A Short Tax Guide for U.S. Citizens Residing in the United Kingdom

A Short Tax Guide for U.S. Citizens Residing in the United Kingdom

Moving from the USA to the UK is an idea that many people consider doing and there are certainly lots of things in common between the two countries that makes this move a seemingly easy one: the shared language, the shared culture and heritage.

One of the things that the two countries do not share is their tax laws and the tax authorities. The Internal Revenue Service of the United States is notorious in collecting every bit that is owed by every United States citizen no matter where they reside. This is a particularity of the USA as it is the only country in the world (along with Eritrea)  that taxes people based on citizenship rather than based on residence.

A U.S. citizen will need to file taxes every year throughout their life, even if they would have spent decades without stepping foot on U.S. soil.

US expatriates are expected to file tax returns in both countries. Her Majesty’s Customs Office (HMRC) is the UK tax agency, the equivalent of the American IRS. 

If you are not a resident of the UK, HMRC will tax income you receive only from UK sources. However, if you are a permanent resident of the UK, you will pay taxes on all income, regardless of where you are from.

Residency in the United Kingdom

Becoming a resident of the United Kingdom is thus a very important aspect in regards to your future taxation. You turn into a resident in the UK if you spent at least 183 days in the tax year or have a permanent residence in the host country. HMRC also considers the person’s home address. This status differs from residence, citizenship, and nationality. If you have a permanent home in that country, that means you have a UK residence and you pay taxes accordingly.

Dual Taxation

Being a U.S. expatriate living in the United Kingdom does not mean that you will experience double taxation on the same income. The IRS can include foreign income (FEIE), so you will only pay foreign income tax that exceeds certain limits but you must make sure you are filing your taxes. Total wages and salaries for the fiscal year are taken into account.

By 2021, this limit will be set at $108,700. This means that if you earn less overseas, you are less likely to be taxed by the IRS. This income limit is adjusted annually to account for inflation. You can also take advantage of additional benefits such as foreign tax credits and exemptions from foreign homes to cover some of your living expenses in the UK.

To benefit from all exclusions and to minimize your taxes, it is best to contact a UK expat tax consultant that can guide you through the whole process and make sure you don’t leave any money on the table.

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