To combat inflation, on Thursday last week the chancellor announced the autumn budget, which included notable changes to both personal and business taxation.
Tahir Mahmood and Ed Johnson from the London & Capital Tax Team, sit down with John Sneddon of SRDS Tax to discuss the implications these changes have on Americans living in the UK.
The big changes from a personal tax perspective are:
- 45% bracket reduced from £150,000 to £125,140
- Dividend allowance reduction from £2,000 to £1,000 (next year) and later £500 (year after)
- Capital gains tax allowance from £12,300 to £6,000 and later £3,000
- Freeze on income tax allowances and thresholds until 2028
How does this affect me as a US/UK person
01 Increased Income Taxes
Bringing the higher rate down by just under £25,000 gives rise to additional tax of £1,243 for someone earning above £150,000. This may sound like a big change but coupled with the reduction of the 1.25% National Insurance charge, someone earning £160,000 will be less than £100 worse off in 2023/24 compared to this year.
The Capital gains allowance dropping £9,300 down to £3,000 over the next two years. This means anyone who realises capital gains of more than £12,300 a year will have an additional tax £1,860
02 Foreign tax credit position
US taxpayers living in the UK have the option to offset UK taxes paid against their US taxes on UK sourced income in the form of a foreign tax credit. This is to reduce double tax risk as they are subject to income taxes in the US and in the UK based on tax residency.
US/UK taxpayers often find themselves with an excess of these tax credits as rates in the UK and the brackets are much lower than in the US. These excesses can be carried forward for a period of 10 years and an option to carry back one year.
The increases to both income and capital gains taxed have only increased the scope for this excess.
Planning Opportunities
01 The Remittance Basis
For the Americans who haven’t been in the UK for 15 years, you should still be entitled to claim the remittance basis of taxation, although there may be a charge
The remittance basis allows individuals to be taxed on their UK sourced income and anything brought into the UK.
With the differential in US and UK tax rates increasing, albeit ever so slight, this may be more of a viable option.
02 Planning sales to utilize CGT allowance
The Capital gains annual allowance set to drop to £3,000 in the next 2 years, utilize it while you have it.
Any sales made in the future should be looked at more carefully, any losses you may have should be crystallised at the right times to keep your capital gains position as low as possible
03 Pension contributions
This is going back to basics, but a pension is one of the most tax effective structures that can be used. By making contributions into your pension, you will bring down your current tax rates and have the potential to use foreign tax credits.
04 Utilizing Foreign Tax Credits
For a US/UK person if you have foreign tax credits available on your US tax return, the way you use these are to bring your UK tax liability down below your US liability, this means the US will dip into those credits and you’ll have a lower tax rate on both sides of the Atlantic.
