The income generated from investments in the UK can be interest and dividends (and Capital Gains on the sale of these investments but will ignore this for now).
If you are investing in these through vehicles such as ISAs (Individual Savings Accounts) these are tax free in the UK.
If you are investing directly (or through portfolio) there are new tax rules that you would need to follow.
THE PERSONAL SAVINGS ALLOWANCE (PSA)
This applies to interest income and depends on what kind of taxpayer you are.
- Basic tax taxpayers are entitled to an allowance of £1,000 tax free
- High rate taxpayers are entitled to an allowance of £500 tax free
- Additional rate taxpayers do not get any allowances for this.
This means that if your total income is less than around £45,000 (around £43,000 in Scotland) you will pay no tax on the first £1,000 of interest that you receive.
THE STARTING SAVINGS RATE BAND (SRB)
This is where it gets a little tricky.
A starting rate of £5,000 is available to every taxpayer (in addition to the PSA). This means that up to £5,000 of interest only can be taxed at 0%.
The downside is that the £5,000 is reduced £1 for every £1 of income that exceeds the personal allowance. Therefore, for the year ended 5 April 2018, the Personal allowance is £11,500 and if your income exceeds £16,500 you will have no tax free amount available .
For example: you have employment income of £13,000 and interest of £1,000 how much of the savings rate band would you be entitled to.
- Total income is £14,000
- Deducted personal allowance of £11,500
- Leaves £2,500 available for savings rate band
- As the interest received is below £2,500 tax will be at 0% meaning no tax due on this interest.
Please note that in this example the interest is only £1,000 and this would be covered by the personal savings allowance discussed earlier.
The first £5,000 of dividends for the year ended 5 April 2018 is tax free. This does not matter how much income that you have and is available to additional rate taxpayers.
Dividends are taxed as follows:
- 0% on the first £5,000 (and still covered by personal allowance)
- 7.5% on dividends up to the basic rate (about £45K in the UK & £43K in Scotland)
- 32.5% on income between the higher rate and the additional rate (up to £150K in income)
- 38.1% when you are an additional higher rate taxpayer.
IMPLICATIONS FOR US CITIZENS IN THE UK
A US Citizen of Green Card Holder living in the UK (or any country in the world) must continue to file US Federal Tax Returns no matter where they are living. They must also report worldwide income.
Normally UK taxes are much higher in the UK than the US, but with the number of allowances against dividends and interest it’s likely that there may be tax bills due to the IRS (Internal Revenue Service). This is because there may no foreign tax credit to set off against this income.