A Simple Tax Guide For US Citizens Living In London
Filing taxes can be confusing and complicated as it is, but when you are not living in your native country, the process becomes all the more complex.
Over 166,000 Americans reside in the United Kingdom. To help this specific group, Xerxes brings you a simple tax guide for US citizens living in London.
The first question that a US expatriate may have is after how long of staying in the UK are they obligated to start paying taxes to the UK government? The answer is when you start qualifying as a UK resident.
To check your residency status, simply take the Statutory Residence Test (SRT). If you went to the UK with the intention of living there for 2 years or above, you are treated as a tax resident from the very first day. You also qualify as a resident if you have stayed in the UK for over 183 days in one year or 91 days per year over the period of the last 4 years.
Even if you are a UK tax resident, you need to declare your worldwide income to the IRS. The US citizenship-based taxation system states that U.S. filing rules for Americans living abroad are the same as for Americans living in the states.
This does not mean that you have to pay your taxes twice!
The IRS offers programs like Foreign tax credit(FTC), Foreign earned income exclusion(FEIE), Foreign housing exclusion(FHE), etc. to avoid double taxation and reduce your tax liability.
For Social Security Taxes, a totalisation agreement between UK and US helps US expatriates to determine which country they should contribute to, they don’t have to pay twice.
For income tax imposed, one can use FTC to collect tax credits on a dollar-to-dollar basis.
Eg, Taxes to be payed (US) = $ 500
Taxes already paid (UK) = $ 300
Credits received = $ 300
Tax owed (US) = $200
You can also take the Physical Presence Test or the Bona Fide Residence Test, to check if you qualify for FEIE. a certain amount( which changes each year based on inflation), will be excluded if you do pass. People qualified for FEIE can also look at FHE to further reduce their tax liability.
A cautionary note: People with more than $10,000 in their foreign account need to file a Report of Foreign Bank and Financial Accounts (FBAR). Penalties apply if they don’t.
Coming to the tax rate now. US expatriates have a higher tax rate in the UK as compared to their native country. The exact payable amount is based on the income that you have.
If you have annual earnings of £150,000 or above, your estimated tax rate is 45%, for income between £50,271 to £150,000, the tax rate is 40%, and for annual income above £12,571 up to £50,700, the tax rate drops to 20%. Below £12,571, the tax rate is 0%.
In the UK, the tax year is from April 6 to April 5. you must file your tax returns to Her Majesty’s Revenue & Customs (HMRC) office before October 31st. However, If you are filing your taxes electronically your deadline gets extended to October 31st.
Taxation processes can be confusing, but Xerxes Associates are here to assist. Contact us for any further queries.
