Understanding the income tax rates in the US and the UK is crucial for anyone living or working in these countries. This comparison simplifies the complexities and highlights the key differences that can affect your finances. This is particular useful for Brits moving to the US, and for Americans moving to the UK.
United States (US)
The United States employs a progressive system, where rates increase as income rises. As of 2024, the federal ranges from 10% to 37%. There are seven brackets; your pay rate depends on your earnings level. For example, single filers with an income of up to $11,000 are taxed at 10%, while those earning over $518,401 face a 37% rate.
In addition to federal taxes, most states impose their own rate. These vary significantly, with some states, like California, having a top rate of 13.3%, while others, such as Florida and Texas, have no state income tax.
It is worth booking a call with our US & UK dual qualified specialist, Simon Misiewicz, who can give you comfort and confidence.
You will also need to know about the US & UK tax treaty to ensure you do not overpay taxes on your earnings. Be sure to know where you pay the least amount: US vs UK Income Tax Rates.
The Internal Revenue Service (IRS) may withhold up to 30% tax on your US income. This 30% rate may be reduced with the aid of Form W8-BEN, designed to reduce the amount you pay because of the US & UK tax treaty. Ensure you obtain your US tax ID (ITIN) when you need to submit a US tax return.
Please note that the W8-BEN form is for individuals. You will need to complete Form W8-BEN-E as a UK limited company or corporation to reduce or eliminate US withholding taxes.
Moving to the US may require you to file a 1040 return to the IRS. Americans need to note that they are expected to file taxes even if they no longer live in the US.
United Kingdom (UK)
The United Kingdom also uses a progressive system, but the structure differs. As of 2023/2024, the rates start at 0% for earnings up to £12,570, the personal allowance. Beyond this allowance, income is taxed at 20% (basic rate) on earnings from £12,571 to £50,270, 40% (higher rate) on earnings from £50,271 to £125,140, and 45% (additional rate) on income over £125,140.
Unlike the US, the UK does not have separate state or regional income taxes, simplifying the system. However, other taxes, such as National Insurance contributions, add to the overall burden.
Key Differences
One significant difference between the US and UK income systems is the presence of state taxes in the US. This creates a more complex and varied environment compared to the UK, with consistent rates across the country.
Another key difference is the treatment of income brackets. The UK has fewer brackets and a higher threshold before the top rate applies, which can result in different burdens for high earners compared to the US.
Impact on High Earners
High earners in the US might face a combined federal and state tax rate that exceeds the UK’s top rate. For example, a high earner in California could pay up to 50.3% in combined federal and state taxes, compared to the UK’s top rate of 45%. This can influence decisions about where to live and work, especially for those in high-paying industries.
Impact on Low and Middle-Income Earners
The differences can be less stark but still significant for low and middle-income earners. The UK’s higher personal allowance means low earners may initially pay less. At the same time, the US system’s varied state taxes can create disparities in burdens depending on the state of residence.
Additional Considerations
When comparing the US and UK taxes, it’s important to consider other taxes and social contributions. In the US, Social Security and Medicare payroll taxes add to the burden, while National Insurance contributions serve a similar purpose in the UK.
Moreover, deductions and credits, such as the US Earned Income Tax Credit (EITC) or the free personal savings allowance in the UK, can affect overall liability.
Conclusion
The US and UK have progressive systems, but the specifics of their structures lead to different experiences for residents. High earners might find the UK’s top rate more favourable, while state taxes in the US add complexity and potential variation in burdens. Understanding these differences is essential for effective financial planning, whether considering a move between countries or aiming to optimise your situation.
This is useful information for British citizens who are looking to move to the United States (US). It is also useful information for Americans moving to the United Kingdom (UK).
Q&A Section: US vs UK Income Tax Rates
How do brackets differ between the US and the UK? The US has seven brackets ranging from 10% to 37%, while the UK has three brackets: 20%, 40%, and 45%.
Do state taxes in the US make a big difference overall? Yes, state taxes can significantly impact overall in the US, with some states imposing no income tax and others having high levels, like California’s 13.3%.
Which country has a higher rate? The UK’s top income rate is 45%, which is lower than the highest combined federal and state rate in the US, which can exceed 50% in some states.
What is the personal allowance in the UK, and how does it affect taxes? The personal allowance in the UK is £12,570, meaning income up to this amount is not taxed. This benefits low earners by reducing their overall burden.
How do National Insurance contributions in the UK compare to payroll taxes in the US? National Insurance contributions in the UK are similar to US payroll taxes for Social Security and Medicare. Both add to the overall burden beyond taxes.