.S. IRA account. Interest in SIPP does not need to be reported on your US tax return.
OEICS are collective investment schemes that are treated in the US as PFIC.
The cost of one form 8621 is $150 - this is up to 3 forms. If more than 3 forms, each additional account is $50 each.
In this example, each trust or unit share must be reported on a separate form 8621.
Contributions to the UK National Insurance system withheld from your pay-check or made on self-employment income are not deductible from the U.S. taxable income and do not qualify for the foreign earned income credit.
You can check your record of UK National Insurance contributions here: https://www.gov.uk/check-national-insurance-record
An agreement between the United States and the United Kingdom improves Social Security protection for people who work or have worked in both countries. It helps people who, without the agreement, would not be eligible for retirement, disability or survivors benefits under the Social Security system of one or both countries. It also helps many people who would otherwise have to pay Social Security taxes to both countries on the same earnings.
The provisions of the agreement eliminate double Social Security taxation and permit dual residents to use their work in both countries to qualify for benefits.
If you are self-employed
Contributions to National Insurance system make you exempt from contributions to the U.S. Social Security system that otherwise would be required in the U.S. on self-employment income.
How it impacts those who want to earn US Social Security credits
If you have Social Security credits in both the United States and the United Kingdom, you may be eligible for benefits from one or both countries. If you meet all the basic requirements under one country's system, you will get a regular benefit from that country. If you do not have enough work credits under the U.S. system to qualify for regular benefits, you may be able to qualify for a partial benefit from the United States based on both U.S. and U.K. credits. To be eligible to have your U.K. credits counted, you must have earned at least six credits under the U.S. system.
Although the agreement allows the Social Security Administration to qualify for U.S. retirement, disability or survivor benefits, the agreement doesn’t cover Medicare benefits.
U.S. Social Security Benefits
U.S. Social Security benefits received by US citizens and green card holders residing in the UK are exempt from tax in the United States and are taxable only in the UK.
UK State Pension
UK State Pension and other payments received under the National Insurance legislation by US citizens and green card holders residing in UK are taxable in both countries.
Foreign tax credit can be applied to eliminate double taxation.
When a US citizen/green card holder is a participant in a pension scheme established in UK:
a) Contributions paid by or on behalf of that individual to the pension scheme may be excludable in computing his U.S. taxable income
b) Any benefits accrued under the pension scheme, or contributions made to the pension scheme by or on behalf of the individual’s employer is not treated as part of the employee’s taxable income
However - exclusion of contributions to pension scheme is not mandatory. You may report those contributions on our Tax Questionnaire Earned Income Tab (Question - Did your employer contribute to your pension plan? to have it added to your annual taxable income.
Considering the high tax rate paid in UK on earned income, added employer contributions may still leave you tax free in the U.S. Your benefit: the added amount will be considered previously taxed - which will reduce the taxable portion of pension payments in the future.
Pensions and other similar remunerations paid to US citizen/green card holder residing in UK are taxable in both countries.
However - you can eliminate the burden of double taxation. Taxes paid in UK on pension income are applied as a foreign tax credit against tax owed on the same income in the U.S.
Individual tax-deferred saving accounts arrangement (ISA) do not qualify for income deferral in the US Income earned on those accounts must be reported on U.S. tax returns.
Report interest earned in the Passive Income > Interest sub-tab of our Tax Questionnaire (Foreign Interest Income); dividends are reported in the Passive Income > Dividends sub-tab (Foreign Dividends).
U.S. green card holders residing in the UK may elect to apply what is known as the tie-breaker rule of the US/UK Tax Treaty and be deemed a resident only of the State (i.e. country) with which their personal and economic relations are closer (UK).
Under such election, the individual would file form 1040NR and report only income derived from U.S. sourced. The requirement to provide full disclosure of foreign bank accounts remains and tax on income from U.S. sources will be higher than tax on the same income when applied to U.S. residents filing form 1040.
UK Financial Accounts and FBAR/FATCA
The Foreign Account Tax Compliance Act (FATCA) is a piece of legislation introduced by the United States government in 2010, to help counter US tax evasion.
In the UK, the principles of FATCA have been brought into the local law. This means that UK financial institutions need to provide information on US accounts to the local tax authority, HM Revenue and Customs (HMRC). Further, it becomes a subject to the Intergovernmental Automatic Exchange of information.
The main requirements of US and UK Intergovernmental Agreement came into effect on 1 July 2014.
UK banks were required to extract account balances at 30 June 2014 and undertake checks depending on the value of the account. Higher value accounts (balances over $1m) were reviewed by 30 June 2015 and lower value accounts ($50k - $1m for individuals and $250k - $1m for entities) will need to be reviewed by 30 June 2016.
Financial institution must search their data to identify financial accounts held by US Specified Persons, or by foreign entities in which US taxpayers hold a substantial ownership interest.
In order to achieve this, financial institution need to search their data looking for any one of seven indications (indicia) that an account holder may be a US person. These indicia are:
- US citizen (check for US passport or Green Card).
- US residential address
- Place of birth in the US
- US telephone number
- Standing instructions to send funds to a US bank account
- Power of attorney (PoA) or third party authority in favour of a person with a US address
- Use of a c/o or hold mail address
- Individual bank accounts such as savings accounts, checking accounts, and time deposits.
- Retirement accounts - workplace retirement scheme, individual retirement accounts (SIPP), or QROPS
- Brokerage accounts, commodity futures or options accounts,
- Insurance policies and annuity contracts with a cash value
- Unit Trusts or other similar pooled funds (OEIC)
- Business accounts where U.S person has a greater than 50 percent interest in the entity
Even though FATCA will provide relief in reporting scope to many UK retirement plans that are considered “deemed compliant”, the FATCA rules applying to individuals were not relaxed. Form 8938 specifically requires reporting by U.S. taxpayers who participate in foreign pension plans.
UK financial assets exempt from FBAR/FATCA reporting are limited to National Insurance, Real Estate Holding, precious metals held directly, and collectibles.
UK Tax Glossary for US Expats
Benefits in kind are non-cash benefits such as company cars, given to employees. They used to be called fringe benefits. Most benefits in kind are taxable. There are different rules if an employee earns less than a certain amount each year.
Similar to a bank but owned by members of the building society rather than shareholders in a company (close equivalent to U.S. credit union).
Saving Account with interest earnings deferred in the UK but taxable as regular savings account in the U.S.
Tax applied to residential properties in England, Wales and Scotland.
Everyone who normally lives in the United Kingdom is entitled to receive a certain amount of income each year before they have to start paying tax. This amount is called the personal allowance. There are also other additional allowances which can reduce the tax you have to pay. The amounts of the allowances are usually announced each year.
Inland Revenue used to be the government department for assessing and collecting most types of tax. It is now called HM Revenue and Customs (HMRC).
HM Revenue and Customs (HMRC) is the government department responsible for assessing and collecting most types of tax, including VAT. HMRC is also responsible for paying tax credits and child benefit.
This stands for Pay As You Earn. It is the UK system for collecting tax and national insurance contributions from the wages and salaries of employees and the tax from some pensions. The employer or pension provider deducts the tax from the employee’s wages or pension and sends it to HM Revenue and Customs.
Self-Invested Personal Pension - the type of UK government-approved personal pension scheme, which allows individuals to make their own investment decisions.
If you're a taxpayer, you're responsible for informing HMRC about any income or gains which may be taxable. Some taxpayers are required to complete a form every year called a Self Assessment tax return, telling HMRC about income and capital gains in that year. HMRC uses the figures on the tax return to work out how much tax is payable. Self Assessment also allows you to claim tax allowances or reliefs against your tax bill and HMRC to collect certain national insurance contributions and student loan repayments. There are strict deadlines for tax returns and making payments under Self Assessment.
Stamp Duty Land Tax is a tax that you pay on a land transaction in England, Wales or Northern Ireland, for example, buying a house or being granted the lease on a property. For more information about Stamp Duty Land Tax, go to the HM Revenue and Customs website and for more information about Stamp Duty Land Tax in Northern Ireland, go to the NI Direct website at www.nidirect.gov.uk
Investment accounts with the preferential UK tax treatment of dividends and Capital Gains.
A tax year starts on 6 April in one year and ends on 5 April the next calendar year.
VAT stands for Value Added Tax, which is a tax on goods and services. It is payable at a certain percentage, which is announced by the government in each year’s Budget. It is administered and collected by HM Revenue and Customs.
Pooled Investment constituted under a trust deed. Similar to U.S. mutual funds but, as opposed to U.S. mutual funds, UK unit trust is subject to PFIC regime.