We all know that you are required to file a tax return with the IRS, reporting your worldwide income, no matter where you live in the world, but what about tax returns for the country you are living in? As a US expat in the UK, you may need to file a return, and possibly pay taxes, on your income to the United Kingdom Government. Here are some basic guidelines on the process, and the requirements for filing UK taxes.
The Basics of the United Kingdom Tax System
The UK equivalent to the IRS is the Her Majesty Revenue & Customs (HMRC) office. The HMRC is the principal revenue collection agency of the United Kingdom government. They collect taxes, administer some of the regulatory systems like the national minimum wage, and are responsible for payment of some state support/welfare.
The UK tax year is April 6th – April 5th. Your UK tax return is required to be filed by January 31st of the year following the end of the tax year if you electronically file your return. If the tax return is paper filed, it must be completed and filed by October 31st following the end of the tax year. There is no automatic extension available to file your UK tax return, but the HMRC may waive the late filing penalty if you meet certain conditions. The HMRC considers each case individually.
In order to work in the UK, and subsequently file your tax returns, you will need to file for a National Insurance number. You will apply for a number through Jobcentere Plus. You will need proof of your identity, proof of marriage or civil partnerships, and residence permits.
The UK tax system is much like the US tax system, where tax is levied as you earn your salary, wages, business income, and investment income. Payroll taxes are known as Pay As You Earn (PAYE) taxes. PAYE includes your income tax and national insurance contributions. The tax rates are progressive, meaning the more you earn, the higher your rate of tax for each additional dollar of income. See National Insurance later.
Married couples cannot file a joint tax return. Each individual is required to file their own tax return/assessment as needed for their own income, but there is a marriage allowance that allows one spouse to transfer some personal allowance to the other spouse.
Who Needs to File a Return?
The HMRC issues tax return forms to individuals. If the HMRC has determined that you paid enough tax through your payroll withholding, they may not send you a tax form, and you do not have to file a return unless you have other income/circumstances.
If you have other sources of income, such as from self-employment or investment income, then you will need to file a tax return and pay the taxes on that income. Other instances where you would need to file a tax return include the following:
- Having income from renting out property
- Profits earned from selling shares, a second home, or other assets resulting in capital gain
- Income earned from non-UK sources while you lived in the UK
- If you claimed child benefits and your or your partner’s income was above £50,000
- Your income was £100,000 or higher
You may also want to file a tax return to claim deductions, which help to reduce your tax liability or get a ‘refund’ from the HMRC. Common deductions are donations to charity, private pension contributions, and work expenses over £2,500.
If you have not received a tax form from the HMRC, but need to file one, you must register online with the HMRC. The sign up process takes 10-14 days to complete, as a verification PIN needs to be mailed to the taxpayer. If you need to register online, be sure to do so as early as possible to avoid late filing penalties.
Whether you need to pay tax on foreign income (non- England, Scotland, Wales, or Northern Ireland income) is dependent upon your residency status in the UK. Non-residents only need to pay taxes on their UK sourced income.
Whether you are a UK resident depends upon how many days you spend in the UK during the tax year (not the calendar year).
You are automatically considered a tax resident if either of the following apply:
- You spend 183 days or more in the UK
- Your only home was in the UK – a home you have owned, rented, or lived in for at least 91 days – and you spent at least 30 days in there in the tax year.
If you are a resident of the UK, you will need to report your worldwide income on a tax return filed with the HMRC. Income includes wages, salaries, rental income on foreign property, investment and savings interest, and pension income. There are some tax reliefs available to help offset double taxation on your income, so you are not paying tax to more than one country on the same income. This is important with US expats, as the US also requires you to file a tax return and report your income to the IRS (even if you don’t live in the USA). Foreign sourced income will need to be reported on a self-assessment return filed with the HMRC.
You are automatically considered a non-resident if either of the following applies:
- You spent fewer than 16 days in the UK, or 46 days if you have not been classified as a UK resident in the past 3 years
- You work abroad full time and spend less than 91 days in the UK (of which less than 30 days are spent working in the UK)
Nonresidents only pay tax on their UK income. A self-assessment will need to be filed to report your income and calculate the taxes due to the HMRC.
Calculating the Tax
How much income tax you pay each year depends on how much of your taxable income is above your personal allowance and how much of that income falls within each tax band. For the 2019-2020 tax year, the rates are as follows:
|Earnings in GBP (£)||Rate Applicable to Income Level (%)|
|0-5000||Starting Rate for savings: 10%|
|0-37,500||Basic rate: 20%|
|37,501-150,000||Higher rate: 40%|
|Over 150,000||Additional rate: 45%|
The standard amount of personal allowance is £12,500 per person.
In addition to income taxes, you may also need to make National Insurance (NI) contributions. National Insurance is mandatory for most UK residents. The contributions you make into the NI system qualify you for certain benefits including the State Pension, jobseeker’s allowance, maternity allowance, bereavement benefits, and other Social Security type benefits.
Social Security Agreement with the USA
The US and the UK have a Social Security Agreement in effect that dictates which country is allowed to assess Social Security taxes on income of US and UK citizens. US employees in the UK are generally not assessed US social security taxes, but must make the UK National Insurance payments on their income. This agreement (known formally as a ‘Totalization Agreement’) also covers self-employed individuals. Normally, no matter where you earn it, self-employment income is subject to US Social Security and Medicare taxes; known as self-employment tax. This is in addition to regular income tax assessed. With a ‘Totalization Agreement’ in place, the taxpayer only needs to pay the Social Security and Medicare taxes to the resident country; in this case the United Kingdom.
US-United Kingdom Tax Treaty
A tax treaty is different than a Social Security agreement. The US-UK tax treaty (find it here) dictates the terms of taxes between the US and UK, providing tie-breaker rules and determining which country a taxpayer is considered a resident. While the individual income tax issues are included in the tax treaty, the bulk of the treaty relates to commerce, property, and governmental rights to tax income based on jurisdictions.
One of the major factors in the treaty sets out the guidelines for relief from double taxation. It allows a credit on your US tax return of taxes paid to UK and vice versa. While the treaty allows for double taxation relief, it is also a legal document and as such could be interpreted in many ways to apply to various situations.
Of course, a simple article such as this cannot fully explain the ins and outs of the United Kingdom tax system and the requirements for filing. Hopefully this article can help you understand your responsibilities, and minimize any unwelcome surprises!