Tax Essentials for Americans in the UK
American citizens living and working in the UK need to be compliant with both US and UK tax regulations. There are a number of common problems that can arise if you are not aware of some particular rules. Fortunately these problems are easy to avoid if you have the right information.
Difference in Tax Years
The US tax year is the same as the calendar year so runs from 1 January to 31 December but the UK tax year runs from 6 April to 5 April each year so this difference in itself can cause some issues. It means that a UK-based American citizen requires 2 years of UK tax data in order to complete one US tax return. However, you can choose to use monthly salary slips or bank statements rather than year-end income statements to make it easier to report for a single calendar year that spans two UK tax years.
If you are not paid in dollars while living in the UK (or indeed any overseas country) then you will need to convert your income into USD for the purposes of filing your tax return to the IRS. You can do this via a number of methods but need to be consistent about which method you choose. If you are likely to receive a large bonus payment at a certain time of the year then it could be advantageous to choose one method over another.
The different methods are:
- Use the current foreign exchange rate on the day your salary is paid
- Use a monthly average of FX rates for each salary payment
- Use an annual average and apply the same FX rate to all income
Double Taxation Treaty
Most employees working in the UK will be on the Pay As You Earn (PAYE) scheme so your employer automatically deducts income tax from your salary. Assuming your employer uses the correct tax code then the right amount of tax and National Insurance Contributions (NICs) will be withheld so you will be compliant with HMRC (Her Majesty’s Revenue and Customs).
Because of the double taxation treaty between the US and UK you will only have to pay tax on your salary in the UK. You can use the Foreign Tax Credit and the Foreign Earned Income Exclusion to establish tax credits in the US to show tax has already been paid on your income and avoid being taxed again in the US.
However, be aware that if you are self-employed and paying income tax and National Insurance in the UK you will not automatically get a credit for the NICs in the US. You would have to specifically opt out of the US Social Security scheme to avoid paying both UK National Insurance and US Social Security contributions.
Because the tax years are not the same in the UK and US the tax return filing deadlines are also different:
- US Filing Deadline is 15th April
- UK Filing Deadline is 31st January
However, the IRS offers a 2-month extension to US citizens living and working overseas so the filing deadline for the US is automatically extended to 15th June if you are based in the UK. You may also request an additional 4-month extension to 15th October if you do not have all necessary paperwork to complete the return in June. Be aware though that a further extension could incur extra costs for you because interest is payable on all unpaid taxes from 15th April.
Note that not everyone is required to file a UK Self-Assessment tax return by 31st January; if the only income you receive is a salary or pension you usually won’t need to file a return but some of the situations where you will need to file a tax return are if you are self-employed, earn over a certain threshold, have income from investments over a certain threshold or sell a property and make a profit.
Tax on Pensions
If you have a company pension to which both you and your employer contributed (“defined contribution”), a final salary pension scheme (“defined benefit”) or a “Simplified Individual Pension Plan” (SIPP) then the double taxation treaty dictates that the pension is taxed in the country where you are resident at the time that it is paid to you. If you are an American resident in the UK then it is taxed in the UK but declared in the US with the appropriate credit. If you are resident in the US after retirement and receiving a pension from a UK company then it is not taxed in the UK but in the US.
Some UK pension providers automatically withhold tax on pension payments. If that is the case a claim can be made on the Residence pages of the UK tax return to have this tax repaid and a separate claim under the double taxation agreement has to be filed. This applies to both lump sums payments and regular pension payments.
SIPP’s will also need to be reported on your “Foreign Bank Account Form” (FBAR) each year.
Tax on ISAs
“Individual Savings Accounts” (ISAs) provide tax-free savings in the UK but they are considered to be a foreign trust by the IRS and you do need to report your income and capital gains on an ISA each year on your US tax return. As an American living in the UK you will need to pay tax on the income and gains from these accounts. ISA’s will also need to be reported on your FBAR each year.
Foreign Bank Account Form (FBAR)
SIPP’s, ISA’s, savings accounts and checking accounts all need to be reported on your FBAR to the IRS by 30th June each year if you have more than $10,000 in total, or the foreign equivalent, in overseas accounts and there are large penalties for failing to do so; penalties start at a minimum of $10,000. The threshold amount of $10,000 of savings is cumulative so you could potentially have $2,000 in 5 different accounts and this would have to be declared.
But there are other potential pitfalls regarding the FBAR that are less obvious; for instance if you own your own home in the UK and have an offset mortgage the savings that are offsetting interest payments on the mortgage still need to be reported on your FBAR.
As London-based accountants and Tax Advisors, Tuchbands have experience dealing with a wide range of tax issues concerning US citizens living in the UK so call us on 020 8458 8727 if you need professional advice.