Government

UK vs. US Tax Rates: Income, Corporate and Expat Implications

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Navigating the complexities of UK and US taxes can be a nightmare for cross-border workers and multinational companies. This guide provides invaluable insights into the key differences between the two tax systems. 

Gain clarity on divergent terminology, filing requirements, rates and allowances to make better informed decisions and avoid costly mistakes when managing your taxes on both sides of the Atlantic.

Disclaimer: The information provided in this article is for general informational purposes only and should not be construed as financial or tax advice. The information is not intended to be a substitute for professional advice from a qualified financial advisor or tax professional. You should always consult with a qualified professional before making any financial or tax decisions.

The author of this article assumes no liability for any actions taken based on the information provided.

Quick Answer to UK vs. US Tax

The UK has higher income taxes, with a top rate of 45% vs 37% in the US. However, the US has higher payroll taxes. Inheritance tax in the UK has a lower exemption of £325,000 vs $12.92 million in the US. 

The UK will raise its corporate tax rate to 25% in 2023 while the US federal rate is 21%. Overall the UK tax system tends to have higher rates for individuals while the US has higher rates for corporations.

Comparison of UK and US Personal Tax Rates and Allowances:

CountryTax-Free AllowanceBasic RateHigher RateTop Rate
UK£12,57020% (£12,571 to £50,270)40% (£50,271 to £150,000)45% (over £150,000)
USStandard deduction $12,950 (Single), $25,900 (Married Filing Jointly)10% – 24% (up to $89,075 for Single)32% ($89,076 to $170,050 for Single)37% (over $539,900 for Single)
This table provides a clear comparison of the tax-free thresholds and the progressive rates applied to different income brackets in the UK and US.

Corporate Tax Rates:

Tax CategoryUK (Current and Future)USComments
Corporate Tax Rate19%, rising to 25% in 2023 for profits over £250,000Flat 21%While the UK has a rising scale based on profit, the US maintains a flat rate.
Small Profits Rate19% for profits up to £50,000N/AThe UK incentivises small businesses with a lower tax rate.
Tax ResidenceBased on incorporation locationPlace of management and controlDifferent criteria could affect multinational corporations.
This table highlights the current and future corporate tax rates in the UK, the flat corporate tax rate in the US, and the criteria for tax residence, which is particularly relevant for multinational companies.

Major Taxes in the UK

The UK has numerous tax systems which are interwoven into both personal and corporate matters. From income tax and national insurance to corporation tax, here is everything you need to know about tax systems in the United Kingdom.

UK Income Tax

The UK has a progressive income tax system with tax rates increasing as income rises. For 2022/23, the main tax rates and thresholds are:

  • Personal Allowance: £12,570 tax-free
  • Basic Rate: 20% on £12,571 to £50,270
  • Higher Rate: 40% on £50,271 to £150,000
  • Additional Rate: 45% on over £150,000

Additional allowances like the Personal Savings Allowance and Dividend Allowance allow some income to be received tax-free. Most employees pay income tax through Pay As You Earn (PAYE), with tax deducted from each paycheck. 

The self-employed complete annual Self-assessment returns.

Non-domiciled UK tax residents can use the remittance basis and only pay UK income tax on funds brought into the UK. There are also specific residence rules for determining UK tax liability.

UK National Insurance

National Insurance (NI) is paid by employees, employers and the self-employed based on relevant earnings/profits. Class 1 NI has lower and upper thresholds, with a nil rate between these. Class 2 and 4 NI apply to the self-employed. 

Voluntary NI can be paid to build entitlement to the State Pension and other benefits. Those not working may qualify for NI credits.

UK Value Added Tax (VAT)

VAT is a consumption tax charged on most goods and services in the UK. The standard rate is 20%, with reduced 5% and zero rates applying to essentials like food and children’s clothing. 

VAT registration is compulsory above £85,000 in taxable turnover and voluntary below this. Registered businesses charge VAT on sales (output tax) and can reclaim VAT on purchases (input tax).

UK Capital Gains Tax

Capital Gains Tax (CGT) applies to gains arising from the sale of chargeable assets. Individuals have an annual CGT exemption of £12,300. Gains above this are taxed at 10% (basic rate) and 20% (higher/additional rate). 

Companies pay CGT at the 19% corporation tax rate. Entrepreneurs’ Relief can reduce the CGT rate to 10% on qualifying business disposals.

UK Inheritance Tax

Inheritance tax (IHT) is charged at 40% on the value of an estate above the nil rate band (£325,000 standard or up to £500,000 with residence nil rate band). 

Various exemptions like gifts between spouses and charitable gifts reduce potential IHT liabilities. Lifetime gifts also become exempt from IHT after 7 years.

UK Stamp Duty

Stamp duty land tax is payable when buying residential property over £125,000 in England and Northern Ireland. First-time buyers pay nothing on the first £300,000. 

Rates rise to 5% above £250,000 up to £925,000, then 10% above £925,000 up to £1.5 million and 12% above £1.5 million. Non-residential property has a zero rate under £150,000, then 2% from £150,001 to £250,000.

UK Business Rates

Business rates are a property tax levied on non-domestic premises like shops, offices and warehouses. Rates are based on a property’s rateable value set by the Valuation Office Agency and a multiplier set by the government. 

100% small business rates relief provides an exemption on properties with a rateable value below £12,000.

UK Corporation Tax

The main rate of corporation tax is currently 19% and will rise to 25% from April 2023 for profits over £250,000. A small profits rate of 19% applies to profits up to £50,000. 

Companies are subject to UK corporation tax if incorporated in the UK or centrally managed and controlled in the UK.

UK Council Tax

Council tax is an annual property tax that helps fund local services. All domestic properties are assigned to one of eight bands (A to H) based on property values as of 1991. Band D is the standard rate. 

Higher bands pay proportionally more; lower bands get a discount. Exemptions or discounts apply in certain cases like students or single occupancy.

Major US Federal Taxes (and their UK Equivalent)

From a UK point of view, US tax systems can seem more laborious, mainly due to the fact that residents file their own taxes. This is the same irrespective of whether you’re self-employed or work for someone else.

Here is everything you need to know about tax systems in the US and how they differ from that of the UK.

US Income Tax

The US has a progressive federal income tax with seven tax brackets ranging from 10% to 37%. Taxable income includes wages, business income, capital gains, rental income, and other earnings. 

Deductions like the standard deduction and itemised deductions reduce taxable income. Filing status options include single, married filing jointly, and head of household. In contrast to the UK, individuals are required to submit their own income tax returns if they earn over the threshold. 

Capital gains are taxed at lower rates. Pass-through entities like S-corps and LLCs avoid corporate tax, with income passing through to owners’ personal returns. State income tax also applies in most states.

US Payroll Taxes

Payroll taxes fund Social Security and Medicare. The employee and employer each pay 6.2% Social Security tax on the first $160,200 of wages in 2023. 

Medicare tax is 1.45% each, plus an extra 0.9% Medicare surtax on wages above $200,000 for single filers. Self-employment tax covers both portions for the self-employed.

US Sales Tax

Sales tax is imposed by states and localities on purchases of goods and some services. Rates vary significantly by location from 0% to over 10%. 

Use tax applies to out-of-state purchases. Sellers must collect sales tax in states where they have physical presence. Remote sellers may also be required to collect tax.

US Estate and Gift Tax

Estate tax applies to transfers at death above an exclusion amount ($12.92 million per person in 2023). Gifts above the annual exclusion ($17,000 per recipient in 2023) use up part of this lifetime exclusion. 

Taxable estates are taxed at a flat 40% federal rate. Unlimited marital deduction allows spouses to transfer assets tax-free.

US Capital Gains Tax

Long term capital gains on assets held over one year are taxed at preferential rates of 0%, 15% or 20% based on income. Short term gains are taxed as ordinary income. 

Capital losses offset capital gains, and unused losses can be carried forward. Additional 3.8% net investment income tax may also apply at higher incomes.

US Corporate Income Tax

The federal corporate tax rate is a flat 21%. C corporations pay this tax on corporate profits. Pass-through entities avoid corporate tax but owners pay individual rates on passed-through income. 

Corporations are tax resident if incorporated in the US or managed and controlled from the US.

US Excise Taxes

Excise taxes apply to sales of specific goods like tobacco, alcohol, gasoline, firearms, and air transportation. For example, federal tax is 18.4 cents per gallon of gasoline. 

Other sin taxes apply to tobacco, alcohol, and gambling. Revenues support specific federal programs.

US Customs Duties

Customs duties/tariffs tax imported products based on classification, value, and country of origin. Rates vary by product. 

Most favoured nation status means standard tariffs apply unless special trade agreements provide reduced rates. Duties raise revenue and also enact trade policy goals.

Key Differences in UK and US Terminology

While the UK and US tax systems share similarities in areas like income tax and VAT/sales tax, the terminology used can differ significantly. This reflects the separate evolution of the two systems and can cause confusion for taxpayers dealing cross-border.

Some of the major terminology differences include:

UK PAYE vs. US Income Tax Withholding

In the UK, PAYE (Pay As You Earn) refers to the system where income tax is deducted by employers before wages are paid to employees. Tax is calculated and deducted each pay period.

The equivalent concept in the US is income tax withholding. Federal and state income taxes are withheld from employees’ paychecks based on Form W-4 settings provided to the employer.

UK National Insurance vs. US FICA Payroll Taxes

National Insurance (NI) in the UK refers to specific social security taxes paid by employers, employees and the self-employed. NI funds state benefits like the State Pension and maternity pay.

The US equivalent is FICA payroll taxes – Social Security and Medicare taxes deducted from paychecks to fund those federal programs. FICA stands for Federal Insurance Contributions Act.

UK VAT vs. US Sales Tax

Value Added Tax (VAT) is a consumption tax charged on most goods and services sold in the UK. Rates include standard 20%, reduced 5%, and zero. Businesses register for VAT above a turnover threshold.

The US equivalent is sales tax charged on goods and some services at the state and local levels. Rates vary across the country. Use tax applies to out-of-state purchases.

UK Pensions vs. US Retirement Accounts

Pensions are one of the main retirement planning vehicles in the UK. Key options include workplace pensions (like defined benefit schemes), personal pensions (like SIPPs) and the State Pension. Significant tax reliefs promote pension savings.

In the US, the main retirement accounts are 401(k)s, IRAs, and other defined contribution plans. These allow tax-deferred or tax-free savings invested towards retirement. Social Security is the equivalent of the UK State Pension but often provides less income replacement.

Overall, while the UK and US tax systems share broad similarities, the exact terminology used can differ substantially. This reflects their separate evolutions and legal/social policy foundations. Understanding the key differences is vital for taxpayers compliance requirements and financial planning in both countries.

The Impact of Tax on UK and US Citizens

This section is for both British and American expats who are concerned about the tax implications of relocating to a new country. Careful consideration of the tax consequences of moving and working abroad is essential to avoid potential complications.

Tax Implications for UK Citizens in the US

UK citizens working or living in the US face a complex set of tax implications. Without careful planning, there is potential for double taxation on the same income by both HMRC and IRS.

UK citizens are taxed by the IRS on their US source income and worldwide income while US tax resident. HMRC taxes based on UK tax residence and domicile. Dual citizenship alone does not determine tax residence. Often taxes paid to the IRS can be credited against UK tax liabilities.

Estate tax also differs significantly. The US has an estate tax with a high lifetime exclusion amount. The UK has a lower nil rate band for inheritance tax but no lifetime cap. Proper wills and trusts are important to mitigate cross-border estate tax exposure.

Overall UK citizens in the US need to be aware of filing obligations, tax credits, and estate planning differences to manage their dual tax status effectively. Taking specialist cross-border tax advice is highly recommended.

Tax Implications for US Citizens in the UK

US citizens living in the UK still face US tax filing requirements and potential double taxation. The US taxes citizens on worldwide income regardless of residence. Foreign tax credits apply to reduce US tax attributable to foreign income taxed by HMRC.

However, foreign tax credits may not eliminate all double tax, especially on UK investment income due to lower US tax rates on dividends and capital gains. US citizens in the UK also need to report foreign bank accounts to the IRS under FATCA and file additional forms like FBAR.

For US citizens considering renouncing citizenship due to tax impacts, the exit tax rules should be understood. Overall US citizens need to engage in meticulous financial planning and filing compliance when based abroad in the UK.

Tax Treaties

The UK and US have had a tax treaty since 2001 that aims to improve cooperation on enforcing tax laws and preventing tax evasion. Importantly, the treaty covers elimination of double taxation. This is done through tax credits and exemptions so the same income is not taxed at full rates by both countries.

The treaty also provides for information exchange between HMRC and IRS to help ensure taxpayers meet filing and reporting requirements in both jurisdictions. Updated protocols have expanded the treaty’s scope on areas like inheritance tax and pension schemes. The UK-US tax treaty helps coordinate the complex intersection of the two tax systems for cross-border taxpayers.

The Impact of Tax on UK and US Businesses

Similarly to managing personal tax over the globe, it’s equally important, if not more so to ensure you’re compliant as a business. From corporate tax to payroll and PE risks, here’s what you need to consider as a business that operates across the UK and US.

Corporate Tax Differences

While the UK and US both levy corporate income tax, key differences exist in rates and residence rules that impact cross-border businesses.

The current UK corporation tax rate is 19%, set to rise to 25% in 2023 for profits over £250,000. The US federal corporate tax rate is a flat 21%. Historically the UK rate has been several points lower. State corporate taxes also apply across most of the US.

Corporate residence is based on incorporation location in the UK, while the US uses a place of management and control test. For groups with UK incorporated, US managed subsidiaries this can create potential for dual-residence risks.

Careful tax planning is needed on corporate structure, transfer pricing, and profit repatriation to legitimately minimise global tax liabilities.

Hiring and Payroll Considerations

Payroll taxes and requirements diverge between the UK and US. Employers need to comply with respective NI and FICA regimes. Optimal pension plans also differ, with UK auto-enrollment not present in the US.

For staff working cross-border, employers must determine correct jurisdiction for payroll taxes and filings. Seconded employees add further complexity. Advice is needed in areas like short-term business visitors to avoid permanent establishment risks.

HR teams should be trained on key differences in pensions, benefits packages, and payroll compliance. Using localised payroll providers can help improve compliance and reduce administrative burdens.

Transfer Pricing and PE Risks

Businesses with UK and US operations need robust transfer pricing documentation to substantiate intercompany charges and cost allocations. Without arm’s length pricing, double taxation risks arise.

Permanent establishment status should also be carefully monitored to avoid unintended taxable presence. Triggering PE can create significant tax liabilities, especially on deemed profit attribution.

Joint UK and US tax advice provides optimal transfer pricing and business model solutions that balance tax efficiency, cash flow planning, substance requirements, and reputational considerations.

Proactive tax risk management is prudent given increasing IRS and HMRC enforcement scrutiny on multinational enterprises. Transfer pricing penalties and assessments can be material if documentation and structures are sub-optimal.

Final Thoughts from UK vs. USA

Navigating the tax complexities between the UK and the US can be a daunting task. While both countries have progressive tax systems, the specific rates and brackets vary significantly.

If you’re an expat or planning to move between the UK and the US, seeking professional tax advice is highly recommended. A qualified tax advisor can help you understand the specific tax implications of your situation and develop a personalised plan to optimise your tax savings.

UK vs. US Tax Rates FAQ:

Are taxes higher in the UK or US?

In general, taxes are higher in the UK than in the US. The top marginal income tax rate in the UK is 45%, while the top marginal income tax rate in the US is 37%.

Is the UK a high tax country?

Yes, the UK is considered a high-tax country. The UK’s tax-to-GDP ratio is 33.5%, which is higher than the OECD average of 34.1%. This means that the UK government collects more revenue from taxes as a percentage of the country’s economy than most other developed countries.

Why is British tax so high?

British taxes are relatively high due to a combination of factors, including the extensive social welfare system, the sizable public sector, and the need to finance government spending. The UK’s progressive tax structure ensures that higher earners contribute more to the tax revenue, which helps fund essential public services.

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