Questions covered:

U.K. Pension Accounts

I have a U.K. ISA account with stocks. It contains a mixture of OEICS, investment trusts, and individual shares. Do I have to report it as PFIC?

OEICS are collective investment schemes that are treated in the U.S. as PFIC.

Social Security in the U.K. (National Insurance)

Contributions to the U.K. National Insurance system withheld from your paycheck or made on self-employment income are not deductible from the U.S. taxable income and do not qualify for the foreign earned income credit.

You can check your record of U.K. National Insurance contributions here.

U.S. - U.K. Social Security Totalization Agreement

Overview

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 survivor 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 agreement's provisions 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 the National Insurance system exempt you from contributions to the U.S. Social Security system that otherwise would be required in the U.S. on self-employment income.

How it impacts those who want to earn U.S. 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 common 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

U.S. Social Security Benefits

U.S. Social Security benefits received by U.S. citizens and green card holders residing in the U.K. are exempt from tax in the United States and are taxable only in the U.K.

U.K. State Pension

U.K. State Pension and other payments received under the National Insurance legislation by U.S. citizens and green card holders residing in the U.K. are taxable in both countries.

The foreign tax credit can be applied to eliminate double taxation.

Contributions to Employer Pension Schemes

When a U.S. citizen/green card holder is a participant in a pension scheme established in the U.K.:

  • a) Contributions paid by or on behalf of that individual to the pension scheme may be excludable in computing his U.S. taxable income

and

  • b) Any benefits accrued under the pension scheme or contributions made to the pension scheme by or on behalf of the individual's employer are not treated as part of the employee's taxable income

However - the 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 U.K. on earned income, added employer contributions may still leave you tax-free in the U.S. Your benefit: the added amount will be considered previously taxed - which will reduce the taxable portion of pension payments in the future.

Taxation of U.K. Pension Benefits

Pensions and other similar remunerations paid to U.S. citizens/green card holders residing in the U.K. are taxable in both countries.

However, you can eliminate the burden of double taxation. Taxes paid in the U.K. on pension income are applied as a foreign tax credit against tax owed on the same income in the U.S.

Self-Invested Schemes (such as ISA)

Individual tax-deferred saving accounts arrangement (ISA) do not qualify for income deferral in the U.S. 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

U.S. green card holders residing in the U.K. 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 (U.K.).

Under such an election, the individual would file form 1040NR and report only income derived from U.S. sources. The requirement to provide full disclosure of foreign bank accounts remains, and the tax on income from U.S. sources will be higher than the tax on the same income when applied to U.S. residents filing form 1040.

Self Invested Personal Pension (SIPP)

SIPP is an individual pension plan. U.K. pensions plans are IRS-qualified, whether it is employer-sponsored or individual plans. Therefore there is no need to report it as a 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 U.S. tax return.

U.K. Income Reporting

How do I report income on the Tax Questionnaire?

For income you earned while being employed:

You will need four pay stubs for the year. All of them are for the calendar year you are filing U.S. tax returns (Jan-Feb-Mar and Dec). Add the amounts printed online to Total Payment for January, February, and March. Then add the amount from line Taxable Pay YTD from the December paystub (because the U.K. tax year is Apr-Mar, the Gross to Date value on the December paystub will reflect your pay for Apr-Dec).

A more straightforward way is this: If your salary has not changed over the year, you can multiply one monthly Total Payment amount by 12. Enter the result online 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 U.K. (i.e., before contributions to National Insurance).

Redundancy Pay

If you received redundancy pay, add the 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 must be reported separately for each type of income on which tax was paid. Add the amounts printed online 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 online Amount of foreign tax paid on earnings in the filing year of the Taxes & Deductions > Taxed Paid section of the 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 tax withheld during the filing year.

The payor may withhold taxes on unearned income (i.e., bank-withheld income from dividends), or you may owe tax upon completing the 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 the 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 property tax separately in the Taxes & Deductions > Deductions section and stamp duty in the Income > Home Sale section.

Reporting council tax depends on whether you rent or own a flat. If you are a renter, 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 between tenancy, report it as property tax on Income > Passive Income > Rental Income.

How do I report my deductions?

We will take specific deductions allowed for U.K. residents by the US/UK treaty (i.e., we can deduct contributions made to the employer pension scheme). You will report contributions to the employer pension separately from the gross income. We will take this deduction if this improves your tax position (in some cases, you may benefit from not taking this deduction now).

Further, the Taxes & Deductions > Deductions section offers you questions related to various additional deductions. Such deductions include mortgage interest, alimony payments, and investment advisor fees. Similarly to personal allowance in the U.K., the U.S. tax system also applies a concept of "Standard deduction": $12,000 per single person and $24,000 for the married couple for the 2018 tax year. For most U.K. residents filing a U.S. 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 contributions to the 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, and 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 received them from the bank or brokerage account.

As I live in the U.K., my taxes are automatically taken out of my salary, but I also have a deduction taken out for National Insurance. Do I add these 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 N.I. Entirely on the U.S. tax returns. 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.

U.K. Tax System

Who is considered a U.K. 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 spend in the country. This exercise counts each day if you are in the U.K. at midnight.

  • If you are in the U.K. 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 U.K. If you spend less than 183 days in the U.K., you will not be considered a resident for tax purposes.

  • If you have spent 91 days or more on average per year in the U.K. over the last four tax years, you will be considered a resident for tax purposes. You would be considered a resident for tax purposes from your arrival if you intended to spend more than 91 days per year in the U.K.

  • If you come to the U.K. and expect to stay for two years or more, you are considered a tax resident from the first day you arrive.

There are also two types of residents: Ordinarily and not ordinary.

  • Resident and ordinarily resident – When you come to the U.K. 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 U.K. and intend to come to the U.K. for at least two years but less than three years.

What is a Domicile?

For U.K. tax purposes, domicile is important for determining how you are taxed on your worldwide income. Domicile is defined as where a person has a 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 had changed domicile while you were still a dependent, your domicile would also have changed. You can, however, adjust your domicile. 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 challenging 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 U.K. are considered non-UK domiciled.

Is Foreign Income Taxed in the U.K.?

The tax paid on worldwide income will depend on your residency and domicile status in the U.K. If you are considered a resident of the U.K., you are taxed on all of your investment income, no matter the location. This will be the same income reported on your U.S. expat taxes.

If you are a resident but not domiciled in the U.K., you can file using the remittance basis for foreign income and capital gains. If you are a domiciled resident 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 U.K. tax on investment income remitted in the U.K. Income must be remitted if brought to the U.K. or paid to you in the U.K. Contacting a tax advisor regarding overseas bank accounts is good to avoid costly mistakes for non-UK domiciled residents.

What is the U.K. 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 can exclude £8,105 of your income as a personal allowance for 2012-2013. Note that this will be reduced by £1 for every £2 income over £100,000, regardless of age.

What is the U.K. tax year?

The tax year in the U.K. is different from the U.S. It is from April 6th through April 5th.

When is the U.K. tax due date?

Tax returns must be filed with the HMRC before October 31st of the tax year if they are filed by paper. This is also different than the April deadline for U.S. expat taxes.

If you are e-filing, you have until January 31st, following the tax year. HMRC does not offer extensions.

For payment, the U.K. 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 July 31st following the tax year.

How do you account for different tax years between U.S. & U.K.?

We use the prorated earnings and tax paid from two consecutive years covering the entire calendar year.

For example, to calculate figures for the 2017 U.S. tax year, we take three months from the U.K. 2016-2017 tax year and nine months from the U.K. 2017-2018 tax year. To do this, we would typically use your paystubs or run the calculation for obtaining these numbers.

What U.K. 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 (April 6th to April 5th).

  • P60 - Your P60 shows the tax you've paid on your salary in the tax year (April 6th to April 5th). If you're working for your employer on April 5th, they must give you a P60. They must provide this by May 31st, on paper or electronically.

  • P11D - Your employer will send a P11D to H.M. 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 you receive (we ask for it on the Earned Income tab of the Tax Questionnaire).

Do I have to complete a U.K. tax return?

Most taxpayers in the U.K. are taxed at source and do not need to complete a Self Assessment Tax Return. 'Taxed at source means that the money you receive has already had the tax taken off, such as the wages you get from your employer when paid under the Pay As You Earn (PAYE) system or U.K. 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 H.M. Revenue & Customs about the income within six months of the end of the tax year in which the payment is received (that is by October 5th following the end of the tax year). HMRC will 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, other forms of income are taxed in the U.K.

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 U.K., including national insurance.

Any capital gains will also be taxed, including the sale of your only or primary residence, life insurance policies, corporate bonds, motor cars, gifts of assets to charity, gains from ISA accounts, and U.K. government bonds. If you are a resident or ordinarily resident and domiciled in the U.K., this includes worldwide capital gains. If you are not domiciled, it will only be on capital gains earned in the U.K., 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 U.K. HMRC deems you responsible for inheritance taxes if you have been resident in the U.K. for 17 or more of the last 20 years. If you are domiciled in the U.S., you are only responsible for inheritance on assets inside the U.K.

What is the name of the U.K. Tax Declaration document, and who must have it prepared? Do you need its copy?

U.K. 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 can check whether you need to on this page. You usually won't need to send a return if your only income is your wages or pension.

If you get an email or letter from H.M. 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 the Self Assessment form for the period covered by the U.S. tax year (i.e., either January 1st - April 5th or April 6th - December 31st), please provide it (or both of them) to us.

We ask for it in the question Do you have an annual tax summary (i.e., local W2) from any country outside of the U.S.? in the tab Personal Details > The Basics > Return Logistics of our Tax Questionnaire.

U.K. Businesses & Investments

Opening a local business in the U.K. as a U.S. citizen

Of course, before opening a local business in the U.K., you must first possess the right to reside and work in the U.K. What's more, legally, you must decide on your business structure and register your business with the appropriate U.K. agency. There are several U.K. agencies where 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 U.S. filing requirement?

Sole Trader (Sole Proprietorship)

As a Sole Trader, you are self-employed and responsible for your business's debts. You must report your self-employment to the IRS via form Schedule C.

Limited Company

A limited liability company means the business is considered a separate entity from the individuals who form it. You must report your Limited Liability Company to the IRS via Form 5471.

Partnerships

U.K. Partnership limited liability partnership (LLP) is treated as a corporation (filed via Form 5471). General partnership (L.P.) is treated as a partnership - Form 8865.

U.K. - 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 U.S. tax evasion.


In the U.K., the principles of FATCA have been brought into the local law. This means that U.K. financial institutions must provide information on U.S. accounts to the local tax authority, H.M. Revenue and Customs (HMRC). Further, it becomes a subject to the Intergovernmental Automatic Exchange of information.

When did U.K. banks start sending data to the IRS?

The main requirements of the U.S. and U.K. Intergovernmental Agreements came into effect on July 1st, 2014.

U.K. banks were required to extract account balances on June 30th, 2014, and undertake checks depending on the account's value. Higher value accounts (balances over $1m) were reviewed by June 30th, 2015, and lower value accounts ($50k - $1m for individuals and $250k - $1m for entities) needed to be reviewed by June 30th, 2016.

What searches do a U.K. bank have to do to comply with US FATCA?

The financial institution must search their data to identify financial accounts held by U.S. Specified Persons or foreign entities in which U.S. taxpayers hold a substantial ownership interest.

To achieve this, the financial institution needs to search its data looking for any one of seven indications (indicia) that an account holder may be a U.S. person. These indicia are:

  • U.S. citizen (check for U.S. passport or Green Card)

  • U.S. residential address

  • Place of birth in the US

  • US telephone number

  • Standing instructions to send funds to a U.S. bank account

  • Power of attorney (PoA) or third-party authority in favor of a person with a U.S. address

  • Use of a c/o or hold mail address

Which types of U.K. financial assets must/are not required to be reported on FBAR / FATCA?

Account types that must be reported

  • Individual bank accounts include 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 a U.S. 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 U.K. retirement plans considered "deemed compliant," the FATCA rules applying to individuals were not relaxed. Form 8938 requires reporting by U.S. taxpayers participating in foreign pension plans.

U.K. financial assets exempt from FBAR/FATCA reporting are limited to National Insurance, Real Estate Holding, precious metals held directly, and collectibles.

U.K. 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.

Building society

Similar to a bank but owned by members of the building society rather than shareholders in a company (the close equivalent to a U.S. credit union).

Cash ISA

Saving Account with interest earnings deferred in the U.K. but taxable as regular savings account in the U.S.

Council Tax

Tax applied to residential properties in England, Wales, and Scotland.

Income Tax Allowances

Everyone who lives typically in the United Kingdom is entitled to receive a certain amount of income each year before they have to start paying taxes. This amount is called the personal allowance. Other additional allowances can reduce the tax you have to pay. The amounts of the allowances are usually announced each year.

Inland Revenue

Inland Revenue used to be the government department for assessing and collecting most types of tax. It is now called H.M. Revenue and Customs (HMRC).

H.M. Revenue and Customs (HMRC)

H.M. 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 benefits.

PAYE

This stands for Pay As You Earn. It is the U.K. 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 H.M. Revenue and Customs.

SIPP

Self-Invested Personal Pension - the type of U.K. government-approved personal pension scheme which allows individuals to make their own investment decisions.

Self-assessment

If you're a taxpayer, you're responsible for informing HMRC about any income or gains which may be taxable. Some taxpayers must complete a yearly form called a Self Assessment tax return, telling HMRC about income and capital gains in that year. HMRC uses the tax return figures to determine how much tax is payable. Self Assessment also allows you to claim tax allowances or reliefs against your tax bill and HMRC to collect specific 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 you pay on a land transaction in England, Wales, or Northern Ireland, for example, buying a house or being granted a lease on a property. For more information about Stamp Duty Land Tax, go to the H.M. Revenue and Customs website and for more information about Stamp Duty Land Tax in Northern Ireland, go to the N.I. Direct website.

Stocks and Shares ISA

Investment accounts with the preferential U.K. tax treatment of dividends and Capital Gains.

Tax years

A tax year starts on April 6th in one year and ends on April 5th of the following calendar year.

VAT

VAT stands for Value Added Tax, a tax on goods and services. It is payable at a certain percentage, which the government announces in each year's Budget. It is administered and collected by H.M. Revenue and Customs.

Unit Trust

Pooled Investment is constituted under a trust deed. Similar to U.S. mutual funds but as opposed to U.S. mutual funds, U.K. unit trust is subject to the PFIC regime.

Did this answer your question?