Taxes in the UK vs. the US: A complete guide | US Expat Tax Service (2024)

Understanding the UK tax system

The UK tax system, administered by Her Majesty's Revenue and Customs, features a progressive income tax structure with varying bands of basic and additional rates, supplemented by personal allowances.

Basic tax structure in the UK

The UK tax system is characterized by its complexity and depth, encompassing multiple forms of taxation.

The backbone of the UK's approach to taxation is embodied in the income tax bands and rates, which are essential for managing UK income.

UK PAYE tax rates and thresholds

The current rates for the UK Pay As You Earn system for the 2023-2024 tax year are as follows:

The standard employee personal allowance for the UK tax year 2023 to 2024 is:

• £242 per week
• £1,048 per month
• 12,570 per year

UK vs. US income tax rate comparison

When comparing tax rates in the United Kingdom and the United States, it's important to understand the nuances of each system.

Both countries use a progressive tax system, but the specific rates and how they are applied differ significantly.

US income tax rates for single filers

In the United States, single filers are subject to various tax rates depending on their income level.

For tax year 2023-2024, the federal income tax rates for single filers are as follows:

US income taxes for married taxpayers filing jointly

Married taxpayers in the US have the option of filing jointly, which often results in a lower tax liability compared to filing separately.

The tax brackets for married couples filing jointly for the 2023-2024 tax year are as follows:

In contrast to the US system, the UK tax structure for individuals is characterized by fewer brackets. Key differences include:

1. Individuals in the UK have a tax-free personal allowance, which does not exist in the US federal tax system.
2. The basic rate of tax in the UK is 20%, which applies to income above the personal allowance and up to a higher threshold.
3. The UK has a higher rate of tax of 40% and an additional rate of tax of 45% for the highest earners.

While both the UK and US tax systems are progressive, the UK system has fewer brackets and a higher starting rate after the personal allowance.

However, the US system has a wider range of brackets, potentially resulting in a higher tax rate at higher income levels.

UK vs. US corporate taxation

Corporate taxation is a critical aspect of the economic landscape in both the United Kingdom and the United States.

While both countries aim to create a competitive environment for business, their approaches to corporate taxation differ in several key respects.

Corporate tax rates in the UK

In the United Kingdom, corporation tax rates are structured for different types of companies and sectors:

• The standard rate of corporation tax is 25%.
• Smaller companies with profits of up to £50,000 benefit from a reduced rate of 19%.
• Companies earning income from patents are taxed at a lower rate of 10%, encouraging innovation.
• Profits artificially diverted from the UK are taxed at a higher rate of 31%.

Corporate tax system in the US

The US corporate tax system, as reshaped by the Tax Cuts and Jobs Act of 2017, features:

• Federal corporate tax rate. Set at a flat 21%, which the 2017 reform significantly reduced from the previous rate, and applies to all taxable corporate income.
• State corporate taxes. These taxes vary from state to state, adding complexity, with rates varying from state to state.
• Tax incentives and credits. Includes incentives for research and development, renewable energy investments, and more.
• International tax provisions. Taxes foreign earnings of US-based multinationals through mechanisms such as GILTI and FDII.

UK vs. US capital gains taxes

Capital gains taxes are an important aspect of the tax systems in both the United States and the United Kingdom. These taxes are levied on gains from the sale of assets such as stocks, bonds, real estate, or businesses.

US capital gains tax rates

In the United States, the taxation of capital gains is significantly affected by the length of time the asset is held. This distinction between short-term and long-term capital gains is a key aspect of the tax system:

• Short-term capital gains. These gains are realized on the sale of assets held for one year or less. They are taxed at the same rates as ordinary income, which can range from 10% to 37% depending on the taxpayer's income bracket.
• Long-term capital gains. Gains from the sale of assets held for more than one year are considered long-term capital gains. They are subject to preferential tax rates, which are generally lower than those for short-term gains. The long-term capital gains tax rates are set at 0%, 15%, or 20%, depending on the taxpayer's income level and filing status.

Below is a detailed table showing the specific long-term capital gains tax rates for 2024 based on income tax thresholds and filing status.

UK capital gains tax rates

The UK's approach to capital gains tax also varies depending on the type of asset and the taxpayer's income level:

When comparing the taxation of capital gains in the United States and the United Kingdom, several key differences stand out:

• The US distinguishes between short-term and long-term gains, while the UK applies flat rates with some adjustments based on asset type and income level.
• The US generally offers lower rates for long-term capital gains than the UK, especially for lower income brackets.
• The UK offers an annual exemption, which allows a certain amount of gains to be tax-free, a feature that does not exist in the US system.
• Both countries have special rules for certain types of assets or taxpayers, such as Entrepreneurs' Relief in the UK and the 3.8% net investment income tax in the US.

UK vs. US VAT rates

Value Added Tax in the UK and Sales Tax in the US represent two fundamentally different approaches to the taxation of goods and services.

While both are consumption taxes, their implementation, collection, and impact on consumers and businesses differ significantly.

VAT system in the UK

The UK VAT system is a broad-based consumption tax levied on the value added to goods and services. It applies to most goods and services sold for domestic consumption.

1. The standard rate of VAT in the UK is 20%, which applies to most goods and services.
2. Certain goods and services, such as children's car seats and domestic energy, are taxed at a reduced rate of 5%.
3. Some items, such as children's clothing and most food, are zero-rated, meaning they are subject to VAT but the rate is 0%.
4. Certain goods and services, including education and health services, are exempt from VAT.

Sales tax structure in the US

Unlike the UK's Value Added Tax, the US sales tax is a one-tier tax levied only at the point of final sale to the consumer. Sales tax rates and rules vary widely from state to county, and city.

Most US states impose a sales tax on the sale of goods and some services. Rates vary from state to state, and some states, such as Oregon, New Hampshire, and Delaware, have no sales tax at all.

In addition to state taxes, local jurisdictions such as cities and counties may levy their own sales taxes, which are added to the state rate.

Some states exempt necessities such as food and prescription drugs.

Estate and inheritance taxes

Estate and inheritance taxes are important considerations in wealth management and estate planning.

Both the UK and the US impose taxes on the transfer of wealth at death, but the systems and rules governing these taxes differ significantly.

Inheritance tax in the UK

1. In the United Kingdom, inheritance tax is levied on the estate of a deceased person. It reflects the government's approach to taxing the transfer of wealth.
2. UK inheritance tax is charged on estates valued above a certain threshold, known as the nil rate tax band. Estates valued below the nil rate band are not subject to inheritance tax. The standard rate of inheritance tax in the UK is 40% on the value of the estate above the nil rate band.
3. Transfers between spouses or civil partners are generally exempt from inheritance tax regardless of the size of the estate.
4. An additional residence nil-rate band may apply when passing home to direct descendants, potentially increasing the amount that can be passed on tax-free.
5. Gifts made during an individual's lifetime may be subject to inheritance tax if the donor dies within seven tax years of making the gift. However, the tax liability is reduced over time, a system known as taper relief.

Estate taxes in the US

The United States imposes an estate tax on the transfer of a decedent's assets before distribution to beneficiaries.

1. The US estate tax applies only to estates above a certain exemption amount, which is set by federal law and adjusted periodically. The maximum federal estate tax rate is 40%, but the effective rate depends on the value of the estate.
2. The US uses a unified credit system, which effectively allows a certain amount of assets to be transferred tax-free during life or at death.
3. In addition to the federal estate tax, some states impose their own estate or inheritance taxes, with varying rates and exemptions.
4. In the US, any unused portion of the estate tax exemption can be transferred to the surviving spouse (known as portability), potentially doubling the amount the couple can pass on tax-free.

UK vs. US property taxes

In both the UK and the US, property taxes are an important source of local government revenue.

These taxes are levied on property ownership and differ significantly in structure and implementation in the two countries.

Council tax and other property taxes in the United Kingdom

In the United Kingdom, property taxes primarily take the form of Council Tax and other specific property-related levies.

Council Tax This is a local tax levied by councils to fund local services such as refuse collection, policing, and education. The amount of Council Tax payable depends on the valuation band of the property, which is based on its rateable value.

Properties are classified into one of eight bands (A to H) based on their value on April 1, 1991. The band determines the amount of Council Tax payable.

Stamp duty land tax

When buying a property in the UK, buyers may have to pay SDLT. The rate depends on the purchase price of the property, whether it is a residential property, and the buyer's circ*mstances, such as whether they are a first-time buyer.

SDLT rates for residential properties:

• 0% on properties up to £250,000.
• 5% on the portion between £250,001 and £925,000.
• 10% on the portion between £925,001 and £1.5 million.
• 12% on the excess over £1.5 million.

First-time buyer relief:

• No SDLT on properties up to £425,000.
• 5% on properties between £425,001 and £625,000.

Property tax system in the USA

The US property tax system is more varied, with taxes levied at the local (county or municipal) level and based on the assessed value of the property.
Properties are periodically assessed to determine their current market value. The assessed value is then used as the basis for calculating property taxes.

Property taxes are calculated using a millage rate, a specific dollar amount per $1,000 of assessed property value. Millage rates vary from place to place.

Many states offer homestead exemptions, which reduce the taxable value of a home for primary residents, thereby reducing their tax burden.

Property tax rates and rules can vary widely from one state or locality to another, reflecting the decentralized nature of the US tax system.

Tax benefits and credits

Tax benefits and credits are essential tools used by governments to incentivize behavior, provide relief to taxpayers, and address social issues. In both the UK and the US, these fiscal mechanisms play a crucial role in the overall tax strategy.

However, the nature and implementation of these benefits differ significantly between the two countries.

Tax credits in the UK

1. Working tax credit. Aimed at low-income workers, this credit provides financial support to those who meet certain criteria related to hours worked and income levels.
2. Child tax credit. Designed to support families with children, this benefit provides additional financial support based on the number of children and family income.
3. Marriage allowance. Allows a portion of the personal exemption to be transferred from one spouse to another, beneficial for couples where one partner earns significantly less than the other.
4. Research and Developmenttax credits. Companies that engage in qualified R&D activities can claim these credits, which encourage innovation and investment in new technologies.
   

   Also read. Tax guide for Americans in the UK

US tax deductions and credits

1. Standard deduction. This is a flat amount deducted from income before taxes are calculated and is available to all taxpayers who do not itemize deductions.
2. Itemized deductions. Taxpayers may choose to itemize deductions if it provides a greater tax benefit. Common itemized deductions include mortgage interest, state and local taxes, and charitable contributions.
3. Child tax credit. Similar to the UK, the US offers a credit for taxpayers with dependent children that can significantly reduce tax liability.
4. Earned Income Tax Credit (EITC). Designed for low- to moderate-income working individuals and families, the EITC reduces the amount of tax owed and may result in a refund.
5. Education credits. These include the American Opportunity Tax Credit and the Lifetime Learning Credit, which provide relief for those pursuing higher education.

UK vs. US tax filing process comparison

Filing taxes is an annual ritual in both the United Kingdom and the United States, but the systems and procedures differ significantly.

Understanding these differences is critical for taxpayers in each country, especially those with financial obligations in both nations.

Tax filing in the UK

The UK tax filing process is administered by HMRC and is characterized by an emphasis on simplicity and automation for the majority of taxpayers.

• In the UK, taxes for many individuals are managed via the PAYE system, where both income tax and National Insurance contributions are directly deducted from salaries by employers and forwarded to HMRC. This process often eliminates the need for these employees to submit an individual tax return.
• Those with more complex tax situations, such as the self-employed, company directors, or those with significant investment or savings income, must complete a self-assessment tax return each year.
• The self-assessment tax return can be filed online through the HMRC website. The deadline for online filing is 31 January following the end of the tax year in April.

Tax return process in the US

In the US, the IRS oversees the tax filing process, which is more uniform in requiring annual tax returns from most taxpayers.

• Almost all individuals and businesses in the US are required to file annual tax returns, regardless of whether their taxes are withheld at source.
• The standard form for individual tax returns is Form 1040. There are variations of this form for different tax situations.
• The typical filing deadline is April 15 of each year for the previous calendar year.
• The IRS encourages the use of electronic filing, which is faster and more secure. Many taxpayers also use tax preparation software to help them file their returns.

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