Working in the UK? US Expat Tax Awareness Explained
Working in the UK can be an exciting opportunity for US citizens, green card holders and American expats. Whether you have moved to London for employment, business, family, education or a long-term career opportunity, the UK offers access to one of the world’s most established professional and financial markets.
However, one area that many US expats underestimate is tax. Living or working in the UK does not automatically remove your US tax responsibilities. At the same time, becoming UK tax resident may also bring HMRC reporting obligations. This means many Americans working in Britain need to consider both US and UK tax systems at the same time.
This is where proper US/UK tax awareness becomes essential. Mistakes can lead to missed filings, unnecessary stress, double taxation concerns, penalties, or confusion over which country has the right to tax certain types of income.
Why US Expats in the UK Need Tax Awareness
The United States has a different approach to taxation compared with many other countries. US citizens and resident aliens generally remain subject to US tax reporting requirements even when they live abroad. This can come as a surprise to Americans who assume that paying UK tax through employment or self-employment is enough.
For example, a US citizen working in London may pay UK income tax through PAYE. However, that does not automatically mean their US tax filing obligations disappear. Depending on their income level, filing status, bank accounts, investments and personal circumstances, they may still need to file a US federal tax return and possibly additional forms.
For UK purposes, tax residence is also important. HMRC uses the Statutory Residence Test to determine whether someone is UK tax resident for a particular tax year. Once you are UK tax resident, your UK tax position may be affected by your employment income, foreign income, gains, savings, investments and other sources of wealth.
The key point is simple: if you are American and working in the UK, your tax position should not be treated casually.
US Tax Responsibilities While Working in the UK
Many US expats working in the UK need to consider whether they are required to file a US tax return. This may apply even if they do not owe any US tax after reliefs, credits or exclusions are considered.
Common US tax matters for Americans in the UK may include:
US Federal Income Tax Returns
US citizens and certain US resident aliens living abroad may still need to file annual US tax returns. This can include reporting salary, self-employment income, rental income, investment income, dividends, capital gains and other income.
Many expats wrongly assume that if their income is earned in the UK and taxed in the UK, it does not need to be reported to the IRS. In many cases, that assumption is incorrect. Reporting and payment are not the same thing. You may have a filing requirement even if the final US tax due is reduced or eliminated by available tax relief.
Foreign Earned Income Exclusion
Some US expats may qualify for the Foreign Earned Income Exclusion, which can allow eligible individuals to exclude a portion of foreign earned income from US taxable income. However, this is not automatic. It must be claimed correctly, and eligibility depends on specific rules.
It is also important to understand that the Foreign Earned Income Exclusion does not cover every type of income. It generally relates to earned income, not investment income, rental profits, dividends, pension income or capital gains.
Foreign Tax Credit
The Foreign Tax Credit may also help reduce double taxation where tax has already been paid to the UK. For many US expats in the UK, this can be highly relevant because UK tax rates may be significant.
However, the correct approach depends on the individual’s circumstances. Choosing between claiming the Foreign Earned Income Exclusion and using Foreign Tax Credits requires care, especially where pensions, investments, future planning, capital gains or UK tax exposure are involved.
FBAR and Foreign Account Reporting
US expats in the UK may also need to consider foreign bank account reporting. If the combined value of certain non-US financial accounts exceeds the relevant reporting threshold at any point during the year, an FBAR filing may be required.
This can include UK bank accounts, savings accounts, investment accounts and certain other financial accounts. The FBAR is separate from the US tax return, and many expats only discover the requirement after they have already missed previous filings.
This is one of the most common areas where US expats need professional guidance because the rules can apply even where no additional tax is due.
UK Tax Responsibilities for US Expats
Working in the UK also brings UK tax considerations. Depending on your employment status, residence position and income sources, you may need to deal with HMRC as well as the IRS.
UK Employment Income
If you are employed in the UK, your employer may deduct income tax and National Insurance through PAYE. For some individuals, PAYE may deal with most UK employment tax obligations. However, it does not automatically cover every situation.
You may still need to file a UK Self Assessment tax return if you have additional income, are self-employed, have rental income, claim certain reliefs, receive foreign income, have capital gains, or fall into other HMRC reporting categories.
UK Tax Residence
Your UK tax residence position is highly important. The UK tax year runs from 6 April to 5 April, which is different from the US calendar tax year. HMRC’s Statutory Residence Test considers factors such as days spent in the UK, work patterns, accommodation, family ties and other connections.
This means that a person may need careful advice when arriving in the UK, leaving the UK, splitting time between countries, or working internationally.
Foreign Income and Gains
US expats in the UK may also need to consider how foreign income and gains are treated. This can include US investment income, rental income, pension income, business income or gains from selling assets.
The UK rules in this area can be complex, particularly for internationally mobile individuals. A tax position that appears simple at first may become more complicated when both HMRC and IRS reporting are considered together.
Common Mistakes US Expats Make
US expats working in the UK often make mistakes because they assume one tax system automatically recognises the other. Unfortunately, US and UK tax rules are not identical.
Common mistakes include assuming UK tax payment removes the need for US tax filing, failing to report UK bank accounts, forgetting about FBAR, misunderstanding the Foreign Earned Income Exclusion, ignoring US state tax issues, failing to plan before selling assets, overlooking pension treatment, and waiting until deadlines are close before seeking advice.
Another common mistake is using a tax adviser who only understands one side of the issue. A UK-only accountant may not understand IRS reporting. A US-only tax preparer may not understand HMRC rules. For US expats in the UK, the best approach is usually to seek advice from professionals who understand both systems.
Why Professional US/UK Tax Advice Matters
US and UK tax compliance is not simply about filling in forms. It is about understanding how both tax systems interact.
A US expat working in the UK may need to consider income tax, foreign tax credits, foreign earned income exclusion, FBAR, FATCA, pensions, investments, capital gains, property, self-employment, business ownership, state tax, UK Self Assessment and future relocation plans.
Professional advice can help reduce the risk of mistakes and provide clarity over what needs to be filed, when it needs to be filed, and how your affairs should be structured.
For many expats, the value of good advice is not only financial. It also provides peace of mind. Knowing that both your IRS and HMRC obligations have been considered properly allows you to focus on your work, family and life in the UK.
Contact Xerxes Associates LLP
If you are a US expat working in the UK and need help understanding your US and UK tax obligations, Xerxes Associates LLP can assist.
Xerxes Associates LLP is a London-based firm of specialist US and UK tax advisers. The team provides support for US citizens living in the UK, UK expats in the US, and individuals with cross-border tax requirements. Their services include US federal and state income tax returns, UK Self Assessment tax returns, personal tax planning, FBAR and ITIN assistance, consultations and expat tax support.
To discuss your circumstances, contact Xerxes Associates LLP using the details below:
Xerxes Associates LLP
Warnford Court
29 Throgmorton Street
London
EC2N 2AT
United Kingdom
Telephone: +44 (0)207 411 9026
Alternative Number: +44 (0)207 411 9051
Email: info@xerxesllp.com
Website: xerxesllp.com
If you are unsure whether you need to file in the US, the UK, or both, it is better to seek advice early rather than wait until a deadline or tax issue arises.
