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Congratulations. You’ve decided to come to the UK and experience all the British traditions that come with it. It’s not just about taking tea at 4pm and catching a glimpse of the Queen! Here are some helpful tips regarding UK taxation.
The UK tax year starts on 6 April. If you start your job in the middle of the tax year, and your salary is less than £100,000, your taxes will be calculated including a personal allowance of £12,500 (also written as 1250L). This means that personal allowances will be spread over the tax year to 5 April. Any earnings over £1,040 per month will be subject to income tax at 20 percent or over £4,167 at 40 percent. If you opt to get health insurance from your employer it will usually be taxed either through your monthly payroll or on a Form P11D. There are no tax deductions from income for school fees, personal healthcare insurance or medical expenses. Mortgage interest is also not a deduction. The US Form W2 equivalent is the UK Form P60, which is provided after 5 April. If you are earning more than £100,000, and your UK tax code is still 1250L on your payslip, ask HMRC to change this.
You may bring your business with you or start a new business. In either case you need to register with HMRC within three months. You will need to apply for your National Insurance number first. Once issued you can apply online for your Self-Assessment tax record to be set up. Fees earned abroad get fully included in UK self-employment.
You may effectively be an employee of a US corporation but unless a UK branch is registered as an employer, you will pay UK taxes like a self-employed worker and can claim necessary work and office running expenses, even if you work from home.
If you only plan to stay in the UK for two to three years and travel abroad for work, there are arrangements that could reduce your taxes. It is important to consider the following when you start your assignment, as the clock starts ticking on day one.
• Get your salary paid offshore only
• Try to calculate a percentage of your foreign workdays
• Allocate that percentage against your monthly pay
• Keep an approximation of foreign workday compensation offshore
• Do not bring that portion in to the UK or use it to settle credit cards for UK goods or services.
If this applies to you, there are some tax reliefs due. You can offset the costs of your ‘detached duty’, e.g. living accommodation and reasonable living expenses. You must get paid offshore and limit remittances to the UK.
You may be at that stage when you wish to purchase a home in the UK. It is important to ensure that capital that you bring over to the UK does not get co-mingled with investment income. Try to keep capital separate. Capital transfers and gifts from abroad are not taxable income. This does not mean that you have changed your permanent residence or domicile.
As a UK resident you will be charged to UK tax on remittances. US taxes paid can be offset against certain types of income and gains. So even though you may consider you have paid US taxes on these sources, this does not exempt you from declaring and paying UK taxes due. It makes sense to utilize available UK allowances on investment income and gains as a way of remitting to the UK. It is important to bear in mind foreign exchange movements on long term sales as these can convert modest gains into large gains or smaller losses than anticipated. Rental property rules are different in the UK and exclude certain allowed US tax law deductions.
When in your 7th year of residence in the UK, any offshore income and gains must be declared on your UK tax return to avoid the Remittance Basis Charge. In some situations, it may be necessary to make protective loss claims.
You can save into your work or private pension to get tax relief. The basic rate taxpayer annual maximum is £40,000. For higher earners, this is tapered to the maximum restriction of £10,000. This will include employee and employer contributions and payments into your 401k Plan and IRA. Roth IRAs are not deductible. You may be able to discuss options like Salary Sacrifice.
With the savings allowance of £1,000 available on bank interest income restricted to basic rate taxpayers, it makes sense to keep savings accounts in joint names. A restricted allowance of £500 remains available whilst in the 40 percent tax bracket. ISAs are tax-free in the UK but income and gains will be taxable in the USA.
As a taxpayer, you can sign a Gift Aid form so that donations to your chosen registered charity or place of worship get a basic tax rate top-up by the Government. Make sure you sign up and keep these receipts. For higher rate taxpayers, this can save you tax at the 40 to 45 percent applicable rates when you claim through your tax return. PAYE code adjustments can be applied for in order to ease monthly employee withholdings.
Gabriella Alexander-Passe is a Chartered Accountant and Big Four trained, specializing in UK tax therapy for Americans in the UK and other taxpayers.
020 8343 2063