Moving overseas as a US citizen working in the UK is an exciting and milestone decision.
While certain aspects of planning for an international move are engaging, like researching neighborhoods in London and learning to say “flat” instead of “apartment,” others are less so.
One common area expats tend to avoid digging into is understanding the differences in the US and UK tax systems. But, as a US citizen working in the UK, it is essential to ensure you have a strong understanding of how UK employment taxes work.
In the following guide, we dig into the most important tax topics related to being an employee in the UK. These include
- an overview of tax codes in the UK
- the concept of domicile
- comprehension of filing requirements in both countries
- and more.
Read on if you’re a US expat seeking to make informed financial decisions and ensure compliance with tax laws while working in the UK.
Paying taxes in the UK – an overview
His Majesty’s Revenue & Customs (HMRC) is the government entity responsible for administering and collecting taxes in the UK.
Individuals pay tax according to the UK tax year,’ which runs from April 6th to the following April 5th. For example, the tax year beginning on April 6, 2023, and ending on April 5, 2024, is known as the 2023/24 tax year.
Types of taxes US citizens working in the UK should know
There are two types of taxes levied on employment income: income tax and national insurance. These taxes are deducted “at source.” Therefore, US citizens working in the UK receive net pay rather than gross pay i.e. receive income after taxes have been deducted.
Income tax in the UK is progressive (similar to the IRS scheme), meaning the tax rate increases as you earn more. National insurance, on the other hand, is regressive, meaning the tax rate decreases as you earn more.
While similarities exist between the US and UK tax systems, there are distinct features of the British system that US expats should be aware of. Below, we have provided a high-level overview of the UK tax system, including the concept of Pay As You Earn (PAYE), tax codes, National Insurance Contributions (NICs), UK tax rates, and more.
PAYE (Pay As You Earn)
The PAYE system is a method by which tax is deducted from employment income at source and handed over to HMRC. Your employer is responsible for operating the PAYE system.
A tax code determines the amount of tax that is deducted from your employment income.
HMRC issues tax codes based on the information in their system. When you relocate to the UK, your employer should ask you to complete a “starter declaration” form. HMRC uses the information on this form to create your tax code.
The standard UK tax code is 1257L for individuals whose earnings are less than £100,000.
If your earnings are more than £125,140, the general tax code is 0T.
If your earnings are over £125,140 and you receive employment-related benefits, the general tax code is K.
It is extremely important to check that your tax code is correct. Verifying your tax code prevents you from paying too little or too much tax at source. This can be rectified at the end of the tax year through filing a UK tax return however, it is generally best practice to get your tax code right so deductions at source are correct for cash flow management purposes.
If you think your tax code is incorrect, you can contact HMRC to update details about your income and personal circumstances. HMRC will then update your tax code accordingly.
National Insurance Contributions (NICs)
National Insurance Contributions (NICs) are a form of social security tax in the UK that fund various state benefits and services. There are six classes of national insurance. However, the class that employees pay is Class 1.
Class 1 contributions
Class 1 NICs are paid on ‘earnings’ which broadly includes salaries, bonuses, and assets that are “readily convertible assets.” Your NIC contributions will be deducted directly from your earnings.
The vast majority of employment-related benefits will not be subject to Class 1 NICs. These include a company car, housing, and private medical insurance. Therefore, you will not suffer national insurance deductions on many employment-related benefits.
Tax bands and rates
As we mentioned earlier, the UK has a progressive income tax system consisting of several tax bands. Similarly to the concept of the US minimum income threshold, the UK has a 0% tax band known as the “personal allowance.” This enables earnings up to a certain level to be tax-free.
For 2023- 2024, the Personal Allowance amount is £12,570. Once earnings are in excess of the personal allowance, tax is levied.
The basic rate applies to income within a certain range, while the higher rate and additional rate apply to higher income brackets. Each tax band has its corresponding tax rate, with higher rates applied to higher income levels. Below, we’ve pulled together a table to illustrate these key concepts.*
*Note: The above information does not include Scotland, which utilizes a slightly different model and has very different rules. For the purposes of this article, we focus on England, Wales, and Northern Ireland.
UK PAYE Tax Rates and Thresholds, 2023-2024 (England, Wales, and Northern Ireland)
|Personal Allowance* (see comment below)
|0% tax on income up to £12,570
|Basic tax rate
|20% on annual earnings between £12,571 to £50,270
|Higher tax rate
|40% on annual earnings from £50,271 to £125,140
|Additional tax rate
|45% on annual earnings above £125,140
*If your total income is between £100,000 – £125,140, the personal allowance is reduced by £1 for every £2 by which your income exceeds £100,000. The personal allowance is removed in full if your total income exceeds £125,140. This rule applies to all UK taxpayers (England, Scotland, Wales, and Northern Ireland).
The UK offers a special tax regime to non-dom taxpayers.
Broadly, you will be considered non-domiciled if you were born outside of the UK to non-dom parents and you do not consider the UK to be your long-term home.
Many foreign nationals who live/work in the UK for a period of time maintain a non-dom status on the basis that an argument can be sustained that their long-term home is overseas.
The special tax regime is known as the remittance basis. This gives you the option to exclude foreign incomes and gains from UK taxation, providing that those incomes and gains are kept offshore.
In effect, paying tax on your foreign income and gains becomes voluntary, as you can use the remittance to completely remove the UK’s taxing right.
The remittance basis can also be used to exempt the UK from taxing employment income generated from work days exercized overseas for your first three tax years of residence.
Do US expats living in the UK also have to file US taxes?
Yes, due to the US’s citizenship-based taxation system, all US citizens and Green Card holders in the UK must report their worldwide income.
When you move to the UK and become a tax resident there, US citizens and Green Card holders are typically still required to file an annual tax return with the IRS. Therefore, US citizens working in the UK are required to file two tax returns. The first is with the HMRC in the UK, and the second is with the IRS in the US.
Fortunately, several tax provisions can help you avoid double taxation when living abroad.
Foreign Earned Income Exclusion (FEIE)
This provision allows qualifying taxpayers to exclude up to $120,000 of foreign-earned income (for the tax year 2023) from taxation.
Foreign Tax Credit (FTC)
This provision allows qualifying taxpayers to deduct what they have paid in foreign income taxes from what they owe the US. The credit is not refundable, however, it can be carried forward for up to 10 years.
Foreign Bank Account Report (FBAR)
Filing the FBAR is a simple administrative procedure that can be done online. It requires those with $10,000 or more in foreign accounts to file FinCEN Report 114. The deadline is annually on April 15, with an automatic extension for expats until October 15.
Seeking guidance from a qualified tax professional or utilizing resources provided by the IRS can be beneficial in navigating these requirements effectively.
Child Tax Credit (CTC)
This provision allows parents to claim up to $1,500 in partially refundable credits per qualifying dependent.
Foreign Account Tax Compliance Act (FATCA)
Requires single filers with over $200,000 in foreign assets on the last day of the tax year (or over $300,000 at any point in the tax year) to file Form 8938. (Note: thresholds for filing FATCA are much lower for those who reside in the US).
This information is provided in partnership with Emma McDermott, Founder and CEO of Global Tax Consulting. Emma is a UK tax advisor and the owner of GTC.
GTC specializes in UK tax planning and UK tax compliance for individuals with international tax affairs.