Moving across the pond is an attractive idea, with many young Americans opting to live in the UK. Several factors influence their decision, and a more affordable cost of living is one of the most notable. You can expect cheaper rent, groceries, utilities, and most importantly, healthcare. For anyone looking to move abroad, eliminating the language barrier is always an advantage. These factors and more make the UK a great choice.
If you intend to retain your US citizenship, remember to do your homework and determine the tax implications of being a US expat. Here’s some basic information to get you started.
You’ll Pay Taxes in Both the US and the UK
US expats are expected to file tax returns in both countries. Her Majesty’s Revenue and Customs office (HMRC) is the tax processing agency in the UK. You might think of it as the equivalent to the IRS in the United States. Your IRS tax return will carry information about the worldwide income you earn, including any sources in the United Kingdom.
If you’re a non-resident of the United Kingdom, the HMRC levies tax dues on the income you earn only from UK sources. But, if you’re a permanent resident of the UK, you’ll pay tax obligations on all income, regardless of where it originated.
Qualifying for Residency in the UK
You’re considered a bona fide UK resident for taxation purposes if you meet the necessary criteria. Living for a minimum of 183 days of the fiscal year or having a permanent home in the host country makes you a resident. You should have owned, lived, or rented the house for a total of 91 days out of 365 days. The HMRC also takes into consideration the Domicile of the person. This status is distinct from residency, citizenship, or nationality. Having a permanent, long-term home in the country means that you have a UK domicile, and you’ll pay taxes accordingly.
You Need Not Pay Dual Taxes
Being a US expat living in the UK does not mean that you’ll experience double taxation on the same income. The IRS allows you the Foreign Earned Income Exclusion (FEIE), so you’ll only pay taxes on foreign income over and above specific cutoffs. It takes into account your total salaries and wages earned during the fiscal year.
For the year 2021, this limit has been set at $108,700. In short, if your foreign income is less than this, you are unlikely to owe the US government any taxes. This income limit is adjusted each year to account for inflation. You can also take advantage of additional benefits such as the Foreign Tax Credit and Foreign Housing Exclusion to cover some of your living expenses in the UK.
Running a Business in the US from the UK
If you’re running a sole proprietorship business or are self-employed, you can deduct your earnings from the taxable amount. However, you’ll pay self-employment tax on it. This rate stands at 15.3% and includes 12.4% for Social Security and 2.9% for Medicare. Remember that the self-employment tax is calculated on the total worldwide income earned without any exclusions. Check with an expert consultant for information on applicable dues.
For example, let’s say your source of income is freelance digital marketing after completing an In-Demand Career course and you take in $80,000 in the fiscal year. As a US citizen, you’ll still need to pay that 15.3% self-employment tax to the IRS. However, your income is under the Foreign Earned Income Exclusion limit, so you will not send any income tax back to the United States. You will, however, need to see how much income tax the United Kingdom expects.
Understanding UK Taxation Rates
Similar to the IRS, the UK HMRC collects taxes according to income slabs. If you earn between £0 and £5,000, you’ll pay a tax rate of 10%. However, income up to £37,500 has a tax rate of 20%. The numbers continue to rise, with the maximum being income levels of at least £150,000. These amounts incur a 45% tax.
Tax rates are different for Scottish residents, so work with a certified consultant for more information about filing returns there.
When adding up your total income, make sure to include rental income from any property you own and any capital gains earned from selling stocks or any other assets. You’ll also mention any other earnings from across the border.
Living and working in the UK has multiple benefits, and many Americans are opting to move abroad. However, make sure to stay on top of your tax obligations, or you stand to incur severe penalties and fees.