US Expat Taxes for Americans Living in the UK – What You Need to Know
There are an estimated 225,000 Americans living in the UK.
Living in the UK is a fun and fascinating experience for all kinds of reasons – the accents, the culture and history, the people and the pubs, the countryside, and having Europe on your doorstep, to name but a few. As an American expatriate living in the UK though, what exactly do you need to know regarding filing US expat (and British) taxes?
All US citizens and green card holders whose global income meets US minimum income thresholds are required to file a US federal tax return and pay taxes to the IRS, regardless of where in the world they live or where their income is generated.
The good news there are various exclusions and credits available to prevent Americans who are already paying income tax in the UK from having to pay tax on the same income to the IRS too.
US taxes – what expats need to know
US minimum income thresholds for filing in 2021 are: $12,400 (of any income received in 2020), or just $400 of self-employment income, or just $5 of any income for Americans married but filing separately from a foreigner. If your income meets these thresholds, you must file Form 1040. While any tax owed is still due by April 15th, Americans living in the UK get an automatic IRS filing extension until June 15th. This can be extended still further online until October 15th by filing Form 4868.
Those who had more than US$10,000 in total in one or more foreign bank accounts at any time during the tax year, you also need to file FinCEN Form 114, sometimes known as an FBAR (Foreign Bank Account Report).
“Aspiration and wealth creation are the key engines of growth and prosperity in our country.” – Former UK Prime Minister David Cameron.
For Americans in the UK who are paying British income tax, there are several IRS provisions available that can be claimed to prevent paying US tax on the same income.
The two primary ones are the Foreign Earned Income Exclusion, which allows expats to exclude the first US$107,600 (in 2020) of their earned income from US income tax if they can demonstrate that they are resident in the UK or they spent at least 330 days outside the US lat year. The second provision is the Foreign Tax Credit, which gives expats a dollar US tax credit for every dollar of tax they’ve paid in the UK. The Foreign Tax Credit is often a sensible option for expats who pay more in UK tax than they would owe in the US, as they can carry excess tax credits forward.
Don’t forget though, even if you don’t owe any tax in the US, if your income is over the minimum thresholds, you still have to file.
The US-UK Tax Treaty
There’s a US-UK Tax Treaty, however it doesn’t prevent Americans living in the UK from having to file US taxes. It does contain provisions that can benefit some Americans in the UK though, such as those who receive retirement income, and sports men and women, students, and entertainers.
For most types of income, the solution set out in the Treaty for US expats to avoid double taxation of their income arising in the UK is to claim US tax credits to the same value as British taxes that they’ve already paid on their income.
If they have income arising in the US, Americans in the UK can claim British tax credits against US income taxes paid to the IRS when they file their UK tax return.
The United States – United Kingdom Tax Treaty also covers corporation taxation, stating that a company will be taxed in the country where it is registered, unless it has a ‘permanent establishment’ (meaning an office, factory, or branch, etc.) in the other country, in which case the permanent establishment’s profits will be taxed in the country where it is located.
It’s also worth mentioning that the United States – UK Tax Treaty has a clause allowing the two countries to share tax information, meaning the IRS can see what British taxes American expats living in the UK are paying, and vice versa. British banks also share their US account holders’ contact and balance info with the US Treasury, so it’s never worth being economical with the truth or ducking your responsibilities. The penalties for tax evasion for expats are steep to say the least.
To claim a provision in the United States – UK Tax Treaty (besides claiming US tax credits), expats should use IRS form 8833.
The US-UK Totalization Agreement
A separate agreement called a Totalization Agreement allows US expats in the UK not to pay social security taxes to both the US and UK governments. Instead, contributions made while in the UK can be credited to either system. Which country they pay to depends on how long they will be living in the UK.
British taxes – what US expats need to know
The British tax year runs from April 6th to April 5th, rather than January 1st to December 31st. If you file online, UK tax returns are due by the end of the January following the tax year. If you file a paper return, they’re due earlier, on October 31st. Either way, you have to register with the British equivalent of the IRS, which is called the HMRC, by October 5th.
Any taxes owed are also due by January 1st following the end of the tax year.
Income tax on employment income at a UK firm will be deducted at source, and if that it your only source of income, there’s no requirement to file a UK tax return
British income tax rates are typically higher than US rates, so for many Americans in the UK it makes sense to claim the Foreign Tax Credit.
The UK charges capital gain tax on sales of shares and property, however if the property is your principal home, no capital gains tax is payable.
You can find information on British income tax rates here.
If you’re a US citizen or green card holder (or US/UK dual citizen) and you have been living in the UK for a while but didn’t know that you had to file a US return, don’t worry: there’s a program called the IRS Streamlined Procedure that allows you to catch up without paying any penalties. The program is voluntary, so it’s important not to delay, as if the IRS contacts you first, then the program is no longer available.
We strongly recommend that if you have any doubts or questions about your tax filing situation as a US expat living in the UK, that you seek advice from a US expat tax specialist.