A Guide to Non-Resident UK Tax for American Expats
Living as an American expat in the UK can come with its own set of challenges, and understanding your tax obligations is one of them.
The UK has a different tax system than the United States, and as a non-resident, you may have other tax requirements.
This post aims to help you navigate the world of non-resident UK tax and ensure you meet your tax obligations.
What is a non-resident UK tax?
As an American expat living in the UK, you may be considered a non-resident for tax purposes. This means you will only be taxed on your UK-sourced income, not your worldwide income. This is different from the US tax system, which taxes its citizens on their worldwide income, regardless of where they live.
The UK tax year runs from April 6th to April 5th of the following year, and non-residents must file a UK tax return if they have UK-sourced income that needs to be reported.
Who is considered a non-resident?
To determine whether you are considered a non-resident for UK tax purposes, you will need to look at the Statutory Residence Test (SRT). The SRT is a set of rules that considers factors such as the amount of time spent in the UK, the location of your home, and the nature of your work.
Generally, you will be considered a non-resident if you:
1. Spend fewer than 16 days in the UK during a tax year if you were a non-resident in all of the previous three tax years.
2. Spend fewer than 46 days in the UK during a tax year if you were a non-resident in any of the previous three tax years and you have no home in the UK.
3. Work full-time overseas and spend fewer than 91 days in the UK during a tax year, with no more than 30 days being workdays.
Reviewing the SRT rules in detail is essential to accurately determining your residency status. If you are unsure about your residency status, seeking professional advice is recommended.
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What income is taxable for non-residents?
As a non-resident, you will only be taxed on your UK-sourced income, which can include the following:
● Income from UK employment or self-employment
● Rental income from UK property
● UK pension income
● Interest and dividends from UK investments
● Capital gains on the sale of UK assets
It’s important to note that some types of income may be subject to tax in both the UK and the US, which can lead to double taxation. To help prevent this, the US and the UK have a Double Taxation Agreement (DTA), which can provide relief from double taxation in certain circumstances.
Filing a UK tax return as a non-resident
If you have UK-source income that needs to be reported, you will need to file a UK tax return. This can be done online using the HM Revenue & Customs (HMRC) Self Assessment service or by completing a paper tax return. The deadline for filing your UK tax return is as follows:
● Paper returns: October 31st following the end of the tax year
● Online returns: January 31st following the end of the tax year
It’s crucial to ensure that your UK tax return is accurate and filed on time to avoid any penalties or interest charges.
Do non-residents need to file a UK tax return?
Non-residents may need to file a UK tax return if they have income from the UK, such as rental income or self-employment income, or if they are responsible for paying UK tax. However, if their only income from the UK is from employment or pensions and taxes are deducted at source, they may not need to file a tax return.
What steps should you take for a tax return?
1. Notify HMRC of your tax liability by October 5th, after the tax year ends.
2. Determine your residence status using the Statutory Residence Test rules.
3. Find out your domicile status.
4. If non-domiciled, check if the remittance basis applies to your foreign income/gains or if you want to claim it.
5. If claiming the remittance basis, see if a double taxation agreement allows UK personal tax allowances.
6. If filing on an arising basis, gather information on your global income and gains.
7. Find appropriate exchange rates for foreign income or gains on GOV.UK.
8. Check if a double taxation agreement exempts any foreign income source or provides a credit for overseas taxes paid.
9. If there is no double taxation agreement, see if the UK offers unilateral relief for overseas taxes paid.
UK non-resident pension tax relief
As a UK non-resident, you may be eligible for certain tax reliefs on your pension contributions. Here’s an overview of the key points to consider regarding pension tax relief for UK non-residents:
● Personal pension contributions: If you are a non-resident with a UK-registered pension scheme, you can still claim tax relief on your personal pension contributions. However, the amount of relief is limited to the lower of your UK-relevant earnings or the annual allowance.
● Employer pension contributions: If a UK employer contributes to your pension scheme while you are non-resident, these contributions will also be eligible for tax relief up to the annual allowance.
● Qualifying overseas pension schemes (QROPS): If you transfer your UK pension fund to a qualifying overseas pension scheme, you may be able to benefit from certain tax advantages, such as no UK tax on the growth of your pension fund and potentially lower taxes on your pension income when you start to draw your pension.
● Lifetime allowance: Keep in mind that UK non-residents are still subject to the UK lifetime allowance, which is £1,073,100 as of March 2023. This limit applies to the total value of all your pension benefits (excluding the State Pension), and any excess will be subject to tax charges.
● Double taxation agreements: If you are living in a country with a double taxation agreement with the UK, you may be able to avoid being taxed twice on your pension income. Check the specific agreement terms between the UK and the country where you are a tax resident.
How long do you have to stay out of the UK to avoid paying taxes?
The number of days you stay out of the UK to avoid paying tax depends on your residency status. To be considered a non-resident for tax purposes, you generally need to spend fewer than 183 days in the UK during the tax year (April 6th to April 5th). The exact rules can be complex and depend on several factors, such as your ties to the UK, work patterns, and the length of your absence from the country. It’s advisable to consult with a tax professional for personalized advice.
Understanding your tax obligations as an American expat living in the UK is essential to ensuring you remain compliant and avoid potential penalties. By familiarizing yourself with the UK’s non-resident tax rules and seeking professional advice when necessary, you can quickly and confidently navigate the UK tax system.
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