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Simple Tax Guide for Americans in United Kingdom

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.

We have many clients from the UK and are familiar with the issues you face. We even have a local phone number for our UK based clients: 020 3129 8742.

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.

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 2015-2016 from Her Majesty’s Revenue & Customs (HMRC), are:

Rate   Earnings
20% On GBP 0 - GBP 31,785
40% GBP 31,786 - GBP 150,000
45% More than GBP 150,000

You can exclude an allowance of GBP 10,600. 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?

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.

  • A taxpayer who is in the United Kingdom, but does not plan to stay over two years, is considered a resident in that tax year on the condition they spend 183 days or more within the country. A taxpayer who spends under 183 days there is not considered to be a resident when it comes to taxes.
  • A taxpayer who has spent at least 91 days per year on average in the United Kingdom over the previous four years is a resident. They are considered to be a resident starting on the arrival date if they intended to stay an average of over 91 days per year.
  • A taxpayer who comes to the United Kingdom and plans to stay at least two years is considered a resident for tax purposes starting on the day they arrive.

In the UK there are 2 different resident types: ordinarily & not ordinarily.

  • A resident who is ordinarily resident - this is the classification for someone who comes to the country and intends to stay at least three years. This is proven by either leasing property for at least a 3 year term, or by purchasing property.
  • A resident who isn’t ordinarily resident - this is the classification for someone who has been outside of the country and intends to be in the United Kingdom at least 2 years, but under 3 years.

UK Domicile

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.

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.

UK Taxes

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 main residence, corporate bonds, life insurance, cars, ISA account gains, asset gifts to charity, and United Kingdom government bonds. For a resident, and for those with a UK domicile who are ordinarily resident, taxes are imposed on capital gains worldwide. For those not domiciled, taxes are only on any capital gains that are earned within the UK, which allows for electing remittance basis on overseas gains.

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

1. Who is considered a UK Resident?

2. What is a Domicile?

3. Is Foreign Income Taxed in the UK?

4. What is the UK income tax rate?

5. What is the UK tax year?

6. When is the UK tax due date?

7. How do you account for different tax years between US & UK?

8. What UK tax forms can I expect to receive?

9. Do I have to complete a UK tax return?

10. What other taxes aside from Income Tax should I be aware of?

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

1. How do I report income on the Tax Questionnaire

2. How do I report taxes paid on the tax questionnaire

3. How do I report my deductions?

4. How do I report pension contributions?

5. How do I report pension payouts?

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?

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?

2. Social Security in the UK (National Insurance)

3. US - UK Social Security Totalization Agreement

4. Taxation of Social Security Benefits

5. Contributions to Employer Pension Schemes

6. Taxation of UK Pension Benefits

7. Self-Invested Schemes (such as ISA or SIPP)

8. Tie-Breaker Rule to Apply Treaty Benefits

UK Financial Accounts and FBAR/FATCA

1. UK - US FATCA Treaty overview

2. When did UK banks start sending data to the IRS?

3. What searches does a UK bank have to do to comply with US FATCA?

4. Which types of UK financial accounts reported on FBAR / FATCA ?

5. Which types of UK financial assets are not required to be reported on FBAR / FATCA ?

UK Tax Glossary for US Expats

1. Benefits in kind

2. Building society

3. Cash ISA

4. Council Tax

5. Income tax allowances

6. Inland Revenue

7. HM Revenue and Customs (HMRC)

8. PAYE

9. SIPP

10. Self assessment

11. Stamp Duty Land Tax (England, Wales and Northern Ireland only)

12. Stocks and Shares ISA

13. Tax years

14. VAT

15. Unit Trust