Property Developers, Property Investors

Americans living and paying tax in the UK

simon

Simon Misiewicz

7th September 2021

The frequently asked questions about Americans living and paying tax in the UK

As tax accountants, we are regularly asked about Americans living and paying tax in the UK. We will look to answer the below questions in this Article.

“Are you an American paying too much tax in the UK?”

“Why do Americans pay tax in the UK?”

“What are the basics for Americans living and paying tax in the UK?”

“What is the UK equivalent to the IRS?”

“Who needs to file a UK tax return?”

“What other instances would you need to file a UK tax return?”

“Do you still need to file a US tax return?”

“What is the difference between a UK resident and a UK domicile?”

“What are the types of UK residents?”

“What is your Domicile Status?”

“Are there tax deadlines for Americans in the UK?”

“Is an American’s foreign income taxed in the UK?”

“What is the UK-US tax treaty?”

“How can Americans save on US taxes while living in the UK?”

Are you an American paying too much tax in the UK?

Our UK and US tax specialists help over 1,000 monthly retained investors to minimise tax whilst building their wealth.

There are many reasons why some Americans living in the UK pay far more tax than they need to.

This is because:

– They do not know what they do not know.
– They have not spoken to a tax specialist to go through their situation to see what tax reliefs are available to them.
– Their accountants or solicitor are not aware of the many reliefs available to their clients and are not taken advantage of.
– Tax legislation changes but either the person or their accountant/tax specialist have not been made aware.

Why do Americans pay tax in the UK?

Americans pay tax in the UK based on set income tax rates ranging from 0% to 45%.

The percentage of taxes paid by Americans living and working in the UK increases as income increases in different bands. These tax bands are called tax brackets in the US.

US ex-pats have to pay tax on income in the UK, including wages, benefits, pensions and savings interest.

Income tax is also paid on any income above the personal allowance.

Americans do not have to pay tax 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 Income Tax from your wages.

If you work for yourself or have other UK income, you must send a Self Assessment tax return to HMRC.

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.

It is important to find out about the tax requirements for Americans in the UK before moving here.

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What are the basics for Americans living and paying tax in the UK?

As UK tax accountants serving thousands of landlords that purchase buy to let properties, we know that the basics for Americans living and paying tax in the UK can seem complex and difficult to navigate.

According to the 2011 UK Census, 173,740 US-born residents were living 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 business people and their families with strong ties to the economic relations between the City of London and New York City and Washington.

Chelsea and Kensington both have large American communities.

What is the UK equivalent to the IRS?

The UK equivalent to the IRS is HMRC, which collects taxes, administers some regulatory systems such as the national minimum wage, and is responsible for payment of some state support and welfare.

To work in the UK and subsequently file tax returns, Americans living in the UK need to file for a National Insurance number. This can be obtained through Jobcentre Plus.

You will need proof of identity, proof of residence or civil partnerships, and residence permits.

The UK tax system is similar to the US tax system whereby tax is levied as you earn your salary, wages, business income and investment income.

Payroll taxes are called 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 in the UK as an American, the higher your tax rate for each additional dollar of income.

If you’re an American looking to live and work in the UK, speak to a British tax accountant before you move.

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Who needs to file a UK tax 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 and what taxes you must pay to HMRC while living in the UK.

HMRC issues tax return forms to individuals.

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 tax return.

You will not then have to file a tax return unless you have other income or specific circumstances.

If you have other income sources, such as self-employment or investment income, you will need to file a tax return and pay taxes on that income.

What other instances would you need to file a UK tax return? 

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 tax return to claim deductions, which can help reduce your tax 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.

Do you still need to file a US tax return?

Regardless of where you live, you must file ex-pat taxes in the US.

US citizens and permanent residents are required to file ex-pat tax returns with the federal government every year. Along with the usual tax return for income, many are also required to submit a return disclosing assets held in bank accounts in foreign countries, including the UK, by 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 and paying tax in the UK, which are worth reviewing.

What is the difference between a UK resident and a UK domicile?

Defining if you are a UK resident is decided by guidelines produced by HMRC.

Residency in the UK is usually determined by an individuals long-term intentions and how many days they are physically present in the UK.

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 days or more are spent in the UK.

If you spent 91 days or more on average per year in the UK during the last four years, you would be considered by HMRC a resident for tax purposes.

What are the types of UK residents? 

There are two types of UK residents: ordinarily and non-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.

Resident and not ordinarily resident: when you have been outside the UK and intend to come for at least two years but less than three years.

What is your Domicile Status?

Domicile status is important for UK tax purposes in terms of factoring in your worldwide income.

Domicile is decided by UK law and is defined as an individual’s long-term, permanent home. It is not the same as citizenship, nationality or residence status.

Your domicile or origin is the same as your father’s domicile at the time of birth.

If your father changed domicile while you were still a dependent, your domicile would also have changed.

To acquire a different domicile, you must cut links with your previous domicile, move to a new jurisdiction and have a permanent home in that jurisdiction.

Most US ex-pats in the UK are considered non-UK domiciled.

If you are unsure about the differences between being a resident and a domicile, it’s advisable to speak to one of our UK and US tax advisors before moving to the UK.

Are there tax deadlines for Americans in the UK? 

The UK tax year is different from the US tax year, which is important to note when moving.

In the UK, the tax year is 06 April to 05 April. Tax returns need to be filed with HMRC before 31 October of the tax year if filed by paper.

If you are e-filing, you have until 31 January of the year following the tax 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 of the tax year. Payments must be completed by 31 July of the following tax 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 tax return. This makes the due date for your US tax return 15 June.

Our UK and US tax 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 ex-pat taxes.

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.

It is advisable to speak to a good tax advisor regarding overseas bank accounts to avoid costly mistakes for non-UK domiciled residents.

What is the UK-US tax treaty? 

There is a UK-US tax treaty, but this does not prevent Americans living in the UK from filing US taxes.

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 tax credits to the same value as British taxes they have already paid on their income.

If they have income arising in the US, Americans living and paying tax in the UK can claim British tax credits against US income tax paid to the IRS when they file their UK tax return.

The US-UK tax treaty has a clause allowing the two countries to share tax 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 country that receives the tax payment is usually determined by the taxpayer’s resident status in each country.

If you’re unsure of your tax status, speak to one of our experienced UK tax accountants today.

How can Americans save on US taxes while living in the UK?

The US has one of the few governments that tax the international income of their citizens and permanent residents who live overseas.

Certain provisions help protect US ex-pats from double taxation, including the following for US citizens living in the UK:

– The Foreign Earned Income Exclusion allows you to decrease your taxable income on your 2021 US ex-pat taxes by the first $108,700 earned due to working in the UK as a resident.
– A foreign tax credit could allow you to lower your tax bill on the remaining income by certain amounts paid to the UK government.
– A Foreign Housing Exclusion allows an additional exclusion from income for certain amounts paid for household expenses occurring due to living in the UK.

With the many forms of taxation applied to Americans living and paying tax in the UK, it is important to apply all of the exclusions, deductions and credits to your US ex-pat taxes.

Speaking to an experienced US and UK tax advisor can also help minimize or eliminate your US tax bill.

You may be interested in our main Article on UK Tax status if you want to move to the UK or from the UK. You may also be interested in knowing more about our property tax services if you want to invest in UK buy to let properties.

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