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If you’re an American who is planning to live or is already living in the UK, it’s important to understand how the UK tax system works to stay tax compliant with the country. The thing is, the UK tax system is different from the US, with unique rules on residency, tax brackets, and filing requirements. It’s easy to get lost in all the information surrounding taxes.
How Does the UK Tax System Work for Americans in the UK?
Here are some notable things to consider when trying to be compliant with His Majesty’s Revenue and Customs.
The UK Tax Year
Currently, the UK tax year starts from April 6 of this year to April 5 of the following year, unlike the US tax year, which follows the calendar year from January 1 to December 31. Some are usually mistaken in thinking that the US and UK tax years are the same, but this honest mistake could cost you a lot of money so it’s important to know the difference.
Key Implications for Americans:
Reporting Overlaps: Income earned between January 1 and April 5 falls into different tax years for the UK and the US, requiring careful documentation to avoid discrepancies.
Tax Planning Challenges: Being strategic with the timing and execution of available credits, deductions, and even tax payments could save you a lot of time and effort.
Double Taxation Considerations: Americans may need to adjust their reporting methods to maximize benefits under the US-UK Double Taxation Treaty and avoid paying taxes twice on the same income.
Foreign Tax Credit and Exclusions: Americans in the UK who are using the Foreign Tax Credit (FTC) or Foreign Earned Income Exclusion (FEIE) should make sure that their reported UK income aligns properly with US tax deadlines.
Tax Residency and Liability
Determining UK Tax Residency
The amount of taxes you owe in the UK depends on your residency status. The Statutory Residence Test (SRT) determines whether you are considered a UK tax resident. This test takes into account:
- Days spent in the UK
- Ties to the UK, such as family, work, and property
- Prior residency history
If you qualify as a UK tax resident, you may also be subject to taxation on your foreign income (US-sourced income), while non-residents are typically taxed only on UK-sourced income.
Domicile Status
Your domicile (permanent home) can also affect taxation. Even if you are a UK resident, if your domicile remains in the US, you may have different tax obligations, especially regarding inheritance tax.
UK Income Tax for Americans
UK Tax Brackets
Similar to the US, the UK operates a progressive income tax system, so higher income is taxed at higher rates. The rates for the 2024 tax year are:
- Personal Allowance: £12,570 (tax-free)
- Basic Rate (20%): £12,571 to £50,270
- Higher Rate (40%): £50,271 to £125,140
- Additional Rate (45%): Over £125,140
National Insurance Contributions (NICs)
In addition to income tax, employees and self-employed individuals must pay National Insurance Contributions (NICs). NICs help fund benefits such as the National Health Service (NHS) and state pensions.
The primary NIC rates for employees in 2023/24 are:
- 12% on earnings between £12,570 and £50,270
- 2% on earnings above £50,270
Self-employed individuals pay different rates depending on their profits.
Double Taxation: UK-US Tax Treaty
Avoiding Double Taxation
The US taxes its citizens on all their income (local and foreign), regardless of where they live. This means that Americans in the UK must file tax returns with both the HMRC and the Internal Revenue Service (IRS). However, the US-UK Double Taxation Treaty helps prevent double taxation through:
- Foreign Tax Credit (FTC): Americans can claim a credit for UK taxes paid to reduce their US tax liability.
- Foreign Earned Income Exclusion (FEIE): Qualifying individuals may exclude up to $120,000 (2023 limit) of foreign-earned income from US taxation.
- Tax Treaty Exemptions: Certain types of income, such as pensions and social security benefits, may have different tax treatments under the treaty.
Filing Requirements for Americans in the UK
US Tax Filing Obligations
Americans in the UK still need to file:
- Form 1040: The standard US tax return
- Form 2555: If eligible and claiming for Foreign Earned Income Exclusion
- Form 1116: For the Foreign Tax Credit
- FBAR (FinCEN Form 114): If foreign bank account balances exceed $10,000
- FATCA (Form 8938): If foreign assets exceed IRS thresholds
UK Tax Filing Obligations
If you are self-employed, have rental income, or fall outside the PAYE (Pay As You Earn) system, you must file a Self-Assessment tax return with HMRC by:
- 31 October (paper filing deadline)
- 31 January (online filing deadline)
Key Considerations for Americans in the UK
- Social Security: The US-UK Totalization Agreement determines whether you pay into UK NICs or US Social Security.
- State Pensions: UK and US pension contributions may be affected by tax treaty provisions.
- Investment Taxation: UK and US tax laws differ on ISAs (tax-free in the UK but taxable in the US) and PFIC rules (impacting non-US mutual funds).
- US Tax Compliance: Even if you owe no US tax, you must still file annually.
