IN THE UK
Table of Content
- Do US Expats in the UK have to file their US Tax Returns?
- Basic Information about UK taxes for US Expats
- Who is considered as a Resident for UK Taxes?
- Can US Expats in the UK get relief from Double Taxation?
- What about reporting Foreign Bank Accounts and other Foreign Financial Interests in the UK?
- What is a UK ISA?
- What is a Cash ISA?
- What are Stocks and Shares ISA?
- What is a SIPP?
In this blog, we will discuss all the tax implications for the US Expats living in the UK.
Do us expats in the uk have to file their us tax return?
Yes, a US Citizen, Green Card Holder must file taxes for the current tax year to report all wages, interest, dividends, self-employment, rental income on your U.S. tax return.
US Citizens and Green Card Holders are subject to taxes on their WorldWide income, irrespective of their residency. If your total US taxable income is above a certain threshold, depending on your filing status, or self-employed with income over $400, you must file your Tax return. If you would like to claim a refund on the withholding, because your income was less for the year or to claim a tax credit, you must file a tax return.
(The Table below can be used as an US Expat Tax Calculator for the Tax Year 2023)
|Filing Status||Age||Minimum Income requirement|
|Single||Under 65/65 and older||$13,850 and $15,700|
|Married filing Joint||Under 65/65 and older||$27,700 and $29,550( both over 65)|
|Married filing separately||Any age||$5|
|Head of Household||Under 65/65 and older||$20,800 and $22,650|
|Qualifying widow with dependent child||Under 65/65 and older||$27,700 and $29,550( both over 65)|
If your Gross Income for the year is above the threshold mentioned in the table, you must file your US Tax Return. Period!
Basic Information about uk taxes for us expats in the UK.
The UK follows a self-assessment tax model to collect taxes. The HMRC (Her Majesty Revenue and Customs) is the tax authority (equivalent to IRS) in the UK that oversees the tax filing process. The UK doesn’t follow the calendar year like the US. The tax year for 2023/2024 will be from 6 April 2023 and ended on 5 April 2024.
The due date to the paper file is 31st October 2024 and the e-file will be 31st January 2025.
To E-file, your UK Tax Return, make sure you have the UTR (Unique Tax Reference) number and NINO (National Insurance) number
Employment income is provided on the Wage statement “P60” (UK equivalent of Form W2). Benefits are reported on Statement “P11D”.
There is no concept of joint tax returns in the UK, which exists only in the US. The personal allowance in the UK is £12,570 for the tax year 2022/23.
UK Tax Rates for Individuals
Personal Allowance up to £12,570*
Basic rate £12,571 to £50,000
Higher rate £50,001 to £150,000
Additional rate over £150,000
Apart from personal allowances, there are tax-free allowances for interest & dividend income. You may also get up to £1,000 of interest and not have to pay tax on it, depending on which income tax bracket.
You do not pay tax on any dividend income that falls within your personal allowance (the amount of income you can earn each year without paying tax).
You also get a dividend allowance each year. You only pay tax on any dividend income above the dividend allowance. REMEMBER! (Even if they are exempt in the UK, they could be taxable in the US on your Form 1040 or on your FBAR or FATCA). Similarly, an annual exemption of £12,570 for the tax year 2022/23 is available to individuals, and therefore total gains made in the tax year up to this amount are exempt. Any unused annual exemption is lost and cannot be carried forward or transferred to another person
Once your UK income crosses £100,000, the Personal allowance decreases by £1 for every £2 of income over £100,000. So at £125,000, the Personal allowances are completely phased out.
The tax period in the UK will be divided in 2 halves to make up one US calendar tax Year. Tax year 2023, will have UK tax return from 2022/23(3months) and UK tax return from 2023/2024 (9 months).
Who is considered a resident for the uk taxes?
Residency in the UK is a complex matter which involves a series of questions like intent to stay, duration of the stay, number of days in the UK(current & previous), citizenship to the UK, domicile in the UK, etc. If you pass the Statutory Residency Test also known as the SRT, you will be considered as a resident for tax purposes in the UK. The SRT is a complicated matter and beyond the scope of this article, request you visit HMRC.GOV or connect with a UK expat tax expert. The entire UK tax return is based on the correct SRT taken for the given year. If you are a Non-resident in the UK, you will be taxed only on the UK source income.
Can US Expats in the uk get relief from double taxation?
The UK is considered to be a High Tax Country. Based on the rates given above, you can see that the highest rate is at 45%, which is higher than the highest US Tax rate of 37%.
Claiming Foreign Tax Credit on the Taxes paid in the UK is the best way to claim relief from double taxation. As mentioned above, the tax period in the UK will be divided in 2 halves to make up one US calendar tax Year. Tax year 2023, will have UK tax return from 2022/23(3months) and UK tax return from 2023/2024 (9 months). To claim FTC (Foreign Tax Credit) on your US tax return, you need 2 Tax returns from the UK!
Another common way is to claim relief is Foreign Earned Income Exclusion (FEIE). For the 2023 Tax year, the Foreign earned income for exclusion is $120,000. In addition to this, you can claim Foreign housing exclusion/deduction as well, which is subject to some threshold limit.
Form 2555 needs to be completed under the Bonafide Residence Test (BFR) or Physical Presence Test (PPT). This form is an election in itself, hence some tax planning is needed in advance to make the best use of it.
An optimization calculation is needed in the year of departure on whether to claim FTC or FEIE. The UK has a totalization agreement with the US, preventing you from being part of 2 social security systems at the same time. If you are self-employed in the UK, you need to make sure to register with the HMRC and pay social security taxes there and not in the US. If you are in the UK for less than 2 years, you can claim relief in the form of DDR(Detached Duty Relief) on your UK tax return. You can claim relief on rental costs, utilities, and even food costs based on the location in the UK.
The United States and the UK have a tax treaty in place to mitigate the effects of double taxation. Understanding the correct treaty position is a complicated matter, usually requiring the help of a qualified expert in both countries.
WHAT ABOUT REPORTING OF FOREIGN BANK ACCOUNTS AND OTHER FOREIGN FINANCIAL INTERESTS FOR US EXPAT IN THE UK?
The UK has signed the FATCA agreement and Financial institutions in the UK directly report to the IRS. Here is the link to that list.
If you do move to the UK and if your UK Employer deposits more than (USD) $10,000 into a UK Bank, you have to file FBAR or FinCen 114 with the Department of treasury by the due date of your tax return. Similarly, if you have foreign financial assets over a certain threshold, you have to file Fatca Form 8938. Reporting here isn’t only restricted to foreign bank accounts. You may have to report foreign stocks, UK ISA (Individual Savings Account) UK Pensions. Apart from this, you need to report foreign mutual funds, UK rental properties, UK companies and UK partnerships if any, you own. All of these are reported on their separate foreign forms. Failure to file those, will invite massive penalties starting at $10,000.
WHAT IS A UK ISA (INDIVIDUAL SAVING ACCOUNT) ?
An ISA, or Individual savings Account, is a savings account that you never pay any tax on. The amount of money you can save or invest in an ISA in a single tax year – also known as your annual ISA allowance, is restricted to £20,000.
What is a cash isa?
Cash ISAs are more like an ordinary savings account: you pay cash in and it earns interest, tax free. For US Taxes, they are reported and taxed. They are also reported on FBAR & Fatca Form 8938.
What is Stocks and shares ISA?
Like the name suggests rather than simply saving, you are investing in things like stocks and shares, bonds, gilts or commercial properties to help your savings grow over time and any interest or returns you get are tax free. US Expats need to check their underlying investment. We recommend avoiding this investment as it could possibly trigger the dreadful forms like Form 3520 and Form 8621 to report PFIC’s.
What is a SIPP? How are they reported on the tax returN BY US EXPAT IN THE UK?
A SIPP is a personal retirement plan. It allows individuals to make their own investment decisions from the full range of investments. It’s a tax-deferred personal pension plan. Most SIPP has their own provider as a trustee.
The US Expat who owns the foreign trust (UK SIPP) may have to report the trust on Form 3520, annual return to report transactions with foreign trusts and the receipt of certain Foreign gifts, and on Form 3520-A, annual information return of a foreign trust With a U.S. owner.
However, the recent update through Rev. Proc. 2020-17 has brought about some much-needed change, which may exempt from information reporting requirements for certain tax-favored foreign trusts that are established and operated exclusively or almost exclusively to provide pension or retirement benefits. It may exempt requirements for qualifying tax-favored foreign retirement trusts and qualifying tax-favored non-retirement savings trusts if you meet all the 6 tests given in the Rev.Proc.2020-17. If you are not sure, makes sense to file Form 3520/3520-A.
Other reporting requirements do remain. The Article 17 (a) & (b) of the 2001 US-UK tax treaty provides a good insight regarding the taxing of the income generated by these SIPP. Income from SIPP is only taxable after distribution. Whenever claiming a treaty based position, it’s always a good idea to complete Form 8833, explaining the position taken.
Both UK and US Taxes are far from simple. In the UK, days count, intention, residency, domicile play a major role in preparing a tax return. In the year of arrival and departure, getting the correct statutory residency test is very important. Like the US, the UK taxes its residents on worldwide income, although some relief is given by the remittance basis rules(income that you bring to the UK is only taxed). Being a high tax country, a US Expat must be careful on whether to claim FEIE or FTC. Claiming FTC may require 2 UK Tax Returns. Filing an extension Form 4868 makes sense if taking this approach.
If you have any questions about US Expat Taxes or our Blog, feel free to get in touch with us through email or schedule a no-obligation 15 Minute Video Call with us.
DISCLAIMER: The above info should only be considered for the knowledge of US Tax. Every taxpayer’s situation is unique, strongly advise you to consult a Tax professional.