United Kingdom Specific
- UK Pension Accounts
- I have UK ISA account with stocks. It contains a mixture of OEICS, investment trusts, and individual shares. Do I have to report it as PFIC and how much would it cost?
- Social Security in the UK (National Insurance)
- US - UK Social Security Totalization Agreement
- Taxation of Social Security Benefits
- Contributions to Employer Pension Schemes
- Taxation of UK Pension Benefits
- Self-Invested Schemes (such as ISA)
- Tie-Breaker Rule to Apply for Treaty Benefits
- Self Invested Personal Pension (SIPP)
- UK Income Reporting
- How do I report income on the Tax Questionnaire?
- How do I report taxes paid on the tax questionnaire?
- How do I report my deductions?
- How do I report pension contributions?
- How do I report pension payouts?
- As I live in the UK my taxes are taken out of my salary automatically, but then I also have a deduction taken out for National Insurance. Do I add these together for my income tax or is it just the tax paid and no National Insurance payment?
- UK Tax System
- Who is considered a UK Resident?
- What is a Domicile?
- Is Foreign Income Taxed in the UK?
- What is the UK income tax rate?
- What is the UK tax year?
- When is the UK tax due date?
- How do you account for different tax years between US & UK?
- What UK tax forms can I expect to receive?
- Do I have to complete a UK tax return?
- What other taxes aside from Income Tax should I be aware of?
- What is the name for UK Tax Declaration document and who must have it prepared? Do you need its copy?
- UK Businesses & Investments
- Opening a local business in the UK as a US citizen
- What types of local business structures are there in the U.K., and what would be the US filing requirement?
- UK - US FATCA Treaty overview
- When did UK banks start sending data to the IRS?
- What searches do a UK bank have to do to comply with US FATCA?
- Which types of UK financial assets must/are not required to be reported on FBAR / FATCA?
- UK Tax Glossary
- Benefits in kind
- Building society
- Cash ISA
- Council Tax
- Income Tax Allowances
- Inland Revenue
- HM Revenue and Customs (HMRC)
- Stamp Duty Land Tax (England, Wales and Northern Ireland only)
- Stocks and Shares ISA
- Tax years
- Unit Trust
UK Pension Accounts
I have UK ISA account with stocks. It contains a mixture of OEICS, investment trusts, and individual shares. Do I have to report it as PFIC and how much would it cost?
OEICS are collective investment schemes that are treated in the US as PFIC.
The cost of one form 8621 is $150 - this is up to 3 accounts (per form) and we aggregate whenever possible. If more than 3 accounts on a form, each additional account is $50 each.
In this example, each trust or unit share must be reported on a separate form 8621. If preparing 3 or more forms, they are eligible for a 20% discount.
Social Security in the UK (National Insurance)
Contributions to the UK National Insurance system withheld from your paycheck or made on self-employment income are not deductible from the US taxable income and do not qualify for the foreign earned income credit.
You can check your record of UK National Insurance contributions here.
US - UK Social Security Totalization Agreement
An agreement between the United States and the United Kingdom improves Social Security protection for people who work or have worked in both countries. It helps people who, without the agreement, would not be eligible for retirement, disability or survivors benefits under the Social Security system of one or both countries. It also helps many people who would otherwise have to pay Social Security taxes to both countries on the same earnings.
The provisions of the agreement eliminate double Social Security taxation and permit dual residents to use their work in both countries to qualify for benefits.
If you are self-employed
Contributions to National Insurance system make you exempt from contributions to the US Social Security system that otherwise would be required in the US on self-employment income.
How it impacts those who want to earn US Social Security credits
If you have Social Security credits in both the United States and the United Kingdom, you may be eligible for benefits from one or both countries. If you meet all the basic requirements under one country's system, you will get a regular benefit from that country. If you do not have enough work credits under the U.S. system to qualify for regular benefits, you may be able to qualify for a partial benefit from the United States based on both U.S. and U.K. credits. To be eligible to have your U.K. credits counted, you must have earned at least six credits under the U.S. system.
Although the agreement allows the Social Security Administration to qualify for U.S. retirement, disability or survivor benefits, the agreement doesn’t cover Medicare benefits.
Taxation of Social Security Benefits
US Social Security Benefits
US Social Security benefits received by US citizens and green card holders residing in the UK are exempt from tax in the United States and are taxable only in the UK.
UK State Pension
UK State Pension and other payments received under the National Insurance legislation by US citizens and green card holders residing in the UK are taxable in both countries.
The foreign tax credit can be applied to eliminate double taxation.
Contributions to Employer Pension Schemes
When a US citizen/green card holder is a participant in a pension scheme established in the UK:
- a) Contributions paid by or on behalf of that individual to the pension scheme may be excludable in computing his US taxable income
- b) Any benefits accrued under the pension scheme, or contributions made to the pension scheme by or on behalf of the individual’s employer is not treated as part of the employee’s taxable income
However - exclusion of contributions to the pension scheme is not mandatory. You may report those contributions on Income > Wages > Income Outside of the U.S. tab, question -Did your employer contribute to your pension plan? to have it added to your annual taxable income.
Considering the high tax rate paid in the UK on earned income, added employer contributions may still leave you tax-free in the US. Your benefit: the added amount will be considered previously taxed - which will reduce the taxable portion of pension payments in the future.
Taxation of UK Pension Benefits
Pensions and other similar remunerations paid to US citizen/green card holder residing in the UK are taxable in both countries.
However, you can eliminate the burden of double taxation. Taxes paid in the UK on pension income are applied as a foreign tax credit against tax owed on the same income in the US.
Self-Invested Schemes (such as ISA)
Individual tax-deferred saving accounts arrangement (ISA) do not qualify for income deferral in the US Income earned on those accounts must be reported on U.S. tax returns.
Report interest earned on the Income > Passive Income > Interest tab of our Tax Questionnaire.
Report dividends on the Income > Passive Income > Dividends tab.
Tie-Breaker Rule to Apply for Treaty Benefits
US green card holders residing in the UK may elect to apply what is known as the tie-breaker rule of the US/UK Tax Treaty and be deemed a resident only of the State (i.e., country) with which their personal and economic relations are closer (UK).
Under such an election, the individual would file form 1040NR and report only income derived from U.S. sourced. The requirement to provide full disclosure of foreign bank accounts remains and tax on income from U.S. sources will be higher than the tax on the same income when applied to US residents filing form 1040.
Self Invested Personal Pension (SIPP)
SIPP is an individual pension plan. UK pensions plans are IRS-qualified, whether it is the employer-sponsored or individual plan. Therefore there is no need to report it as foreign trust. Income in SIPP can be deferred like income in a U.S. IRA account. Interest in SIPP does not need to be reported on your US tax return.
UK Income Reporting
How do I report income on the Tax Questionnaire?
For income you earned while being employed:
You will need four paystubs for the year. All of them are for the calendar year for which you are filing US tax return (Jan-Feb-Mar and Dec). Add the amounts printed on line Total Payment for January, February and March. Then add the amount from line Taxable Pay YTD from the December paystub (because the UK tax year is Apr-Mar, the Gross to Date value on the December paystub will reflect your pay for Apr-Dec).
A simpler way is this: If your salary has not changed over the course of the year, you can simply multiply one monthly Total Payment amount by 12. Enter the result on line Gross wages/salary earned with this employer during the tax year question in the Income > Wages > Income Outside of the U.S. section.
For income earned from self-employment
Income from self-employment is a turnover of your unincorporated business. Report it on the Gross Income from Self-employment question of the Income > Self-employment tab.
Each type of income is reported as the gross amount, before any deductions allowed in the UK (i.e. before contributions to National Insurance).
If you received redundancy pay, add gross amount as additional wages. Report other types of income (i.e. workplace pension, State pension, dividends, alimony, royalties, unemployment) on the respective lines of Pension or Other Income tabs of the tax questionnaire
How do I report taxes paid on the tax questionnaire?
Similarly to income, the tax also has to be reported separately for each type of income on which tax was paid. Add the amounts printed on line Tax (Section Deductions of paystub) for January, February, and March. Then add the amount from line Tax Paid YTD from December paystubs. Enter the result on line Amount of foreign tax paid on earnings in the filing year of the Taxes & Deductions > Taxed Paid section of Tax Questionnaire.
If there was additional tax payment during the calendar year (i.e. HMRC issued a tax bill for tax underpaid in the prior year), add that amount to the amount of tax withheld during the filing year.
Taxes on unearned income may be withheld by the payor (i.e. bank withheld income from dividends) or you may owe tax upon completion of tax assessment form. Report each type of tax paid during the filing year in the respective section, even if it applied to income received in prior years.
To calculate the taxes paid during the selected year, use Income Calculator. Provide the figures in your resident country calendar (for individual months or the whole year), then copy the calculated amount earned during the tax year.
Do not combine and report separately property tax in the Taxes & Deductions > Deductions section and stamp duty in the Income > Home Sale section.
Reporting of council tax depends on whether you are renting or owning a flat. If you are a renter, then council tax is a part of your housing expenses reported on the Personal Details > Where I Live > Housing Arrangements tab.
If you are an owner paying council tax in between tenancy then report it as property tax on Income > Passive Income > Rental Income.
How do I report my deductions?
We will take specific deductions allowed for UK residents by the US/UK treaty (i.e. we can deduct contributions made to employer pension scheme). You will report contributions to employer pension separately from the gross income and we will take this deduction if this improves your tax position (in some cases you may benefit from not taking this deduction now).
Further, Taxes & Deductions > Deductions section of TQ offers you questions related to various additional deductions Examples of such deductions are mortgage interest, alimony payments, investment advisor fees. Similarly to personal allowance in the UK, the US tax system also applies a concept of “Standard deduction”: $12,000 per single person and $24,000 for the married couple for 2018 tax year. For most UK residents filing US tax return standard deduction option is more tax efficient than “itemized deductions” - grossing up individual deductions.
How do I report pension contributions?
Report employer contributions and your own contributions to employer pension scheme on the Income > Wages > Income Outside of the U.S. tab. Contributions to ISA and SIPP do not need to be reported.
How do I report pension payouts?
Report payouts from the foreign pension of all types: National Insurance, employer pension, Bereavement Allowance (previously Widow's Pension) in the Income > Passive Income > Pension tab.
Report distributions from individual pension accounts, such as ISA as income from regular investment.
Report interest and dividends as if you have received it from the bank account or brokerage account.
As I live in the UK my taxes are taken out of my salary automatically, but then I also have a deduction taken out for National Insurance. Do I add these together for my income tax or is it just the tax paid and no National Insurance payment?
National Insurance payment is not deductible from your salary. Contributions made to NI entirely on US tax return. Likewise, you do not “deduct” income tax -- we need to report gross salary and then take the foreign tax credit for income tax (not for the National Insurance tax).
Another example of non-deductible taxes is VAT.
UK Tax System
Who is considered a UK Resident?
In the United Kingdom, you are defined as a resident by the rules set out by the HMRC. In short, your residency is determined by your long-term intentions and the number of days you actually spend in the country. For the purpose of this exercise, each day is counted if you are in the UK at midnight.
- If you are in the UK and do not intend to stay for more than two years, you are a resident for the tax year if 183 or more days are spent in the UK. If you spend less than 183 days in the UK, you will not be considered a resident for tax purposes.
- If over the last four tax years you have spent 91 days or more on average per year in the UK, you will be considered a resident for tax purposes. You would be considered a resident for tax purposes from the date of your arrival if you intended to spend more than 91 days, on average per year, in the UK.
- If you come to the UK and expect to stay for two years or more, you are considered a tax resident from the first day that you arrive.
There are also two types of residents: Ordinarily and not ordinarily.
- Resident and ordinarily resident – When you come to the UK and expect to stay for three years or more. This can be proven by purchasing or leasing property available for three years or more.
- Resident and not ordinarily resident – When you have been outside the UK and intend to come to the UK for at least two years, but less than three years.
What is a Domicile?
For UK tax purposes, domicile is important for determining how you are taxed on your worldwide income. Domicile is defined where a person has their long-term, permanent home. It is different from citizenship or residence.
Your domicile or origin is the same domicile as your father’s domicile at the time of birth. If your father changed domicile while you were still a dependent, your domicile will also have changed. You can, however, change your domicile. In order to do so, you must cut links with your previous domicile, move to a new jurisdiction and have a permanent home in that jurisdiction. It is difficult to acquire the domicile of choice compared to the domicile of origin, and the responsibility to prove that your domicile has changed lies on you.
Most expats in the UK are considered non-UK domiciled.
Is Foreign Income Taxed in the UK?
The tax paid on worldwide income will depend on your residency and domicile status in the UK. If you are considered a resident of the UK, you are taxed on all of your investment income, no matter the location. This will be the same income reported on your US expat taxes.
If you are a resident but not domiciled in the UK, you are able to file using the remittance basis for both foreign income and capital gains. If you are a resident and domiciled, but are not ordinarily resident, you can use remittance only for your foreign income, not capital gains. Remittance basis allows you to elect to be liable to pay UK tax on investment income remitted in the UK. Income must be remitted if it is brought to the UK or paid to you in the UK. It is good to contact a tax advisor regarding overseas bank accounts in order to avoid costly mistakes for non-UK domiciled residents.
What is the UK income tax rate?
For the 2013-2014 tax year, the national income rates from Her Majesty’s Revenue & Customs (HMRC) are as follows:
|Earnings in GBP (£)||Rate Applicable to Income Level (%)|
|0-2790||Starting Rate for savings: 10%*|
|0-32,010||Basic rate: 20%|
|32,011-150,000||Higher rate: 40%|
|Over 150,000||Additional rate: 45%|
*If your non-savings income is above £2,710 (2012-2013) or £2,790 (2013-2014), this rate does not apply.
You are able to exclude £8,105 of your income as a personal allowance for 2012-2013. Note that this will be reduced by £1 for every £2 of income over £100,000, regardless of age.
What is the UK tax year?
The tax year in the UK is different from the US. It is from April 6th through April 5th.
When is the UK tax due date?
Tax returns need to be filed with the HMRC before October 31st of the tax year if they are being filed by paper. This is also different than the April deadline for US expat taxes.
If you are e-filing, you have until January 31st of the year following the tax year. HMRC does not offer extensions.
For payment, the UK has a withholding system (PAYE) that will go through your employer’s payroll. For non-wage income that does not have withholding, payments are due on January 31st of the tax year. Payments must be completed by the 31st of July following the tax year.
How do you account for different tax years between US & UK?
We use the prorated amount of earnings and tax paid from two consecutive years covering the full calendar year.
For example, to calculate figures for the 2017 US tax year, we take 3 months from the UK 2016-2017 tax year and 9 months from the UK 2017-2018 tax year. To do this we would normally use your paystubs or run the calculation for obtaining these numbers.
What UK tax forms can I expect to receive?
There are three PAYE tax forms: P45, P60, and P11D:
- P45 - You get a P45 from your employer when you stop working for them. Your P45 shows how much tax you’ve paid on your salary so far in the tax year (6 April to 5 April).
- P60 - Your P60 shows the tax you’ve paid on your salary in the tax year (6 April to 5 April). If you’re working for your employer on 5 April they must give you a P60. They must provide this by 31 May, on paper or electronically.
- P11D - Your employer will send a P11D to HM Revenue and Customs (HMRC) if you get any benefits in kind (e.g., company cars or interest-free loans). The P11D records how much each benefit is worth.
We would like you to provide us with every PAYE form that you receive (we ask for it on the Earned Income tab of the Tax Questionnaire).
Do I have to complete a UK tax return?
Most taxpayers in the UK are taxed at source and so do not need to complete a Self Assessment Tax Return. ‘Taxed at source’ means that the money you receive has already had the tax is taken off, such as the wages you get from your employer when paid under the Pay As You Earn (PAYE) system or UK bank interest taxed at source.
People who have income that has not been taxed at source, or not taxed at the correct rate, and on which tax is due, are required to inform HM Revenue & Customs about the income within six months of the end of the tax year in which the income is received (that is by 5 October following the end of the tax year). HMRC will then send you a notice to file a tax return, either by post or electronically.
Such income would include, for example, rental income, self-employed income, savings income for higher rate taxpayers, and occasional untaxed income like eBay sales or casual freelance earnings.
However, if you receive a notice to file a return from the HMRC - you must complete a return and submit it to HMRC. This is so even if you are an employee and all your income is taxed under PAYE.
What other taxes aside from Income Tax should I be aware of?
In addition to income tax on salaries paid, there are other forms of income that are taxed in the UK.
Non-cash compensation is considered taxable. This includes housing stipends, relocation expenses, meal and clothing allowances, commuting costs, club memberships, education reimbursement or home leave payments. There are exceptions, but in general, expats can expect to pay taxes on non-cash compensation in the UK, including national insurance.
Any capital gains are also going to be taxed, including the sale of your only or main residence, life insurance policies, corporate bonds, motor cars, gifts of assets to charity, gains from ISA accounts, and UK government bonds. If you are a resident or ordinarily resident and domiciled in the UK, this includes worldwide capital gains. If you are not domiciled, it will only be on capital gains earned in the UK, allowing for election by the remittance basis for overseas gains.
For estate taxes, you can expect to pay inheritance tax to worldwide assets if you are domiciled in the UK. HMRC deems you responsible for inheritance taxes if you have been resident in the UK for 17 or more of the last 20 years. In the case that you are domiciled in the US, you are only responsible for inheritance on assets located inside the UK.
What is the name for UK Tax Declaration document and who must have it prepared? Do you need its copy?
UK Tax Declaration is called Self Assessment.
This page explains who must have it prepared and submitted to the HMRC:
You’ll need to send a tax return if, in the last tax year:
- you were self-employed - you can deduct allowable expenses
- you got £2,500 or more in untaxed income, eg from renting out a property or savings and investments - contact the helpline if it was less than £2,500
- your savings or investment income was £10,000 or more before tax
- you made profits from selling things like shares, a second home or other chargeable assets and need to pay Capital Gains Tax
- you were a company director - unless it was for a non-profit organization (e.g. a charity) and you didn’t get any pay or benefits, like a company car
- your income (or your partner’s) was over £50,000 and one of you claimed Child Benefit
- you had income from abroad that you needed to pay tax on
- you lived abroad and had a UK income
- you got dividends from shares and you’re a higher or additional rate taxpayer; but if you don’t need to send a return for any other reason, contact the helpline instead
- your income was over £100,000
- you were a trustee of a trust or registered pension scheme
You can check whether you need to on this page. You usually won’t need to send a return if your only income is from your wages or pension.
If you get an email or letter from HM Revenue and Customs (HMRC) telling you to send a return, you must send it -- even if you don’t have any tax to pay.
If you submitted Self Assessment form for the period covered by the US tax year (ie either Jan 1 - Apr 5 or Apr 6 - Dec 31), please provide it (or both of them) to us.
We ask for it in the question Do you have an annual tax summary (ie local W2) from any country outside of the U.S? in the tab Personal Details > The Basics > Return Logistics of our Tax Questionnaire.
UK Businesses & Investments
Opening a local business in the UK as a US citizen
Of course, before opening a local business in the UK, you must first possess the right to legally reside and work in the UK. What’s more, you must decide on your business structure and register your business with the appropriate UK agency. There are several UK agencies in which you may need to register your business such as the Companies House and Her Majesty's Revenue and Customs (HMRC).
What types of local business structures are there in the U.K., and what would be the US filing requirement?
Sole Trader (Sole Proprietorship)
As a Sole Trader, you are self-employed and personally responsible for your business’s debts. You will need to report your self-employment to the IRS via form Schedule C.
A limited liability company means that the business is considered a separate entity from the individuals who form it. You will need to report your Limited Liability company to the IRS via Form 5471.
UK Partnership limited liability partnership (LLP) is treated as corporation (filed via Form 5471). General partnership (LP) is treated as partnership - Form 8865.
UK - US FATCA Treaty overview
The Foreign Account Tax Compliance Act (FATCA) is a piece of legislation introduced by the United States government in 2010, to help counter US tax evasion.
In the UK, the principles of FATCA have been brought into the local law. This means that UK financial institutions need to provide information on US accounts to the local tax authority, HM Revenue and Customs (HMRC). Further, it becomes a subject to the Intergovernmental Automatic Exchange of information.
When did UK banks start sending data to the IRS?
The main requirements of US and UK Intergovernmental Agreement came into effect on 1 July 2014.
UK banks were required to extract account balances at 30 June 2014 and undertake checks depending on the value of the account. Higher value accounts (balances over $1m) were reviewed by 30 June 2015 and lower value accounts ($50k - $1m for individuals and $250k - $1m for entities) needed to be reviewed by 30 June 2016.
What searches do a UK bank have to do to comply with US FATCA?
The financial institution must search their data to identify financial accounts held by US Specified Persons, or by foreign entities in which US taxpayers hold a substantial ownership interest.
In order to achieve this, the financial institution needs to search their data looking for any one of seven indications (indicia) that an account holder may be a US person. These indicia are:
- US citizen (check for US passport or Green Card)
- US residential address
- Place of birth in the US
- US telephone number
- Standing instructions to send funds to a US bank account
- Power of attorney (PoA) or third party authority in favor of a person with a US address
- Use of a c/o or hold mail address
Which types of UK financial assets must/are not required to be reported on FBAR / FATCA?
Account types that must be reported
- Individual bank accounts such as savings accounts, checking accounts, and time deposits.
- Retirement accounts - workplace retirement scheme, individual retirement accounts (SIPP), or QROPS
- Brokerage accounts, commodity futures or options accounts,
- Insurance policies and annuity contracts with a cash value
- Unit Trusts or other similar pooled funds (OEIC)
- Business accounts where US person has a greater than 50 percent interest in the entity
Account types that are not required to be reported
Even though FATCA will provide relief in reporting scope to many UK retirement plans that are considered “deemed compliant”, the FATCA rules applying to individuals were not relaxed. Form 8938 specifically requires reporting by US taxpayers who participate in foreign pension plans.
UK financial assets exempt from FBAR/FATCA reporting are limited to National Insurance, Real Estate Holding, precious metals held directly, and collectibles.
UK Tax Glossary
Benefits in kind
Benefits in kind are non-cash benefits such as company cars, given to employees. They used to be called fringe benefits. Most benefits in kind are taxable. There are different rules if an employee earns less than a certain amount each year.
Similar to a bank but owned by members of the building society rather than shareholders in a company (the close equivalent to US credit union).
Saving Account with interest earnings deferred in the UK but taxable as regular savings account in the US.
Tax applied to residential properties in England, Wales and Scotland.
Income Tax Allowances
Everyone who normally lives in the United Kingdom is entitled to receive a certain amount of income each year before they have to start paying tax. This amount is called the personal allowance. There are also other additional allowances which can reduce the tax you have to pay. The amounts of the allowances are usually announced each year.
Inland Revenue used to be the government department for assessing and collecting most types of tax. It is now called HM Revenue and Customs (HMRC).
HM Revenue and Customs (HMRC)
HM Revenue and Customs (HMRC) is the government department responsible for assessing and collecting most types of tax, including VAT. HMRC is also responsible for paying tax credits and child benefit.
This stands for Pay As You Earn. It is the UK system for collecting the tax and national insurance contributions from the wages and salaries of employees and the tax from some pensions. The employer or pension provider deducts the tax from the employee’s wages or pension and sends it to HM Revenue and Customs.
Self-Invested Personal Pension - the type of UK government-approved personal pension scheme, which allows individuals to make their own investment decisions.
If you're a taxpayer, you're responsible for informing HMRC about any income or gains which may be taxable. Some taxpayers are required to complete a form every year called a Self Assessment tax return, telling HMRC about income and capital gains in that year. HMRC uses the figures on the tax return to work out how much tax is payable. Self Assessment also allows you to claim tax allowances or reliefs against your tax bill and HMRC to collect certain national insurance contributions and student loan repayments. There are strict deadlines for tax returns and making payments under Self Assessment.
Stamp Duty Land Tax (England, Wales and Northern Ireland only)
Stamp Duty Land Tax is a tax that you pay on a land transaction in England, Wales or Northern Ireland, for example, buying a house or being granted the lease on a property. For more information about Stamp Duty Land Tax, go to the HM Revenue and Customs website and for more information about Stamp Duty Land Tax in Northern Ireland, go to the NI Direct website.
Stocks and Shares ISA
Investment accounts with the preferential UK tax treatment of dividends and Capital Gains.
A tax year starts on 6 April in one year and ends on 5 April the next calendar year.
VAT stands for Value Added Tax, which is a tax on goods and services. It is payable at a certain percentage, which is announced by the government in each year’s Budget. It is administered and collected by HM Revenue and Customs.
Pooled Investment constituted under a trust deed. Similar to US mutual funds but, as opposed to US mutual funds, UK unit trust is subject to PFIC regime