Filing taxes as an American in the UK – US Expat Taxes explained

/ Expat Tax, UK & US Taxes, UK Tax, US Tax

As an American living in the UK, you will find yourself in the unenviable situation of needing to file both US and UK tax returns. A complex affair, we believe it’s vital for taxpayers to have an understanding of their obligations and how living within the UK affects US expat taxes.

US Expat Taxes & The UK

The United States is one of the few governments who tax international income earned by citizens, as well as permanent residents, residing overseas. As a result, regardless of where you live, you must file expat taxes in the U.S.

There are an estimated 225,000 Americans living in the UK, all with their own tax requirements. Along with their typical income tax return, many expats will also be required to submit a return disclosing any assets that are held in foreign bank accounts by using FinCEN Form 114 (FBAR). To help protect against double taxation, the following provisions are in place:

  • Foreign Earned Income Exclusion – exclude $103,900 (2018 figures) in earned income from foreign sources
  • Tax Credit – tax on remaining income can be reduced based on the taxes paid to foreign governments
  • Exclusion on Foreign Housing – additional exclusions for you income for some amounts paid to cover household expenses due to living abroad.

Preparing your tax returns

Proper tax planning and the preparation of a quality tax return should allow the majority of expats to use one of the above provisions, along with other strategies, to minimise tax liability.

UK Tax Returns

HMRC (Her Majesty’s Revenue and Customs office) is the UK’s governing body and primary collector of revenue for the government. The UK’s regulatory system for income tax is split into bands based on earnings. Updates on the National Income Tax rates can be found online. 2018 – 2019 rates are as follows:

Band Earnings Rate
Personal Allowance Up to £11,850 0%
Basic Rate £11,851 to £46,350 20%
Higher Rate £46,351 to £150,000 40%
Additional Rate > £150,001 45%

In the UK you’re personal savings allowances means that you may also get up to £1000 of interest tax-free depending on your income band above.

For directors and shareholders drawing dividends, there is a separate tax free allowance. The tax you pay above the allowance depends on the income band you’re in.

Tax Year Tax Free Allowance
6 Apr 2018 – 5 Apr 2019 £2,000
6 Apr 2017 – 5 Apr 2018 £5,000

Add your income from dividends to your other taxable income when working this out. You may pay tax at more than one rate.

Tax Band Tax rate on dividends overallowance
Basic Rate 7.5%
Higher Rate 32.5%
Additional Rate 38.1%

We would always recommend speaking to a trusted advisor when preparing your tax return.

How does residency impact tax paid?

When it comes to whether you or not you need to pay tax in the UK on your foreign incomes, there are two cardinal rules. Non-residents only pay tax on their UK income – they don’t pay UK tax on their foriegn income. Residents however, pay UK tax on all their income. There are special rules for UK residents whose permanent home is abroad (non-UK domiciled) and may qualify for the remittance basis of tax.

You are automatically considered a resident if you either:

  • Spend 183 or more days in the UK in any given tax year
  • You only home in is the UK (min. 91 days)

You’re considered a non-resident if either:

  • Spent fewer than 16 days in the UK
  • You work abroad full-time and meet certain requirements.

The UK statutory residence test is complex and you can find more information on residency at HMRC and for US residence at the IRS.

Paying U.S. Expat Taxes

As a taxpayer it is in your best interest to understand the many types of taxes imposed on you as a US national in the UK. In applying all available deductions, credits and exclusions to your tax planning & return, you can identify the best way to make tax filing hassle free. If you have any questions about your current tax setup and how to approach you UK self-assessment get in touch with our expert team today. Our specialist team can provide advice and assistance with completing your expat tax return whilst living outside the United States.

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