Are you a US citizen who is living in the UK and filing taxes? Are you feeling overwhelmed by the tax system here? Do you have no idea how to even start filing your taxes? If so, don’t worry – you’re not alone!
It is estimated that there are approximately 200,000 American expats living in the United Kingdom, each with their own set of tax obligations under US law. Individuals with dual nationality with the United States, including British nationals, should be aware that they may be subject to tax obligations in the United States.
This blog post is designed to provide you with all the information you need to file your taxes as an American expat in the UK. We’ll explain the basics of the tax system in the UK, and give you some tips on how to make the process a little bit easier. So read on for all the info you need!
What are the basics of the United Kingdom tax system for US citizens?
Her Majesty Revenue & Customs (HMRC) is the UK equivalent of the IRS. The HMRC is the government of the United Kingdom’s primary revenue collection agency. They are in charge of collecting taxes, administering various regulatory systems like as the national minimum wage, and disbursing some forms of public assistance and welfare.
The tax year in the United Kingdom runs from April 6th to April 5th. If you file your tax return electronically, you must file it by January 31st of the year after the end of the tax year. If you are filing your tax return on paper, you must complete and file it by October 31st of the year after the end of the tax year. There is no automatic extension for filing your UK tax return, but if you meet specific criteria, the HMRC may waive the late filing penalty. The HMRC examines each case on its own merits.
You will need to apply for a National Insurance number in order to work in the United Kingdom and, as a result, file your tax returns. Through Jobcentre Plus, you will apply for a number. You’ll need identification, proof of marriage or civil partnerships, and proof of residency.
The UK tax system is similar to the US tax system in that you pay tax on your salary, wages, business revenue, and investment income when you earn them. Pay As You Earn (PAYE) taxes are a type of payroll tax. PAYE is a payroll system that incorporates your income tax and social security obligations. The tax system is progressive, which means that the more money you earn, the higher your tax rate becomes. National Insurance will be discussed later.
Couples who are married are unable to file a combined tax return. Although each person is responsible for filing their own tax return/assessment as needed for their own income, there is a marital allowance that permits one spouse to shift some personal allowance to the other.
What’s the biggest difference between the tax system of the US and the UK?
The US tax regulations for American citizens paying UK taxes are similar to those for Americans living in the US, in that all of their income is taxed in the United States. One significant difference is that in any tax year, the deadline to file and pay your tax return for Americans living in the United States is April 15th, whereas Americans living overseas have an automatic two-month extension to file their taxes, making the deadline June 15th. This extension is not required of taxpayers. Any tax payable, however, must be paid before the 15th of April; failing to do so will result in interest accruing from the 15th of April.
Do you have to pay US taxes on your income earned in the UK?
After learning that they must submit a US tax return, many Americans, Green Card holders, and dual citizens living in the UK wonder if they must pay US tax on their UK earnings. For Americans, the US-UK Tax Treaty is one of the most extensive and lucrative treaties (or “totalization accords”) available. Its primary goal is to prevent double taxes. The treaty prevents US expats in the UK from paying social security and Medicare taxes to two nations at the same time, as contributions can be paid to either depending on how long you plan to stay in the UK.
For Americans living and working in London, there are two sorts of tax benefits: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit.
You record all of your current income on your US tax return and seek a comparable exclusion/deduction to arrive at your taxable income using the FEIE/Form 2555. As a result, the amount excluded will be deducted from your net tax liability, and you will only be taxed on the amount remaining above the FEIE limit (about $100,000/£80,000 per year) if there is any. Form 2555, on the other hand, is not the most efficient way to file US taxes from the UK. The best option is to apply for a Foreign Tax Credit.
The United Kingdom is a high-tax jurisdiction, with tax rates greater than those in the United States, so whatever taxes are paid in the UK are still higher than those in the United States. You effectively never pay taxes to the IRS if you pay taxes in the UK, where they are greater. The bottom line will be 0 or negative once your US tax liability is determined on your US tax return and you claim Foreign Tax Credit for the UK tax payments you’ve made. To put it another way, taxes paid to HRMC are offset on the US side, resulting in you paying no taxes in the US.
When you live in the UK, why is filing FTC preferable to FEIE?
For the following three reasons, the Foreign Tax Credit approach is far superior to the Foreign Earned Income Exclusion/Form 2555 for persons residing in the United Kingdom:
- You will still have to pay taxes if you earn more than the FEIE limit (about $100,000 per year). However, if you earn the same amount using Foreign Tax Credit, you will owe no taxes.
- The credit can be carried forward for a period of ten years. If you worked in the UK for five years and accrued a $100,000 tax credit, and then moved to a low-tax jurisdiction (such as the Middle East), you can still utilize the FTC carried forward to balance the tax on that income in the low-tax jurisdiction. If you lived in Dubai and paid no taxes, you could basically eat into the tax pool you had amassed in the UK for credit.
- If you have dependent children and a low income, you can obtain refundable child tax credits when claiming FTC, which are not accessible to people claiming FEIE.
Always Be Aware of Your Tax Obligations
We understand that UK taxes can be complicated for US citizens, and we know you want to make things easier for yourself. However, one of the biggest mistakes American expats living in the UK can make is failing to realize their tax obligations – and then not paying enough or any tax at all! Don’t make the same mistake. Get the right information and always be prepared.
