Tax Guide for Americans Living in the United Kingdom
Our UK Phone Number: 020 3129 8742
We have been preparing U.S. taxes for Americans living in the U.K. for over 24 years. This makes us one of the most experienced firms in the business!
We'd like to shed light on many questions that we are frequently asked by our clients from the UK. Below we will explain tax concepts that are important to you as an American UK resident and also explain how to report the details of your UK life on our Tax Questionnaire.
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 2013-2014 tax year, the national income rates from Her Majesty’s Revenue & Customs (HMRC) are as follows:
|Earnings in GBP (£)||Rate Applicable to Income Level (%)|
|0-2790||Starting Rate for savings: 10%*|
|0-32,010||Basic rate: 20%|
|32,011-150,000||Higher rate: 40%|
|Over 150,000||Additional rate: 45%|
*If your non-savings income is above £2,710 (2012-2013) or £2,790 (2013-2014), this rate does not apply.
You are able to exclude £8,105 of your income as a personal allowance for 2012-2013. Note that this will be reduced by £1 for every £2 of income over £100,000, regardless of age.
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 2014 US tax year, we take 3 months from the UK 2013-2014 tax year and 9 months from the UK 2014-2015 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) - https://www.gov.uk/paye-forms-p45-p60-p11d/p45
- 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 - https://www.gov.uk/paye-forms-p45-p60-p11d/p60
- 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 - https://www.gov.uk/paye-forms-p45-p60-p11d/p11d
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.
11. What is the name for UK Tax Declaration document and who must have it prepared? Do you need its copy?
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 tab of the Self-employment questionnaire (Supplemental income tab). 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
 Error to fix: Earned Income tab, comment after q. 3.3 is: Please complete the Self-Employment Section in the Earned Income tab
Has to be changed to Please complete the Self-Employment Section in the Supplemental tab
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 tab Earned Income.
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.
6. As I live in the UK my taxes are taken out of my salary automatically but then I also have a deduction taken out for National Insurance. Do I add these together for my income tax or is it just the tax paid and no National Insurance payment?
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
1. I have UK ISA account with stocks. It contains a mixture of OEICS, investment trusts and individual shares. Do I have to report it as PFIC and how much would it cost?
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 5 accounts (per form) and we aggregate whenever possible. If more than 5 accounts on a form, each additional account is $25 each.
In this example, each trust or unit share must be reported on a separate form 8621. If preparing 3 or more forms, they are eligible for 20% discount.
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 (such as Pillar II, Superannuation, KiwiSaver, Employer Matching Contribution, etc)? 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 accounts (such as ISA or SIPP) do not qualify for income deferral in the U.S. Income earned on those accounts must be reported on U.S. tax returns.
Report interest earned in the Interest sub-tab of the Passive Income tab of our Tax Questionnaire (Foreign Interest Income); dividends in the 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 (ie 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:
1. US citizen (check for US passport or Green Card).
2. US residential address
3. Place of birth in the US
4. US telephone number
5. Standing instructions to send funds to a US bank account
6. Power of attorney (PoA) or third party authority in favour of a person with a US address
7. 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 . fac
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 at www.hmrc.gov.uk 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