US Expat Taxes Explained: Filing Taxes as an American in the UK
You are going to be required to file US expat taxes no matter which country you live in, but how will they be affected if you’ve chosen to live in the UK? With its melting pot of nationalities, English-speaking culture and long-standing position as a world power, the UK is a popular choice for Americans expatriates as a host country. It is important to understand how your US expat taxes are going to change with your move to the UK, and what US expat taxes you will be required to pay to your host country while residing there.
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US Expat Taxes in the UK
If you are a citizen or permanent resident of the United States, then you are obligated to file US expat taxes with the US federal government each year no matter the country in which you reside.
In addition to the regular income tax return, you could also be required to file an informational return on your assets held in foreign bank accounts with Foreign Bank and Other Account Reporting (FBAR) Form 114, in addition to Form 8938 Statement of Specified Foreign Financial Assets.
While the US is one of the few governments that tax the international income of their citizens and permanent residents who reside overseas, it does have special provisions to help protect them from double taxation including:
- The foreign earned income exclusion allows you to decrease your taxable income on US expat taxes by the first $108,700 for 2021 ($107,600 for 2020) earned as a result of your labors while a resident of a foreign country.
- A foreign tax credit that could allow lower your tax bill on your remaining income by certain amounts paid to a foreign government, and
- A foreign housing exclusion that allows an additional exclusion from income for certain amounts paid for household expenses that occur as a consequence of living abroad.
With proper planning and quality tax preparation, you should be able to take advantage of these and other strategies to minimize or even eliminate your tax bill. Please do note that you will still need to file even if you know you will owe no US expat taxes. For more information, see US Expat Taxes Explained: An Overview of Our New Series
UK Income Tax Rates
For April 5 fiscal tax years, the national income rates from Her Majesty’s Revenue & Customs (HMRC) are as follows:
|Earnings in GBP (£)||Rate Applicable to Income Level (%)|
|0-2560||Starting Rate for savings: 10%*|
|0-35,000||Basic rate: 20%|
|35,001-150,000||Higher rate: 40%|
|Over 150,000||Additional rate: 50%|
*If your non-savings income is above £2,560, this rate does not apply.
You are able to exclude £7,475 of your income as a personal allowance. Note that this will be reduced by £1 for every £2 of income over £100,000, regardless of age.
Who is a UK Resident?
In the UK, defining if you are a resident of the UK is decided by the guidelines issued by HMRC. Generally speaking, your residency is going to be determined by your long-term intentions and how many days you are physically present in the UK. For the UK, each day is counted as being present 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 fewer 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.
What is Domicile?
For UK tax purposes, domicile is important when it comes time to factor in your worldwide income. Domicile is decided by UK law and is defined as where a person has their long-term, permanent home. It is not the same as nationality, citizenship or a 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. Otherwise, you have your domicile of origin unless you acquire a different 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. HMRC constantly makes changes to UK residence and domicile regulations and most recently made the structure more complicated in April of 2008. It is strongly advised that you get in contact with an expert concerning your domicile status while living in the UK.
UK Tax Due Date
The tax year in the UK is different from your tax year for the US expat taxes. It is April 6th through April 5th. 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 expat 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.
Social Security in the UK
As a general rule of thumb, expatriates are going to be required to pay into the UK’s National Insurance once they have taken up employment (or are self-employed). This is required in order to cover the costs of health insurance, welfare, pension plans, workers compensation and unemployment insurance, as well as other social programs currently in place in the UK. Per the US – UK Social Security Agreement, you will be required to pay Social Security to the country you are working in. However, if your employer sends you to the UK for five years or less, you will continue to be covered by Social Security on US expat taxes and exempt from coverage in the UK. If you are self-employed, you will pay to the country in which you reside.
Is Foreign Income Taxed Within 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.
US – UK Tax Treaty
The US – UK tax treaty is useful for defining the terms for situations when it is unclear to which country taxes should be paid. The country that receives the tax payment is usually determined by the taxpayer’s resident status in each country. It is in place to help relieve double taxation of dual citizens while also being available to explain any tax matters that may be unclear. It is helpful in eliminating dual taxation on US expat taxes.
Taxes in the UK
In addition to income tax on salaries paid, there are other forms of income that are taxed in the UK.
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.
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.
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.
Saving on US Expat Taxes
With the many various forms of taxation that are applied to foreign nationals working and residing in the UK, it is important that you apply all of the exclusions, deductions and credits to your US expat taxes. It is also important to understand the resident and domicile rules for savings on your UK Self-Assessment. Understanding your US expat taxes and your UK filing requirements while living in the UK will streamline the tax filing process and make it as hassle-free as possible. Filing US expat taxes in the UK doesn’t have to be a hassle! If you have any questions about your US expat taxes or your UK Self-Assessment, please contact our expat tax experts