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U.S. Federal Income Tax Obligations For U.S. Expatriates Living/ Working in the United Kingdom (U.K.)

The Basics – The U.K.

The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (U.K.) or Britain, is a sovereign country located off the north­western coast of the European mainland. 

The United Kingdom includes the island of Great Britain, the north­eastern part of the island of Ireland, and many smaller islands. Northern Ireland shares a land border with the Republic of Ireland. Otherwise, the United Kingdom is surrounded by the Atlantic Ocean, with the North Sea to the east, the English Channel to the south and the Celtic Sea to the southwest, giving it the 12th-longest coastline in the world. The Irish Sea separates Great Britain and Ireland.

The U.K. comprises individually the four countries England, Scotland, Wales and Northern Ireland.  Their capitals are London, Edinburgh, Cardiff and Belfast, respectively. Apart from England, the countries have their own devolved governments, each with varying powers. Other major cities include Birmingham, Glasgow, Leeds, Liverpool, and Manchester.

The United Kingdom’s capital and largest city is London and the official language and national language is English with Regional and minority languages including Scots, Ulster Scots, Welsh, Cornish, Scottish, Gaelic and Irish.

The United Kingdom is a unitary parliamentary democracy and constitutional monarchy.  The current monarch is Queen Elizabeth II, who has reigned since 1952, making her the world’s longest-serving current head of state.

There are fourteen British Overseas Territories, the remnants of the British Empire which, at its height in the 1920s, encompassed almost a quarter of the world’s landmass and was the largest empire in history.  These include Anguilla, Bermuda, Cayman Islands, British Virgin Islands, Turks and Caicos Islands and Montserrat in the Caribbean to Gibraltar in Europe to the Falkland Islands in the South Atlantic Ocean to name a few.

The U.K. was a member of the European Union (EU) and its predecessor, the European Economic Community (EEC) from 1 January 1973 until the Brexit referendum which occurred on the 23 of June 2016 officially withdrawing the U.K. from the EU on 31 January 2020.

The U.K. comprises a total area of 93,628 sq miles is the 78th largest country in the world, has a population of 67,886,004 people and a GDP of 2.638 trillion U.S. dollars.  The U.K.’s currency is the is the Great British Pound Sterling known as the GBP, the U.K.’s time zone is 0 UTC, the U.K.’s country telephone dialing code is +44, it’s internet TLD is “.UK” and it operates on a 230 volt electrical grid.

The U.S. and the U.K. share a common language and heritage, making the U.K. a popular destination for Americans to reside and work.  As a U.S. citizen or resident alien (U.S. Expat) living in the U.K., however, there is always the possibility of “double income taxation,” i.e., having to pay taxes to both the U.K. and the U.S. on the same income you earned in the U.K. The good news is that there are rules in place to avoid double taxation.

Knowing your obligations as a U.S. Expat are important. The Internal Revenue Code’s (IRC) rules are, however, quite complex, and while this is a simplified, broad overview to familiarize you with your filing obligations and how to avoid double taxation, you should consult a Certified Public Accountant  (CPA) expert in U.S. Expat income taxation to learn more.  U.S. Expat income taxes are a highly complex niche area of taxation that most CPA’s are not aware of.

U.S. Tax Obligations on U.S. Expats Living in the U.K.

The U.S. imposes the same obligations on its citizens and resident aliens living abroad to file and pay U.S. federal income taxes, as it does on its citizens and residents living and working in the U.S. 

Requirement to File U.S. Income Tax Returns

Specifically, if you are a U.S. citizen, or “resident alien,” and you meet the annual filing thresholds, you are obligated to file a federal return Form 1040 and pay federal income taxes annually no matter that you live and work in the U.K., the fact that you are paid in GBP or USD or where your employer or clients are located whether in the U.S. or the U.K.  The annual filing thresholds, which are dependent on your filing status- Single, Married Separate, Married Joint, Head of House or Qualifying Widower, age and type of income are indexed annually by the Internal Revenue Service (IRS). 

How to Report Income and Expenses Living/ Working in the U.K.

The U.S. Form 1040 is always expressed in U.S. dollars, using exchange rates as prescribed or otherwise allowed by the IRS.  Generally, for income or expense items we use the average Ask rate for the calendar tax year in question, and for gains and losses the daily spot rates.

Avoiding Double Taxation

If you meet the annual income tax filing thresholds referred to above, you are technically required to file and report worldwide income for U.S. income tax purposes on the same income you are also obligated to pay taxes on to the U.K.  The good news is that, if you pay income taxes to the U.K. on income you earned there, the U.S. IRC has provisions in place to let you avoid double income taxation, using both:

  • Use a Foreign Earned Income Exclusion (FEIE) thereby excluding earned income –income earned in the U.K. when determining U.S. income taxes and / or
  • Obtaining a Foreign Tax Credit (FTC) for the taxes you paid, or have accrued, to the U.K. against the taxes you owe to the U.S.

The U.S. FTC

In addition to the FEIE, HD and HE, U.S. Expats living / working in the U.K. can also claim the U.S. Foreign Tax Credit (FTC) on Form 1116 for taxes paid or accrued to the U.K. on the FEI above but not on that already excluded using the FEIE and HE or HD.  In other words there is no double counting the U.K. income or the U.K. foreign tax that can be used in hybrid with both he FEIE / HE/ HD and the FTC. 

The maximum FTC credit you can take is limited to the lower of:

  • Actual taxes paid or accrued to the U.K. on that U.K. FEI or
  • The U.S. Federal Income tax you would have paid on that U.K. FEI.

Note that you may also take the FTC on passive income, using a different category and Form 1116- FTC.

However, remember that since the U.S. FTC is limited as explained above, according to the limitation above you will always end up paying the higher of the two income taxes, which in this case is to the U.K. 

The Form 114 FBAR and Form 8938 FFA

Not to forget or marginalize the fact that all U.S. persons must consider their obligation annually to file Form 114 Report of Foreign Bank and Financial Accounts (FBAR) and Form 8938 Statement of Specified Foreign Financial Assets (FFA) , the former of which is specifically referenced on Schedule B – Interest and Dividends- that accompanies Form 1040, the fact that if you are required to file both the FBAR and FFA Forms as a U.S. Expat living and/ or working in the U.K. the amounts on both forms  must sync and of course that both forms carry a mind boggling non-willful violation penalty of $10,000 per account/ FFA per annum

The Bottom Line

Because the U.K. sets income taxes on income at much higher rates than the U.S., if the U.S. income tax compliance is done correctly, in general assuming no U.S. source income- no U.S. passive income and no U.S. workdays-  you  should never have to pay any additional U.S. Federal Income taxes on income you earned in the U.K. 

As you can see, however, the rules are complex, and it is easy to get overburdened if you do not hire the correct CPA firm U.S. Expat specialists. 

At Protax, our primary goal and objective is to analyze the interplay of the FEIE, HD, HE and FTC to find the optimum strategy to limit the world-wide taxes you pay.  While of course at the same time making sure that you are in full U.S. tax compliance. 

Protax is the world’s leading U.S. individual international tax firm, specializing in the delivery of world class professional services to U.S. Expats.  For more information, fill out our contact form to speak to one of our expert tax consultants.

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