TAXING ISSUES UK Income Tax Through A US Tax Lens The following is designed to provide general tax information for Americans contemplating a move to the United Kingdom and does not constitute legal advice. As with all legal issues, seeking tailored advice from qualified counsel is advisable. Americans who relocate to the United Kingdom will encounter an income tax system with many similarities to the one they have grown to loathe in the United States. Nevertheless, continued US tax obligations, combined with new tax responsibilities in the United Kingdom, create a landscape characterised by both opportunities and pitfalls.
1. Tax Reporting Obligations And Remittance-Basis
Similar to taxation policy in the United States, UK tax residents will generally owe tax to Her Majesty’s Revenue and Customs (HMRC) on worldwide income. But unlike the US system, many taxpayers do not need to file an annual tax return (known as a “Self-Assessment”) with tax responsibilities being largely satisfied through withholdings. For example, an individual earning UK wages as their only source of income would not need to file a tax return unless earnings for the tax year ending April 5th were greater than £100,000. Importantly, Americans who are in the process of moving to the United Kingdom should be aware of potential tax savings through election of remittancebasis taxation. This tax status has no corresponding policy in the United States and creates an opportunity to protect non-UK investment income from UK tax for a limited time following a move. To summarise, investment income from non-UK sources earned during the remittance period is not subject to taxation in the United Kingdom unless funds are remitted into or otherwise spent in the UK. US tax would continue to be due, but Americans with short-term plans in the United Kingdom who earn considerable investment income would be wise to analyse possible tax savings that would be produced through this strategy. The remittance basis can only be used for seven years after arriving in the United Kingdom after which time an annual charge of £30,000 applies. This annual charge then increases to £60,000 for those who are resident in 12 of the prior 14 years, and 12
AMERICAN IN BRITAIN
is not available once deemed domiciled, which applies after 15 years of residence during the prior 20-year period. Please note, domicile determinations can be challenging, and if strong connections are not maintained outside the United Kingdom, there will always be risk of a determination that UK domicile has been established by choice, thus eliminating protection of remittance basis. Irrespective of UK status and filing obligations, US citizenship status will require that annual tax returns and foreign bank account reports continue to be filed back home. Because of these continued US tax obligations, many provisions are in place to eliminate exposure to double taxation for an American living in the UK, but cracks in the foundation do exist.
Outside of remittance basis taxation, tax will generally be assessed in the United Kingdom at a rate higher than the corresponding rate that would be due on that same amount of income in the United States 2. Tax Rates
Outside of remittance basis taxation, tax will generally be assessed in the United Kingdom at a rate higher than the corresponding rate that would be due on
that same amount of income in the United States. Income from salaries or selfemployment, pensions, interest, and rental income will face a “basic” tax rate of 20% after the application of a personal allowance of (£12,570 in 2021/22). A “higher” tax rate of 40% applies to income in excess of £50,271 and an “additional higher” rate of 45% is applied to income over £150,000. By comparison, the progressive tax system in the US contains over twice as many rate bands and a top rate of 37%, which in 2022, does not kick in until total income reaches $539,901 ($647,851 for married taxpayers filing jointly). Americans who are resident in states with high rates of income tax, such as California, Hawaii, or New Jersey, will tack on an additional state tax charge and face rates closer to those encountered in the United Kingdom. But, a permanent move from Texas, Florida, or another state, with no personal income tax, will always come with a hefty increase in the overall income tax bill.
3. Tax Incentives For Pensions And Investments
UK tax policy incentivises investment and offers a wide range of tax protection opportunities for British taxpayers working to fund their retirement or just save for a rainy day. To offset the brutality of the rates described above, tax incentives on investment and retirement are often considerably more generous than those offered in the United States. But unless specifically provided for in the United States – United Kingdom Income Tax Treaty, American citizens will continue to pay US tax on their tax-protected UK income. UK Individual Savings Accounts (ISAs). Participation in retirement savings schemes in the UK is largely protected by this Treaty; however, the Individual Savings Account (ISA) designation will be disregarded for US tax purposes as the accounts do not qualify as retirement plans. ISAs create opportunities for British taxpayers to make limited annual contributions to tax-free investment accounts that can be withdrawn at any point, irrespective of age. ISA income remains fully taxable in the United States and retains its underlying character (ie., dividends, interest, capital gains, or PFIC income!). Tax Incentives for Investment Income (2021/22). In the United Kingdom, annual
