Residing in the UK

Understanding the US and UK taxation regimes and what you need to do

IRS. HMRC. 1040. SA100. Tax return. Self Assessment. National Insurance... When moving to the UK, it can be difficult to comprehend both the US and UK tax systems; what is different, what is similar, what you need to do to be compliant - and most importantly, how to coordinate your tax affairs to avoid double taxation. Here we have given a brief overview of the equivalent aspects of the two systems. (This chart is neither exhaustive or comprehensive and is for information purposes only; many exceptions, conditions and nuances apply. Figures accurate for US Tax Year (TY) 2022 and UK TY 2021/22).

United States

IRS - First things first: the tax system in the US is managed by the Internal Revenue Service. Unfortunately, there is no longer an IRS office based at the London embassy, but there is a dedicated international taxpayers' office in Philadelphia that you can speak to.

United Kingdom

HMRC - In the UK, His Majesty's Revenue and Customs is responsible for the collection and enforcement of taxation.
Income tax - In the US, income tax is payable on income exceeding your itemized or standard deduction ($13,850 for Single/Married Filing Separately taxpayers). There are many items which can be included in the itemized deduction, including mortgage interest, state taxes, charitable contributions etc., which allows the taxpayer to reduce their taxable income (although for TY 2018 to 2025 the suspension of the ability to deduct "miscellaneous" itemized deductions means claiming the standard deduction will in many cases be more advantageous). 

Federal marginal tax rates start at 10%, then 12%, 22%, 24%, 32%, 35% and finally (!) up to 37% for single taxpayers with income exceeding $609,350. There are multiple filing statuses (Single, Married Filing Separately, Married Filing Jointly, Head of Household, among others) and each has its own thresholds for each tax rate.

​Long-term capital gains and "qualified" dividends are taxed at 0%, 15% and 20% depending on the level of other income.

Those living in the US (and sometimes abroad) may also incur state or city taxes. And let's not forget the Alternative Minimum Tax, too!
Income tax - Most of the UK tax-paying population enjoy the standard "personal allowance" of £12,570, above which they pay tax at the 20%, 40% and 45% rates. 20% is payable up to £50,270, 40% up to £125,140 and 45% above that. 

The UK does not allow the myriad deductions that are permitted in the US, although charitable donations made via the Gift Aid scheme provide tax relief for higher (40%) and additional (45%) rate taxpayers. There are no deductions for dependents in your household.

Taxpayers in the UK always file individually, though relief can be claimed for certain married taxpayers by way of the Marriage Allowance or the Married Couple's Allowance.

There are no state or city income taxes in the UK (see council tax below). Note, however, that residents of Scotland pay slightly different rates of income tax to those in England and Wales.

Fortunately for UK taxpayers, the Alternative Minimum Tax is a uniquely American concept.
Social Security / Medicare - As well as federal income tax, Social Security and Medicare tax is also levied on wages and paid by both the employee and employer. These total to 15.3% plus an additional 0.9% for high earners.
National Insurance - Also referred to as NICs, the UK has a similar system of employee and employer Social Security taxes which they call National Insurance Contributions. It's fairly complicated, but the bulk of this is paid at 12% by employees and 13.8% by employers.
Form 1040 - The federal tax return is called the Form 1040 (see the original 1040 here). Along with it, many taxpayers file additional Schedules including B (interest and dividends), C (self employment), D (capital gains) and E (rents and royalties). All single earners with gross income over $13,850 must file a tax return ($27,700 for married couples filing jointly and only $5 for married couples filing separate tax returns).
SA100 - This is what they call the personal income tax return in the UK. Not everyone in the UK who earns taxable income needs to file a tax return. The majority of wage earners simply have their tax deducted above their personal allowance through the Pay As You Earn (PAYE) scheme. You must file an SA100 if, among other things, you are a company director, are self-employed, earn above £100,000 or have to pay tax on non-UK income.
Dec 31st and Apr 15th - Everyone in the US knows April 15th... it's the Federal tax return filing deadline! The tax year is the same as the calendar year, with the tax return (and tax itself) due on April 15th of the following year. An extension to file the return until October 15th is available by filing Form 4868; and taxpayers abroad are automatically granted an extension to June 15th. 

Note: there is never an extension of time to pay tax; all tax is due on April 15th and interest and penalties may accrue if not paid by this date.
Apr 5th and Jan 31st - The financial year end in the UK is (for historical reasons) April 5th, and your tax return (if you need to file one) is due by January 31st of the following year. Penalties for late filing start at £100, and there may also be further penalties imposed for failing to notify HMRC if you are required to file a return.

Needless to say, the different US and UK financial years makes it very complicated when it comes to coordinating your tax returns. You should make sure that any UK tax you owe is paid in the same calendar year so you can apply it to your US taxes. See Your US Tax Liability for more details.
Property taxes - In the US, several authorities have the power to levy a tax on properties within their jurisdiction; it is a tax on the ownership of the property. The taxing authority is generally the city but can also be the state, county, school district and others. It is normally levied as a percentage of the deemed value of the property at a given point in time (either recent or historical) and may also be levied for specific items e.g. flood control and street lighting.
Council tax - The UK also has a system of property-based taxation to fund local governments, but this is a tax on the occupancy of the property rather than the ownership of it. The amount of tax is based on the value of the property at an historical date in time, but is discounted if the property is unoccupied, or occupied by students, or just one person. The rates are set by the Local Authority (or "council") and can vary significantly between councils. 
Schedule C / C Corp / S Corp / LLC - Self-employed individuals in the US who have not incorporated into a legal entity report their earnings and expenses on Schedule C which is attached to their 1040. They usually also file Schedule SE to calculate their self-employment taxes (equivalent to social security taxes for employees). If you are residing and working in the UK, your income is excluded from self-employment tax under the US/UK Social Security Agreement.

If you choose to incorporate your business it becomes a C Corp, or you can elect to be an S Corp. These have similar legal structures (namely limited liability for the shareholders) but vary with regards to taxation: C Corps are taxed at a flat 21% rate (plus state level taxes). Further tax is then payable on wages and dividends distributed from the company. An S Corp election turns the company into a "flow through" entity whereby the income flows to the shareholders and is taxed at the individual level at the shareholder's marginal rate of income tax.

An LLC (limited liability company) is similar to an S Corp with respect to taxation but differs legally. It is also a flow through, and still offers limited liability to the owners, but is not a corporation - it is closer to a partnership and thus has members rather than shareholders. Profit share is not determined by the share of capital owned, but by agreement between the members. There are many other differences which should also be taken into account when deciding between S Corp and LLC. In particular, only US citizens or resident aliens can be shareholders of an S Corp.

Whatever the entity, the incorporation is done with the state authority rather than a federal one.
 SA103 / Limited Company / LLP - As in the US, self-employed individuals who are not incorporated declare their earnings and expenses on their personal tax return, here using form SA103 attached to the SA100, and pay tax on the net income at their marginal rate of income tax. There is also a special type of National Insurance Contributions that must be paid by self-employed individuals.

In the UK it is easy to incorporate a business into a privately held "limited liability company" by making the appropriate filings with Companies House. This is not to be confused with a US LLC. In the UK it is abbreviated to Ltd and is an actual corporation; it is therefore more similar to a C Corp than an LLC. A Ltd company can have any number of shareholders (and possibly different types of shares) and a board of directors. Profit is taxed at the corporate tax level at 19% and is distributed in proportion to share ownership. The company must file annual accounts and an annual return with Companies House, and then a CT600 corporate tax return with HMRC. 

US taxpayers should be aware that shareholders of "closely-held foreign corporations" i.e. companies with few shareholders, are obligated to file Form 5471 with their 1040. This is not a tax return but an information return, and requires full transcription of the CFC's books into US GAAP standard. 

A Limited Liability Partnership (LLP) is treated as "flow through" in the UK (in the same way an LLP or LLC is in the US). It offers limited liability protection to its partners who share profits according to their partnership agreement, and whom are each taxed on these profits at the individual level at their marginal rates of income tax.
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