Are you looking forward to London life but not the London income tax?
While Tax-Free Citizen has no control over the tax laws in London or the rest of the United Kingdom, we can help you to understand what taxes you have to file and pay as a US citizen living abroad in the UK.
If you are a US citizen currently living in or are interested in living in the UK, this guide is to help you understand what you need to know about UK taxes for US expats.
In this article, we’ll discuss:
- US Taxes for Americans Abroad
- Do you have to pay UK taxes as well?
- UK Residence vs Non-Residence
- UK Income Tax Rates
- When are taxes due?
- Avoiding Double Taxation
- Social Security Tax
- Other Taxes in the UK
US TAXES FOR AMERICANS ABROAD
The United States has a unique tax system. It is one of the only countries in the world that has citizenship-based taxation. This means that the US taxes its citizens and residents no matter where they live in the world.
If you are an American citizen or green cardholder, you are still obligated to file and pay tax in the US, even if you are living overseas.
US persons are also required to file the Foreign Bank Account Report (FBAR) if they have more than $10,000 in foreign banks or financial accounts. US persons with foreign assets that value $200,000 or more are required to report under The Foreign Account Tax Compliance Act (FATCA).
DO YOU HAVE TO PAY UK TAXES?
Most other countries don’t have a citizenship-based tax system. Instead they employ residential tax systems that tax you based on whether or not you are a resident of that country. So how does it work in the UK?
The United Kingdom’s tax system is similar to a residence-based tax system and a territorial tax system (a system in which only income sourced from within the country is taxed). It’s sometimes referred to as a non-dom system.
In the UK, non-residents are required to pay tax on their UK income, but the UK doesn’t tax them on any foreign income. Residents of the UK pay tax on all their income.
UK RESIDENCE VS NON-RESIDENCE
What will qualify you as a resident of the UK?
You are a UK resident if you spend 183 days or more in the United Kingdom in a tax year or if your only home is in the UK, you have owned or rented it for 91 or more days, and you spent 30 or more days there in a tax year.
There are two types of residents in the UK: ordinarily and not ordinarily.
An ordinarily resident is someone who comes into the UK and expects to stay there for three years or more. You can prove your intent to stay by purchasing or leasing a property for three-plus years.
A not ordinarily resident is someone who has been outside of the UK and intends to reside in the UK for at least two years and less than three.
You are considered a non-resident of the UK if you spent less than 16 days in the UK during a tax year or if you work abroad full-time and spent less than 91 days in the UK and worked in the UK for less than 30. If you haven’t been classified as a UK resident for the past 3 tax years, you can spend 46 days in the UK and still be considered a non-resident.
What is domicile? Your domicile is where you have your permanent, long-term home. Many countries determine your taxpayer status based on your domicile.
When you are born, your domicile is the same as your parents. If your parent’s domicile changes while you are their dependent, your domicile changes too. When you need to establish a new domicile, you have to cut ties with your previous domicile.
Domiciles of the UK who reside in the UK are taxed on their worldwide income.
UK INCOME TAX RATES
How much income tax do you have to pay in the United Kingdom?
Like in the US, your income tax is going to be based on how much money you make. In the UK, they call these ranges tax bands. (In the US, they are called tax brackets.)
|Earnings in British Pounds||Tax Rate|
|0 – 12,500||Starting Rate: 0%|
|12,501 – 50,000||Basic rate: 20%|
|50,000 – 150,000||Higher rate: 40%|
|Over 150,000||Additional rate: 45%|
Everyone in the UK is given a personal allowance. This is the amount of income that you can earn before you are required to pay income tax. You have to pay tax on any amount over your personal allowance. Personal allowance can also be different depending on your individual situation.
Income in the UK includes your wages, your pension, your benefits, interest on your savings, income and dividends from shares, rental income, and income paid from a trust.
WHEN ARE TAXES DUE?
In the US, taxes are due on April 15th. The dates for the tax year in the UK are different. The UK tax year is from April 6th to April 5th.
In the UK, if you file your taxes on paper, they are due on October 31. When filing electronically, you have until January 31 to submit your documents.
What is the name of the tax service in the UK?
In the UK, you file your taxes with Her Majesty’s Revenues and Customs (HMRC) office. This is the UK equivalent to the IRS in the United States.
The UK Tax Declaration document is called the Self Assessment.
In the UK, you cannot file your UK taxes jointly. Married individuals have to submit their own returns for their personal income. However, you can have one spouse transfer their personal allowance to the other.
AVOIDING DOUBLE TAXATION
The US and UK have an existing tax treaty. This helps people avoid double taxation and determines to which country you pay taxes.
The United States has a few deductions for US persons overseas that can help them to reduce their tax burden.
Foreign Tax Credits allow you to take a dollar-for-dollar tax credit against your US tax obligation for the tax you’ve paid overseas. Because the tax rates in the UK are usually higher than the tax rate in the US, you can use a Foreign Tax Credit to lower your US tax rate to zero.
Another deduction US persons living abroad can use is the Foreign Earned Income Exclusion. The Foreign Earned Income Exclusion is a tax deduction that allows US persons overseas to exclude around the first $100,000 from their US federal income. In 2021, the number you can exclude is $108,700. The number goes up each year to account for inflation.
If you make less than $108,700, your US income tax can be lowered to zero. However, the Foreign Earned Income Exclusion cannot be used with the Foreign Tax Credit and it does not cover self-employment taxes, such as Social Security and Medicare.
SOCIAL SECURITY TAX
Expats are required to contribute to the UK’s National Insurance program if they are employed or self-employed in the UK. This covers the cost of health insurance, pension plans, welfare, workers compensation, and unemployment insurance.
The US and UK have a Social Security Agreement that says you are required to pay Social Security to the country in which you are working. If you are self-employed, you are required to pay your social security to the country where you reside.
If you have a salaried position, you will most likely have your tax deducted by your employer at the source through Pay As You Earn.
If you are self-employed, you are required to fill out a self-assessment form once a year. This can be done after the tax year ends on April 5th and must be submitted by the tax deadline that follows.
What are some other reasons you may have to file a self-assessment tax return?
You may also have to file a self-assessment tax return if you receive £2,500 or more in untaxed income from renting a property, from an investment, or from savings.
You’ll also have to file a self-assessment form if your savings and investment income was equal to or more than £10,000 before it was taxed.
You’ll have to file a self-assessment form If you were a company director, if you made profits from a second home or from selling shares, or if your income or your partner’s income was over £50,000 and you claimed Child Benefits.
Finally, you’ll have to file a self-assessment form if you received any income from abroad, if your income was over £100,000, if you received dividends from shares and you are in the higher or additional rate tax band, or if you were a trustee of a trust or registered pension scheme.
OTHER TAXES IN THE UK
What other taxes might you have to pay in the UK, other than income tax and social security?
Capital gains tax in the UK includes sales of a second property that was rented out, the sale of an investment property, life insurance, cars, corporate bonds, individual savings account gains, UK government bonds, and asset gifts to charity.
The sale of a principal residence is exempt from capital gains tax as long as the owner lived in the property for the entire time that they owned it. If during the period of ownership the property was not lived in or was rented out, only some of the principal private residence relief can be claimed. You cannot claim it on the entire value of the property.
There are two capital gains tax rates in the UK, depending on the asset. The capital gains tax rate for carried interest and second properties is 28%. The capital gains tax rate on all other assets is 20%.
While UK domiciled residents are taxed on all of their worldwide income in the UK, non-domiciled residents of the UK are only subject to pay tax on the UK sited assets in addition to any proceeds that were remitted to the UK which relate to capital gains.
UK domiciles owe inheritance tax on worldwide assets when it concerns estate taxes. Inheritance tax is payable for anyone who was considered a resident of the UK for at least 17 of the last 20 years. If you are now a resident of the US, you’ll only be responsible for inheritance tax on your assets within the UK.
While moving to the UK may not save you money on tax, you can still lower your US tax obligation by moving overseas.
If you are a resident in the UK, you will be required to pay income tax and social security tax to the UK. If you are not self-employed, your employer will most likely take out the tax you owe for you. If you are self-employed, you will need to file the self-assessment tax report.
If you have kept your US citizenship, don’t forget to also file your US taxes on time. While you may not owe any taxes to the US, you can still get in huge trouble with the IRS if you don’t file at all.