Simple Tax Guide for Americans in the UK
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 103,900 (this amount is for 2018 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 2018-2019 from Her Majesty’s Revenue & Customs (HMRC), are:
Up to £11,850
£11,851 to £46,350
£46,351 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.
6 April 2018 to 5 April 2019
6 April 2017 to 5 April 2018
6 April 2016 to 5 April 2017
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- rate on dividends over allowance
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)
Who Qualifies as a Resident of UK?
UK residence status will affect 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 Jobcentre Plus office. Residence permits, proof of any marriage or partnership, and identity proof are 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 from the US tax year. In the UK, it is from 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, ex-pats 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 ex-pat taxes, with an exemption from coverage by the UK program. For the self-employed, they pay in the country they reside in.
Does United KingdomTax 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 a 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. A remittance basis means you can choose to pay United Kingdom tax on your income from investments remitted in the 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
1. Who is considered a UK Resident?
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.
2. What is a Domicile?
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.
3. Is Foreign Income Taxed in the UK?
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.
4. What is the UK income tax rate?
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.
5. What is the UK tax year?
The tax year in the UK is different from the US. It is from April 6th through April 5th.
6. When is the UK tax due date?
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 ex-pat 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.
7. How do you account for different tax years between the US & UK?
We use the prorated amounts of earnings and tax paid from two consecutive years covering the 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 to obtaining these numbers.
8. What UK tax forms can I expect to receive?
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).
9. Do I have to complete a UK tax return?
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 is 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.
10. What other taxes aside from Income Tax should I be aware of?
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 of the UK Tax Declaration document and who must have it prepared? Do you need its copy?
UK Tax Declaration is called Self Assessment.
This page explains who must have it prepared and submitted to the HMRC.
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
your savings or investment income was £10,000 or more before 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
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.
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