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Living in the UK as a US expat has become increasingly popular in recent years. However, it’s crucial to understand the tax laws and regulations that impact your financial planning. This tax guide for US expats living in the UK provides essential information to navigate the complexities of the UK tax system.
One crucial aspect to consider is the impact of Brexit and other political issues on the US-UK relationship. Despite this, the UK’s rich history, English-speaking culture, and position as a world power continue to make it a popular choice for American expats.
The cost of living in the UK is another critical factor to consider. While it may be higher than in some parts of Europe, it’s still relatively affordable compared to other countries worldwide. Factors that impact the overall cost of living include food costs, which vary depending on where you shop and what you buy. Rent is also generally cheaper in the UK than in the US, although areas like London can be expensive.
This tax guide provides essential information on how living in the UK will impact your US tax obligations. It covers UK tax rates, tax treaties between the US and the UK, and tax obligations for self-employed individuals.
By the end of this guide, you’ll be equipped with the knowledge to make informed decisions about your financial future as a US expat living in the UK.
The first question most expats living in the UK have is whether they should file their taxes with the UK government or the US. In most cases, the answer is both. This is because:
To help clarify precisely what taxes you may owe, here’s an overview of the Tax Guide for US Expats Living in the UK.
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 system is much like the US, 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 tax rate for each additional dollar of income.
The UK has a residence-based tax system, which means that if you are considered a tax resident in the UK, you will usually have to pay HMRC tax on all of your worldwide income. Residents typically pay tax on all their income, whether from the UK or abroad. But there are special rules for residents whose permanent home (‘domicile’) is abroad. Non-residents pay tax on their UK income but not foreign income.
Most employees’ taxes are withheld in the UK through the Pay As You Earn (PAYE) system. You will generally only need to file a UK tax return if:
If you are required to file, Her Majesty’s Revenue and Customs (HMRC) should send you a form to fill out. However, you can double-check your tax filing obligations using this HMRC tool. You may also want to file a tax return to claim deductions or receive a refund from the HMRC. Common examples of deductions include:
If you have not received a tax form from the HMRC but need to file one, you must register online with the HMRC. Do this as early as possible to avoid late filing penalties. The sign-up process takes 10–14 days to complete, as the HMRC must mail you a verification PIN.
Your residency status will determine what forms of income you should report. If you are a non-resident, you will only need to report your UK-source income. If you qualify as a resident, on the other hand, you will typically be taxed on your worldwide income. (However, there are special rules for UK residents whose permanent home, or “domicile,” is located outside the UK and for those who are not considered “ordinarily resident.”)
The UK defines residency status based on your long-term intentions and how many days you are physically present in the UK. You will generally be considered a resident for tax purposes if any of the following apply:
You can also be considered “ordinarily resident” and “not ordinarily resident.”
The concept of domicile is fundamental in UK tax law. It can help determine whether you owe taxes on your worldwide income and assets or only UK-sourced income and assets.
Your domicile, or origin, is the same as your father’s at birth. If your father had changed domicile while you were still a dependent, your domicile would also have changed. Otherwise, you have your domicile of origin unless you acquire a different domicile.
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 challenging to acquire a domicile of choice compared to a 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. The HMRC constantly makes changes to UK residence and domicile regulations.
As mentioned, UK residents are taxed on their worldwide income, while non-residents are only taxed on their UK-source income. The rates for the UK income tax—excluding Scotland—are shown below. (All amounts are given in GBP.)
The income rates for Scotland are as follows. (All amounts are given in GBP.)
In both cases, taxpayers can exclude up to GBP 12,500 of their income as a personal allowance. This is reduced by GBP 1 for every GBP 2 income over GBP 100,000.
Non-cash compensation is considered taxable in the UK. This includes:
There are exceptions, but in general, expats can expect to pay taxes on non-cash compensation in the UK.
The UK also taxes capital gains, including:
If you are a resident or ordinarily resident and domiciled in the UK, you will be taxed on your worldwide capital gains. If you are a non-resident and not domiciled, you will only be taxed on capital gains earned in the UK.
The UK imposes an inheritance tax on expats’ worldwide assets if either of the following applies:
If neither of these applies, you will only be subject to an inheritance tax on assets located in the UK.
Like the US, the UK maintains a social security system funded by contributions from the earnings of employers and employees. Fortunately, the US-UK totalization agreement establishes rules for social security contributions to avoid double taxation.
Yes. Typically, whichever country you qualify as a resident of will receive your income tax debt. The US-UK tax treaty defines which country an expat will owe income taxes to, reducing the risk of double taxation. The treaty provides a framework for determining which country should receive your tax debt, but it is not binding. You will likely owe taxes to both countries if you do not meet the treaty’s requirements.
The US-UK Tax Treaty includes two passages that affect Americans the most. They are:
A bilateral agreement between two countries aims to eliminate the double payment of social security taxes for individuals who work in both countries. The US has totalization agreements with over 30 countries worldwide, but does it have one with the UK?
The answer is yes; the US and the UK have a totalization agreement. The agreement was signed in 1984 and has been in effect since 1985. The agreement aims to help workers and employers avoid double social security taxation and ensure that individuals who have worked in both countries can qualify for benefits.
Under the US-UK totalization agreement, workers must only pay social security taxes one country at a time. If a worker is sent to work in the UK by a US company, for example, the worker and the employer will only pay social security taxes in the UK and not in the US. Similarly, if a UK worker is sent to work in the US, they will only pay social security taxes in the US and not in the UK.
The agreement also allows individuals who have worked in both countries to combine their social security credits to qualify for benefits in either country. For example, suppose a US worker has earned enough credits in the UK and is not eligible for US social security benefits. In that case, they may still be eligible for UK social security benefits.
The US-UK totalization agreement benefits both countries, as it helps reduce the administrative burden and costs associated with double taxation. It also provides greater flexibility for workers who move between the two countries and helps ensure they receive the social security benefits to which they are entitled.
When it comes to UK tax forms, Americans living in the UK may need to file a Self-Assessment tax return if they meet specific criteria. For example, if they are self-employed or have income from sources other than employment, they may need to file a Self-Assessment tax return. The tax year in the UK runs from April 6 to April 5, so the deadline for filing a Self-Assessment tax return is typically January 31 of the following year.
Additionally, Americans living in the UK may be eligible for certain tax credits or deductions, such as the UK Personal Allowance, which is a tax-free amount of income that can be earned each tax year. To claim these credits or deductions, they may need to fill out additional UK tax forms, such as the P85 or SA101 forms.
Tax laws and regulations can be complex, and the requirements for filing tax forms can vary depending on individual circumstances. It’s always a good idea to consult with a tax professional familiar with US and UK tax laws to ensure you comply and take advantage of all available tax benefits.
The SA100 is the UK individual income tax form, an equivalent of the US IRS Form 1040.
The deadline for Form SA100 depends on how you intend to file it. If you file a paper return, the deadline is October 31 of the tax year in question. If you file an e-return online, the deadline is January 31 of the following year. Unfortunately, no filing extensions are available.
Form 1040 is the standard US individual income tax return. All US citizens are required to file this form regardless of whether they live in the US, the UK, or anywhere else.
The due date for Form 1040 is typically April 15 (April 18th, 2023), but in the case of expats, that due date is automatically extended to June 15th, 2023 (You can also request a further extension to October 16th, 2023.)
You can also request a further extension to October 15 for filing this form.
If you own non-US financial assets valued above certain thresholds, you must file a FATCA report. The specific threshold for your finances will depend on your filing status and whether you qualify as a bona fide resident of the UK.
If you do have to file a FATCA report, fill it out, attach it to your Form 1040, and file them simultaneously.
If you have at least $10,000 deposited in one or more non-US bank accounts, you must report it by filing FinCEN Form 114, also known as the FBAR.
Unlike the previous forms, you can’t file the FBAR by mail. You must file it electronically using the FinCEN BSA E-Filing System.
The FBAR is technically due on April 15, but if you miss that deadline, it automatically extends to October 15. You won’t even have to file an extension request.
Because of the US-UK tax treaty, most Americans living in the UK are already exempt from double taxation. However, the IRS also provides several other potential tax credits and deductions for expats, such as:
Most expats who use these tax credits can erase their US tax debt.
Filing UK taxes for US citizens doesn’t have to be a hassle! The US expat tax filing deadline is fast approaching, and it’s important that you make sure your taxes are in order. Fortunately, there are several steps you can take to make this task a little easier.
Contact us, and one of our customer champions will gladly help. If you need precise advice on your tax situation, you can also click below to get a consultation with one of our expat tax experts.