At least in comparison to the US, the UK is a high tax environment. In some respects, capital gains and corporate taxation, for instance, the UK tends to be lower taxed than the US. However, since most US expats will be most interested in income taxes, here are 5 things to consider before you arrive and also once you are living in the UK to minimize your UK tax exposure.
1. Open an offshore bank account
You will need to open a bank account in sterling / pounds, of course, in order to receive your UK salary. When you visit a UK bank, request an international sterling bank account held in either the Isle of Man or the Channel Islands. All the major banks offer these. Your salary, and your salary alone, should be paid into this account.
The Isle of Man and Channel Islands are part of the UK banking sector so you will be able to use checks, debit cards and make transfers completely normally. But, these islands are NOT part of the UK for tax purposes (welcome to the weird and wonderful UK!).
So, what this means is that you will only be taxed, once your tax return is completed, on the element that relates to UK work. So if you travel outside of the UK for work purposes (to the US or any other country), the proportion of salary that relates to days worked outside of the UK is tax free in the UK.
Example – You have 225 working days per year, 30 days of which were worked outside of the UK.
Your salary = £125,000.
So 30/225 of your salary (13.3%) is not taxed in the UK.
13% of £125,000 = £16,667
You will only be taxed on £108,333 in the UK (£125,000 – £16,667).
There are some rules around this but the key ones are these:
- Do not pay any other monies into the account that contains your salary. Open other accounts inside or outside the UK for this.
- You must leave the tax free element at least, outside the UK.
2. Contribute to a UK pension scheme
Since the UK does have higher rates of income tax than the US, then it follows that tax deductible items are more valuable, receiving more tax relief.
Employers in the UK must offer you a pension scheme into which they will contribute and into which you may or may not contribute. Where possible, you should contribute as much as you can, especially if your salary is between £100,000 and £121,000. At these levels, your tax free personal allowance is gradually withdrawn, meaning, your marginal rate of tax is at 60%.
What this means is that by contributing to a pension scheme, you are receiving tax relief of 60%! So, for every £400 that you contribute, £1,000 is being added to your pension scheme, which in whatever part of the globe you live in, is fantastic.
And of course, all growth and gains remain tax free until distribution. And if you are resident in the US when you retire, that income is taxable only in the US! Or there are pension schemes in the US that can receive the UK pension funds without penalty – these are known as QROPS, or Qualifying Recognised Overseas Pensions Schemes. This is key so you can have the funds available to you in the US when you move back.
3. Remember self-employment is treated differently
If you are self-employed you intend to continue your self-employment in the UK, there are certain things to know and do.
Firstly, you will be taxed on your worldwide self-employment income in the UK, not just income arising from UK clients. Equally, you will be taxed in the US on the same thing! So, your US CPA will claim foreign tax credits / Foreign Earned Income Exclusion to prevent double taxation arising. Note that you must qualify as a US expat to use the Foreign Earned Income Exclusion. You can find out more about the eligibility requirements here.
However, the key thing is to ensure you do not pay into both the UK and US Social Security systems, which can and often does happen. This is simply another form of double taxation. To prevent this, do the following:
- On arrival in the UK, apply for a National Insurance number via Job Centre Plus, a UK government organisation;
- Once you receive this, register as a self-employed person with HM Revenue & Customs;
- Once you have both your tax reference number and your National Insurance number, apply for a Certificate of Coverage from the UK Revenue.
- This Certificate is provided to your CPA, or the IRS on occasion, and exempts you from the need to pay US Social Security.
The UK-US Totalisation Agreement is the treaty that tries to prevent double taxation via Social Security. This states which country provides Social Security coverage in certain cases, and with self-employed people living in the UK, that responsibility lies with the UK.
So, do not pay US Social Security!
4. Use a suitably experienced expat tax specialist
We would say this, wouldn’t we? But it is true.
UK tax forms looks so lovely and friendly compared to US 1040s. And lots of US expats choose to complete their own UK tax returns without advice or assistance. Here are a few of the reasons why this may not be the right choice for you:
- Yes, the returns look friendly, but the front end is a lot nicer than the back end. Remember that the UK tax code is the largest and most complicated in the world. Second largest is India. Uncle Sam comes in at number 3. It’s a big dog, with a bad attitude, and you wouldn’t approach one of them if you saw it in the street, would you?
- You were not brought up in the system, so you have no embedded knowledge. Within a few months, you’ll have some knowledge, but just enough to be dangerous. Don’t be dangerous, be safe.
- You may well miss available and hidden tax reliefs, or treat those reliefs incorrectly. So, you may over- or under-claim on your tax return. If you under-claim, the Revenue will probably not tell you, so you have overpaid taxes. If you over-claim, the Revenue will get in touch, and maybe fine you.
- US income – how to treat it in the UK? We see lots of errors on this aspect, especially on any US property the taxpayer rents out when they are in the UK. Do not assume that you can just ignore non-UK income. In some cases you can, with no cost. Often you can ignore it but with a cost. Other times you cannot ignore it.
- Foreign tax credits – you have paid taxes in the UK and the US on the same income so you are entitled to relief for this. While you may know the US rules on foreign tax credits, the UK has very different rules and regulations on this aspect. And they are not straightforward. So, there is a high chance of getting it wrong—and spending an inordinate amount of time doing it. You’re in the UK and you should enjoy yourself – and enjoying yourself does not include doing foreign tax credit calculations!
5. Have a short-term contract for tax breaks
The important thing here is to ensure that your contract documentation and any supporting emails, letters, etc, should state that the assignment is temporary in nature, with a term of less than 2 years.
That term may be increased when the contract is nearing its end, but certainly the contracted term should be limited. Why?
The UK offers generous tax reliefs to temporary workers. Since you are at what is considered to be a temporary workplace, you can claim tax relief on your UK home rental costs, on utility bills and real estate taxes, as sometimes even a portion of your grocery bills. This is called “Detached Duty Relief”.
This only applies to the worker, not their family, so if you are travelling with family members, your deductible costs will be reduced. But in any event this is a valuable tax relief.
The bottom line is that UK taxes are complex and confusing! The UK is a wonderful place, where you will have fun and make lots of friends. By seeking out expert tax advice and assistance on US and UK taxes, you can spend less time worrying about taxes and more time enjoying life.
Do you have a specific question about your UK taxes?
If you have a question about your UK self-assessment tax return, simply contact us today and we will get back to you with an answer!