Tax Advice for US Citizens in the UK
If you are an American citizen living and working in the UK, you need to be aware of and compliant with both UK and US tax regulations.
Common issues may arise if you are unaware of certain regulations, but with the right advice these can be avoided.
When is the US tax year?
The US tax year aligns with the calendar year, running from 1st January to 31st December, with the UK tax year running from 6 April to 5 April each year. This difference in itself can cause some tax issues, as it means that a UK-based American citizen requires 2 years of UK tax data in order to complete one US tax return.
You can however choose to use monthly payslips or bank statements rather than year-end income statements to make it easier to report for a single US calendar year that spans two UK tax years.
Currency conversion – US to UK tax
Unless you are paid in US dollars while living in the UK – or indeed any overseas country – 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 including:
–Using the current foreign exchange rate on the day your salary is paid
-Using a monthly average of FX rates for each salary payment
-Using an annual average and apply the same FX rate to all income
You do however 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. Our expert team of accountants can advise you on which may be the best option to choose.
What is the Double Taxation Treaty?
The double taxation treaty between the USA and the UK ensures you only have to pay tax on any salary you earn in the UK. Any necessary tax and national insurance payments will be deducted from your salary via PAYE (Pay As You Earn).
In order to avoid paying tax in the US when you have already paid in the UK, you can use Foreign Tax Credit and Foreign Earned Income Exclusion to establish tax credits.
If you are self employed and paying tax and national insurance in the UK, you will not automatically receive a credit for national insurance contributions (NICs) in the US. To avoid paying both UK national insurance and US social security, you would have to opt out of the social security scheme.
What are the deadlines for filing a tax return?
As the dates of the UK and US tax years differ, the deadlines for filing a tax return also differ:
-The US deadline for filing a tax return is 15th April
-The UK deadline for filing a tax return is 31st January
You are only required to file a self-assessment tax return in the UK if you:
-Are self employed
-Earn over a certain threshold
-Receive income from other investments
-Sell a property and make a profit
The Inland Revenue Service (IRS) offers an extension of two months to US citizens who live and work overseas, so the US filing deadline is automatically extended to 15th June if you live and work in the UK.
If you do not have all the required paperwork you can also request an additional deadline extension, taking you to 15th October to file. You should however bear in mind that requesting a further extension may result in additional costs as interest applies to all unpaid taxes from 15th April.
How to pay tax on a pension
The double taxation treaty specifies that a pension is taxed in the country in which you resided at the time it was paid to you if:
-You have a company pension to which both you and your employer contributed (a ‘defined contribution’)
-You are a member of a final salary pension scheme (a ‘defined benefit’)
-You hold a Simplified Individual Pension Plan (SIPP)
If you are an American citizen living in the UK, any pension payment is taxed in the UK but declared in the US with the appropriate credit. If you are resident in the US after you retire and you receive a pension from a UK company, it is taxed in the US, not the UK.
Some UK pension providers automatically withhold tax on pension payments, in which case a claim can be made on the Residence pages of the UK tax return to have this tax repaid. A separate claim under the double taxation agreement then to be filed. This applies to both lump sums payments and regular pension payments.
SIPPs will also need to be reported on your Foreign Bank Account Form (FBAR) each year.
How to pay tax on an ISA
ISAs are regarded as a foreign trust by the IRS, meaning you need to report any income and capital gains from an ISA on your US tax return each year if you are an American citizen living in the UK. You will also need to ensure you record any ISAs you hold on your FBAR each year.
What is an FBAR?
A foreign bank account form – or FBAR – records any:
This form must be returned to the IRS by 30th June each year if you hold more than $10,000 in total – or the foreign equivalent – in overseas accounts. 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. There are large penalties for failing to do so, from a minimum of $10,000.
There are other elements around the FBAR of which you should be aware. For example, 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.