Many of those in the creative industries can find themselves working in both the US and the UK – and therefore earning in both jurisdictions too. And with offices in London, Liverpool and California, we’re uniquely placed to help creative and sporting people navigate a complex space:
So, what are the things to look out for?
Income Tax:
The biggest difference in tax is one of structure. The US utilises a progressive income tax system with multiple brackets, meaning your tax rate increases as your income rises. The UK also has a progressive system, but with a twist: a tax-free personal allowance. This means you pay no income tax on earnings below a certain threshold. Additionally, the UK has fewer tax brackets with a higher starting rate after the allowance. So, depending on your income level, you might pay more or less tax in one country compared to the other.
The crucial issue is residency. Tax residency determines which country has the primary right to tax your worldwide income. The US taxes its citizens and permanent residents on their global income, regardless of where it’s earned. The UK taxes residents on their worldwide income and non-residents on UK-sourced income. Understanding your residency status in both countries is essential to avoid double taxation.
Social Security vs. National Insurance:
Both the US and UK have mandatory social security contributions to fund social programs. In the US, it’s called Social Security and Medicare taxes, funding retirement benefits and healthcare. The UK’s National Insurance system is similar, contributing towards the National Health Service and state pensions.
Here’s the catch: how these contributions are calculated. The US system typically withholds a fixed percentage of your income. National Insurance contributions are more complex, with different rates for employees, employers, and self-employed individuals. Understanding how much you pay into each system is important for future benefits.
For US citizens working abroad, the Foreign Earned Income Exclusion (FEIE) offers some relief. It allows you to exclude a portion of your earned income from US taxation, potentially reducing your tax burden. However, there are eligibility requirements and income limits to consider.
Tax Filing:
Brace yourself for paperwork (or get us to do it). The US tax system is notoriously complex, requiring most individuals to file tax returns annually, regardless of where they live. The UK system can be simpler, with the government automatically handling some tax deductions. However, if you’re earning income in both countries, filing requirements become more intricate – you’re definitely going to need some support there.
Thankfully, both the US and UK have tax treaties to prevent double taxation of income earned in the other country. These treaties outline which country has the primary right to tax specific types of income. Understanding these agreements will help ensure you’re not taxed twice on the same income.
Just to add to the fun, the US tax system adds another layer of complexity with state taxes on top of federal taxes. Rates vary significantly by state, adding another factor to consider.
One more layer of complication – if you’re self-employed, the tax implications become even more nuanced. Understanding how each country taxes self-employed income is vital.
In short, if you’re working, and earning, internationally, you need to be up-to-speed with the regulatory and tax compliance regimes you’re dealing with. Why not let us do that for you, and you can concentrate on your career, while we protect your finances.
