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 101,300 (this amount is for 2016 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 2016-2017 from Her Majesty’s Revenue & Customs (HMRC), are:
|20%||On||GBP 0 - GBP 32,000|
|40%||GBP 32,001 - GBP 150,000|
|45%||More than GBP 150,001|
You can exclude an allowance of GBP 11,000. This is reduced by GBP 1 for every GBP 2 in income exceeding GBP 100,000 (irrespective of the age of the taxpayer).
Some types of income are taxed differently. Interest on savings is taxed automatically by the financial institution at 20%. Lower income persons can request interest to be tax free, or get a refund for taxes they already paid for savings interest.
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.