American citizens expat taxes living in the UK and US Taxes

Why do Americans move and pay tax in the UK?

American expats living abroad, particularly the UK, could face a tax liability between 0% to 45%. It can be an expensive tax move.

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, as an American, 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.

Before moving here, it is important to find out about the tax 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 tax return.

What are the basics for Americans living 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.

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 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.

Employees that 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 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. That said anyone that has self-employment earnings less than £1,000 will avoid the need to file a self-assessment tax return to HMRC.

What other instances would you need to file a self-assessment return to HMRC? 

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.

Tax residency (183-day myth)

Have you heard of the 183-day tax residency myth?

The story goes that you are only a tax resident in the United Kingdom or the United States if you have lived in those countries for more than 183-days.

Nothing could be further from the truth.

Americans that are employed and have a home or family in the UK could be considered a tax resident within 30 days.

Once they have triggered a tax residence status, the income earned in the United Kingdom becomes taxable.

Americans living in the United Kingdom and are tax residents need to decide how their US income will be taxed in the United Kingdom.

Americans that live in the United Kingdom can use either the remittance basis or have their American/worldwide income taxed by HMRC in the United Kingdom.

The benefit for Americans having their worldwide income taxed is that they will receive a personal allowance which is £12,570 at the time of writing. This personal allowance is the sum of money that may be earned tax-free. The UK personal allowance is very similar to the Standard Deduction that Americans will be used to when submitting taxes to the IRS.

The upside for Americans using the remittance basis is that they will not pay UK tax to HMRC on their American income. The downside is that they will have to pay a tax surcharge as follows:

• £30,000 for non-domiciled individuals who have been resident in the UK for at least 7 of the previous 9 tax years immediately before the relevant tax year
• £60,000 for non-domiciled individuals who have been resident in the UK for at least 12 of the previous 14 tax years immediately before the relevant tax year

We advise that Americans living in the United Kingdom get tax advice to see which pathway (remittance basis Vs worldwide tax) is best for their situation.

Americans also need to be aware that their worldwide income is taxable by HMRC once they have lived in the UK for more than 15 years. At this point, Americans will be UK domiciled.

Tax ID Unique Tax Reference (UTR)

An American with income will be required to file a 1040 tax 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 United Kingdom and will be required to obtain a Unique Tax Reference Number (UTR) from HMRC.

A UTR is a 10-digit number that is used for tax identification. This UTR will be used to correspond with HMRC and submit self-assessment tax returns.

Americans that are employed and do not have significant earnings elsewhere will not be required to submit a self-assessment tax return to HMRC. This is unlike the United States, where the majority of Americans file 1040 tax 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 that are employed will be required to pay employees’ national insurance. Their employers will also pay employer’s National Insurance. Part of these NI contributions supports Americans with free healthcare provided by the National Health Service (NHS).

US citizens moving to the UK will be required to apply for a National Insurance Number.

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.

Are there 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 receiving the tax payment is usually determined by the taxpayer’s resident status.

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