If you’re an American living in the UK, knowing about the US-UK tax treaty is essential. This agreement between the US and the United Kingdom offers some major tax benefits for Americans living and working in the UK (and vice versa).
But, with around 39 pages and tons of technical jargon, the treaty is far from an easy read.
Fortunately, that’s what Bright!Tax is here for. As a tax firm specializing in US expat taxes, we have extensive knowledge of international tax treaties. Below, we’ll go over tax obligations for Americans living in the UK, what benefits the US-UK tax treaty offers, how to avoid double taxation, and more.
Before getting into the specific benefits of the US-UK tax treaty, let’s go over the basic tax and reporting requirements for US expats living in the UK.
To understand how the US taxes your income vs. the UK, you need to understand your tax residency status for each country.
The US’s definition of tax residency is sweeping. Every American citizen and permanent resident whose income meets the minimum reporting threshold is subject to US income taxes and must file a federal tax return.
This applies even to American permanent residents and citizens living abroad. So Americans who are also tax residents in another country may need to pay taxes on the same income twice: once to the US and once to their country of residence. Fortunately, there are ways to avoid double taxation — one of which is the US-UK tax treaty.
Related: How Accidental Americans Can Avoid Double Taxation
Tax residency in the UK, on the other hand, is a bit more complex. You will be considered a UK resident for tax purposes if you meet at least one of the following criteria:
You will automatically be considered a non-resident if you meet at least one of the following criteria:
For those who don’t meet any of the above criteria, tax residency will be determined based on whether or not they maintain sufficient ties in the UK.
The UK taxes its residents on worldwide income and gains. In England, Wales, and Northern Ireland, tax rates on non-dividend income vary from 0% to 45%, depending on the total income earned. In Scotland, however, non-dividend tax rates range from 0% to 47%. Throughout the UK, taxes on dividend income range from 0% to 39.35%.
People earning less than £125,140 per year can exclude up to £12,570 of their ordinary income from taxation.
Read more: US Citizens Working in the UK – A Guide to UK Employment Tax
Other types of income taxes include:
UK tax residents who are non-domiciled (“non-doms”) in the UK are taxed differently than typical tax residents. Non-doms who earn less than £2,000 per year generally do not have to pay UK taxes on foreign earnings or gains as long as they do not remit that income to the UK. Non-doms who earn £2,000 or more per year may claim the remittance basis on foreign income.
Non-residents, meanwhile, typically pay taxes only for their UK-sourced income and gains according to the standard resident rates.
The federal US government taxes citizens and permanent residents on their worldwide income.
Ordinary income is taxed at rates varying from 10% to 37%, depending on the total amount of income earned. Long-term capital gains — or gains from the sale of assets held for at least one year — are taxed at either 0%, 15%, or 20%, depending on your overall income amount. Depending on where you most recently lived, you may need to pay state taxes as well.
Living abroad may also affect your reporting obligations. You may need to file the following reports, among others:
See also: Taxes in the UK vs. US: The Full Breakdown
The US-UK tax treaty’s goal is to clarify taxation for individuals who are subject to taxes in both the US and the UK. Among other things, the treaty defines residence, provides tiebreaker rules, states which country has the right to tax which income (also known as first taxing rights), and more.
If you’re an American living in the UK, the US-UK treaty can benefit you by:
One big caveat, though, is that the treaty contains a Savings Clause, which lets the US reserve the right to tax citizens and permanent residents as if the agreement didn’t exist.
In other words, much of the treaty can be beneficial for non-Resident Aliens, but US tax residents (citizens and permanent residents) are generally excluded from taking advantage of most of the treaty. Fortunately, some provisions are exempted from the Savings Clause — particularly Article 17(1)(b), which allows for tax-free lump-sum withdrawals.
Another major exception to the Savings Clause is the ability to exempt US Social Security benefits from US taxes if they are paying taxes in the UK.
To claim the benefits of the US-UK tax treaty, you’ll need to file Form 8833.
Related: The US-UK Pension Tax Treaty Provision Taxpayers Need to Know About
If you can’t claim a certain benefit from the US-UK tax treaty, don’t sweat it — there are other ways to offset double taxation. The IRS offers a couple of tax breaks specifically for Americans who live abroad, including:
Americans who meet the Physical Presence Test or Bona Fide Residence Test also qualify for the Foreign Housing Exclusion/Deduction. This lets them deduct certain qualifying foreign housing expenses (e.g. rent, utilities, furniture rental, etc.).
Americans abroad can also claim many of the same tax breaks as they would if they lived stateside, like the Child Tax Credit.
While it’s good to have a high-level understanding of the US-UK tax treaty, deciphering the specifics is usually best left to a tax professional. If you want help understanding which treaty benefits to claim — or assistance with anything else related to US expat taxes — don’t hesitate to reach out to Bright!Tax.
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