The Statutory Residence Test (SRT) is the decisive framework used to determine tax residency in the UK. You're considered a UK resident for tax purposes if you meet any of the following conditions: you spend 183 days or more in the UK during the tax year. have a home in the UK.
The US-UK tax treaty is an essential tool for US citizens living in the UK, offering protection against double taxation, reduced withholding tax rates, and clarity on tax residency. While the treaty provides numerous benefits, claiming them requires understanding and filing specific forms.
For US expats, filing taxes late can result in several penalties, especially concerning informational forms. The most common penalty is the failure-to-file penalty, which is 5% of the unpaid taxes for each month the return is late, up to a maximum of 25%.
The Foreign Earned Income Exclusion (FEIE) lets US expats exclude up to $126,500 of foreign earned income from US taxation. To qualify, you must meet the Bona Fide Residence Test or the Physical Presence Test, proving that you reside abroad. The US and UK have a tax treaty that helps prevent double taxation.
Generally, the UK tax system taxes anyone who is resident in the UK on their worldwide income and gains. On the other hand, if you are non-resident in the UK, your foreign income and gains are not in scope of UK tax.
Expats can use the FEIE to exclude foreign income from US taxation. For the entire tax year 2024, the maximum exclusion amount under the FEIE is $126,500. To qualify for the FEIE, you must meet the standards of the physical presence test or the bona fide residence test.
Some US expats are required to pay state taxes even after moving overseas, depending on the state where the expat has residency. Taxpayers can change or terminate their state residency to erase their state tax obligations. Certain states make it much harder for expats to change their residency status than others.
The Statutory Residence Test
The number of days spent in the UK – If you spend 183 or more days in the UK within a tax year (6 April to 5 April the next year), you are automatically considered a UK resident for that year.
The Failure to File penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. The penalty won't exceed 25% of your unpaid taxes.
Differences between the UK and US tax systems
The tax systems in the UK and the US differ significantly. For instance, while the UK has a progressive tax system with rates ranging from 20% to 45%, the US federal tax rates vary from 10% to 37%.
Whether you need to pay depends on if you're classed as 'resident' in the UK for tax. If you're not UK resident, you will not have to pay UK tax on your foreign income. If you're UK resident, you'll normally pay tax on your foreign income. But you may not have to if your permanent home ('domicile') is abroad.
Your tax obligations vary depending on whether you're classified as a resident or non-resident in your country of residence. For example, if you're a dual citizen living in the UK, you'll need to file a UK tax return for income earned there, in addition to your US return.
If someone transfers money into my bank account, do I need to pay UK tax? Receiving funds in your bank account does not automatically incur a tax liability in the UK. Tax obligations depend on the nature and origin of the income rather than the manner of receipt.
If you are living and working in the U.S. as a nonresident alien, you may be required to file a federal tax return. The Internal Revenue Service (IRS) considers you a nonresident alien if you are not a lawful permanent resident (Green Card holder) or do not pass their substantial presence test.
Having right of abode means you're allowed to live or work in the UK without any immigration restrictions. If you have the right of abode, you do not need a visa or electronic travel authorisation (ETA) to come to the UK. There's no limit on the length of time you can spend in the country.
British citizens can stay outside of the UK for as long as they wish without worrying about it affecting their citizenship status. This is because British citizens are under no obligation to live in, or even visit, the UK in order to retain their citizenship and their UK passport.
British citizens don't need a visa to stay in an EU country for up to 90 days in a given 180-day period. This applies only to leisure visits, and any work you carry out will most often require a work permit. After 90 days, you will need to get a visa to be able to stay longer and to get a job or to study.
If you're non-resident, you do not pay UK tax on income or gains you get outside the UK. You may be non-resident the day after you leave the UK - this depends on your situation and how 'split year treatment' applies to you. You may need to pay UK tax if you're non-resident and have UK income.
Importantly, U.S. citizens are always considered U.S. tax residents, even if they live in a foreign country or claim residency elsewhere. They are subject to citizenship-based taxation, meaning they must report and pay taxes on their worldwide income until they formally renounce their citizenship.
Limit on excludable amount
The maximum foreign earned income exclusion amount is adjusted annually for inflation. For tax year 2023, the maximum foreign earned income exclusion is the lesser of the foreign income earned or $120,000 per qualifying person. For tax year 2024, the maximum exclusion is $126,500 per person.
Yes, if you are a U.S. citizen or a resident alien living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live.
US expats are often subject to double taxation, first by the US, and again by their country of residence. The IRS offers several tax credits and exclusions that expats can use to avoid double taxation.
One of the main catalysts for the IRS to learn about foreign income which was not reported is through FATCA, which is the Foreign Account Tax Compliance Act. In accordance with FATCA, more than 300,000 FFIs (Foreign Financial Institutions) in over 110 countries actively report account holder information to the IRS.