Why do Americans move and pay tax in the UK as an expat?
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We have built a new website for American expats who want to be tax-efficient when moving to the United Kingdom as a UK tax resident. We are here for Expenses.
American expats living abroad, particularly in the UK, could face an income tax liability between 0% to 45%. The percentage paid by Americans living and working in the UK increases as income increases in different bands.
US ex-pats must pay taxes on income in the UK, including wages, benefits, pensions, and interest in savings.
Americans do not have to pay taxes in the UK if only making short business trips, training courses, or work meetings.
If you’re employed in the UK, your employer will deduct this under PAYE from your wages.
If you work for yourself, as an American, or have other UK income, you must send a Self Assessment.
Americans living in the UK may also have to send a tax return to HMRC if they:
– made a profit when selling certain assets such as shares or a second home
– have to pay UK tax on foreign income such as savings in an overseas bank account, rent on a property that is let out, or an overseas pension (this depends on being resident in the UK or not)
Americans may also have to pay tax on UK income or gains made while abroad if they have lived in the UK before.
Before moving here, it is important to find out about the requirements for Americans in the UK.
Please note that Americans living abroad in the UK may need to file an FBAR report in addition to the 8938 form, which is part of the 1040 return.
What are the basics for American citizens living in the UK?
According to the 2011 UK Census, 173,740 US-born residents lived in England.
The Office for National Statistics estimated in 2013 that there were 197,000 US-born immigrants resident in the UK.
In London, most Americans are businesspeople and their families with strong ties to the economic relations between the City of London, New York City, and Washington.
Chelsea and Kensington both have large American communities.
Who needs to file a UK self-assessment return?
The UK is a popular choice for American ex-pats. It is vital to understand how living in the UK affects your US ex-pat taxes, you must pay to HMRC while living in the UK.
If HMRC determines that you have paid enough tax through your payroll withholding as an American living and working in the UK, they may not send you a self-assessment return.
Employees who earn more than £100,000 will have to file a UK tax return to HMRC. This is because you start to lose your annual personal allowance, which needs to be reflected in the tax calculations.
You will not then have to file a self-assessment unless you have other income or specific circumstances.
If you have other income sources, such as self-employment or investment income, you must file a self-assessment return and pay money to HMRC. That said anyone with self-employment earnings less than £1,000 will avoid needing to file a self-assessment to HMRC.
What other instances would you need to file a self-assessment return to HMRC as expats?
Other instances where Americans living in the UK would need to file a tax return include:
– Income from renting out property
– Profits earned from selling shares, a second home, or assets resulting in capital gain
– Income earner from non-UK sources while you lived in the UK
– Income of £100,000 or higher
You may also want to file a self-assessment return to claim deductions, which can help reduce your liability in the UK or get a refund from HMRC.
Common allowable deductions for Americans living and paying tax in the UK include donations to charity, private pension contributions and work expenses over £2,500.
Tax ID Unique Tax Reference (UTR)
An American with income will be required to file a 1040 return to the Internal Revenue Service (IRS). Americans will have a Social Security Number (SSN) or an Individual Tax Identification Number (ITIN).
Americans moving to the United Kingdom need to be aware that their SSN or ITIN numbers have no effect in the Country and that they will be required to obtain a Unique Tax Reference Number (UTR) from HMRC.
A UTR is a 10-digit number that is used for identification. This UTR will be used to correspond with HMRC and submit self-assessment returns.
Americans who are employed and do not have significant earnings elsewhere will not be required to submit a self-assessment return to HMRC. This is unlike the United States, where most Americans file 1040 returns to the United States.
National Insurance Number (NI) for healthcare with the National Health Service (NHS) and state pensions
Americans who move to the United Kingdom will be relieved to know they do not need to spend excessive money on insurance as they do in the United States.
Americans who are employed will be required to pay their employees’ national insurance, and their employers will also pay their employer’s National Insurance. Part of these NI contributions will support Americans with free healthcare provided by the National Health Service (NHS).
US citizens moving to the UK must apply for a National Insurance Number.
Do you still need to file a US tax return?
You must file ex-pat taxes in the US regardless of where you live.
US citizens and permanent residents are required to file federal returns every year. In addition to the usual income return, many are also required to submit a return disclosing assets held in bank accounts in foreign countries, including the UK, using FinCEN Form 114 (FBAR).
The US is one of only a few governments that tax international income earned by their citizens and permanent residents living overseas.
The IRS has produced guidelines for Americans living in the UK, which are worth reviewing.
Are there deadlines for Americans in the UK?
The UK tax year is different from the US.
In the UK, the year is 6th April to 5th April. Returns need to be filed with HMRC before 31st October of the if filed by paper.
If you are e-filing, you have until 31 January of the year following the year.
HMRC does not offer extensions to Americans living and paying tax in the UK.
The UK has a withholding system (PAYE) that will go through your employer’s payroll for payment.
For non-wage income that does not have withholding, payments are due on 31 January. Payments must be completed by 31 July of the following year.
If you’re living in the UK on US tax day (which is usually 15 April), you receive an automatic two-month extension from the IRS to file your federal ex-pat 1040 return. This makes the due date for your US 1040 return 15 June.
Our UK and US advisors can assist in helping to ensure you are not subject to late payment fines.
Is an American's foreign income taxed in the UK?
The tax paid on worldwide income by Americans living in the UK will depend on their residency and domicile status.
If you are considered a resident in the UK, HMRC will tax you on all of your investment income. This will be the same income reported on your US 1040.
If you are a resident but not domiciled in the UK, you can file using the remittance basis for foreign income and capital gains.
If you are a resident and domiciled but not ordinarily resident, you can use remittance for foreign income but not for capital gains.
The Remittance basis allows you to elect to be liable to pay UK tax on investment income remitted in the UK.
For non-UK-domiciled residents, it is advisable to speak to a good advisor about overseas bank accounts to avoid costly mistakes.
What is the UK-US tax treaty for Americans as UK Residents
There is a UK-US tax treaty, but this does not prevent Americans living in the UK from filing US taxes. We give advice to American citizens to ensure they are comfortable and confident in their understanding of the UK tax system.
It contains provisions that can benefit some Americans in the UK, such as those receiving retirement income, sportspersons, students and entertainers.
For most income, the solution provided in the Treaty for US ex-pats to avoid double taxation of their income arising in the UK is to claim US credits to the same value as the amount paid to HMRC.
If they have income arising in the US, Americans living and paying tax in the UK can claim credits against their US 1040.
The US-UK treaty has a clause allowing the two countries to share information, meaning the IRS can see what British taxes US ex-pats are paying and vice versa.
British banks also share their US account holders’ contact and balance information with the US Treasury.
The taxpayer’s resident status usually determines the country receiving the payment.
