How to Claim Taxes for Americans Working in the UK
US citizens working in the UK, or other parts of the world for that matter, are subject to US income tax. If they happen to be a resident of theUK, they are also subject to UK taxation rules.
This often leads to double taxation, which can be a problem. This is why proper planning is necessary to reduce, if not eliminate, being taxed twice.
How Do You Claim Taxes in the UK?
Understand that the tax years between the US and the UK are different. The former operates on a calendar year, while the latter operates from 6th of April to 5th of April each year. This means deadline of filing is also different. The good news is if employees live full-time in the UK, they are automatically given a 2-month extension to file taxes.
The bad news is you could be taxed twice, both in the UK and the US. When living and working in the UK, you’re likely to be on the PAYE (Pay As You Earn System) system, where UK taxes are automatically deducted from your salary by your employer. Thanks to the double taxation treaty between the UK and US, your income won’t be taxed twice.
Requirements for Claiming Taxes
When claiming tax relief, exemption or refund, a non-UK resident must meet the following criteria:
- Living in a foreign country
- Earning a foreign income
This also applies to any of the following:
- US citizens that have lived in a foreign country for an entire tax year or for an uninterrupted period
- US resident alien from a country that has an income treaty with the US and has lived in a foreign country for an entire tax year or an uninterrupted period
- US citizen or resident alien who is physically present for at least 330 full days during any period of 12 consecutive months in a foreign country
Once all the criteria are satisfied, it’s time to comply with the paperwork. Non-UK residents wishing to claim UK tax relief, exemption or tax back under the double taxation agreement must do the following:
- Complete the Double Taxation claim form
- Have the completed form certified by the tax authority of your country of residence
- Send the completed and certified form to HM Revenue & Customs (if applicable)
Why does the claim need to be certified by your country of residence?
To confirm your status as a tax resident, confirming at the same time your eligibility for tax relief under the double taxation agreement.
To further reduce the effect of double taxation, expats can also apply for special tax credit and deductions.
Foreign Earned Income Exclusion (FEIE)
FEIE is the largest tax advantage any expat can enjoy. If you have lived in the UK, or other foreign countries, for 330 to 365 days, the first foreign income you earn that is equivalent to $97,600 in 2014 will be exempt from income tax. This doesn’t apply to employees of the US government, however.
Foreign Tax Credit
This gives you a tax credit for the taxes paid to foreign governments, provided that you pass the physical presence of bona fide residence tests. You should also complete the Form 1116.
Because claiming taxes for American expats is a complicated affair, it’s best to seek professional advice and assistance. This is especially true where the filing of deadline is concerned. To avoid incurring penalties, be sure to consult tax specialists in the UK.