The Complete Tax Guide for US Expats in the United Kingdom
In today’s post, we are continuing our series of articles about things US expats in specific countries should look out for when filing their tax returns. Today, let’s talk about the country which gave the United States its language, its laws, and much of its foundation until a, shall we say, family squabble set the two countries on different paths after 1776. I’m referring to, of course, the United Kingdom.
The UK At a Glance
Official Name: United Kingdom of Great Britain and Northern Ireland Capital city: London Currency: Pound Sterling (GBP or £) Area: 242,495 km2 (93,628 sq mi) Population (estimated, 2020): 67,886,004 Head of State (2020): Elizabeth II Prime Minister (2020): Boris Johnson
The kingdoms which make up today’s United Kingdom have existed in one form or another since antiquity (archeologists estimate that the monuments at Stonehenge were erected no earlier than 2200 BCE, and Britannia was a Roman province from 43 until 410 CE) but as a united entity, it can be dated to the reign of Æthelstan, the first king to use the title Rex Anglorum, or King of the English, in 927 CE. Others date the beginning of the nation of England to the Norman Conquest of 1066 and the reign of William the Conqueror.
Ever since the establishment of the Jamestown settlement (named for King James) in what would become Virginia in 1607, the island of Great Britain has had an outsized influence on the North American continent. Famous Americans to have made their home in the British Isles include (among many others):
Nancy Astor (Britain’s first female Member of Parliament)
T.S. Eliot (poet and author)
Lady Randolph Churchill (mother of Winston Churchill)
Wallis Simpson, Duchess of Windsor (wife of Edward VIII, who abdicated in order to marry her in 1936).
Meghan Markle, Duchess of Sussex (wife of Price Harry—yes, I know they moved to California)
Boris Johnson, current Prime Minister of the UK
US expats living in the UK, like other US expats, have to straddle both countries’ tax systems and be sure to keep up on filings for both the IRS and Her Majesty’s Revenue and Customs (HMRC), when required.
UK Tax Overview
The UK’s tax year is April 6 through April 5 the next year.
The majority of UK taxpayers pay their tax through withholding (“pay as you earn”, or PAYE), and don’t need to need to file returns unless they are due refunds.
Self-employed individuals or others who need to pay tax in addition to their PAYE withholdings need to file a self-assessment (SA) tax return no later than January 31 following the end of the tax year. A 9-month extension to October is possible, but any tax due must still be paid by January 31.
Individuals who are residents of and domiciled in the UK are taxed on their worldwide income. Residency and domicile are determined by a number of factors, including:
If you are in the UK for more than 183 days during the year;
If you work in the UK for a period of 365 days;
If you have a permanent home in the UK.
If you have been resident in the UK for 15 of the last 20 years, you will be “deemed domiciled” in the UK automatically.
If you are a non-resident, then you would only report UK-source income to HMRC. Residents and non-residents are taxed at the same rates and have the same due dates for filing and payments.
Income Tax Rates
Income tax in the UK is bracketed, similar to US tax. For tax year 2020/21, rates are 20% on taxable income of up to £37,500, 40% on income between £37,501 and £150,000, and 45% on income above £150,000.
UK National Insurance Contributions
On earnings up to £183 per week, no National Insurance Contributions (NIC, the UK equivalent of Social Security tax) are required. On weekly earnings between £183 and £962, employees pay contributions at the rate of 12%. Above £962 weekly earnings, the employee pays 2%. Employers pay NIC at the rate of 13.8%.
Self-employed individuals pay NIC at the rate of 9% on their net income on amounts between £8,632 and £50,000 per year. Above £50,000 per year, self-employed individuals pay the same 2% rate as employees above the limit.
US Tax for Expats in the UK
As we have mentioned multiple times in this space, the United States taxes its citizens and residents (including Green Card holders) on their worldwide income, no matter where they live. Therefore, you should assume that any income being reported on your UK return will need to be reported on your US return as well.
Filing requirements in the US are determined by your filing status and your income. For tax year 2020, the following thresholds apply:
Filing status Minimum income to be required to file a 2020 return
Married Filing Jointly $24,800
Head of Household $18,650
Married Filing Separately $5
Self-employed $400 (after expenses)
If you or your spouse were age 65 or older at the end of 2020, different thresholds may apply, so contact us for more information.
Reconciling the UK tax year with the US tax year
As mentioned earlier, the UK’s tax year is from April 6 through April 5, instead of the calendar year, as in the US. This can create timing issues when it comes to filing your US returns, as the IRS expects to see your earnings from January 1 through December 31.
There are many ways to deal with this issue, but we find the most accurate way to calculate calendar-year income is as follows: (using US tax year 2019 as an example; the P60 is the UK equivalent of the US Form W-2):
(Amount from P60 2019) – (YTD amount on December 2018 PAYE statement) + (YTD amount on December 2019 PAYE statement) = Calendar Year 2019 Amount
Use this calculation to determine the amount of money you earned during the year, as well as the amount of tax withheld and paid to HMRC.
No double taxation
No one should ever pay tax twice on the same income. Income tax is usually paid to your country of residence first, so most Americans in the UK would pay tax to the UK first and then file their US return. Both the United Kingdom and the United States allow for Foreign Tax Credits, which allow a dollar-for-dollar reduction in tax due on foreign-source income; and because the UK’s tax rates are usually (much) higher than those in the US, you would generally not owe tax to the IRS once you have paid HMRC.
Social Security and the US-UK totalization agreement
The US and the UK signed a Totalization Agreement, which has been in effect since February 13, 1984, and has been amended several times since. The Agreement eliminates double social security coverage and tax for US citizens living in the UK and vice versa. Therefore, self-employed individuals living in the UK will not need to worry about paying self-employment tax on their US returns.
Foreign Earned Income Exclusion
US taxpayers in the UK are entitled to use the Foreign Earned Income Exclusion (Form 2555) to reduce or eliminate their UK wage or income from US taxation if they meet either the Bona Fide Residence Test or the Physical Presence Test.
UK Financial Accounts
US taxpayers with bank or financial accounts outside the United States with an aggregate balance of more then $10,000 USD need to file the Report of Foreign Bank and Financial Accounts (a.k.a. the FBAR, or FinCEN Form 114) every year before October 15. The FBAR should include all bank, investment, and retirement accounts (including ISAs), translated into US dollars at the US Treasury’s year-end exchange rate. In addition, taxpayers with more than $200,000 USD in UK accounts at the end of the year need to file Form 8938 together with their tax returns.
The reasons for Americans to want to live in the UK are many: a high standard of living, taxpayer-funded healthcare, a rich history, and a beautiful countryside. However, US citizens living in this sceptered isle still need to keep up with the IRS’s continually updating rules.
Any questions, comments, or criticism? Was there something we left out or something else you would like to know? Need a quote on your US return? Contact us!