US Expat Taxes in the UK: Key Considerations

A U.S. expat is a citizen or Green Card holder who resides outside of the United States. The U.S. government taxes its citizens on their worldwide income, regardless of their physical location, meaning income earned in the UK is reportable to the Internal Revenue Service (IRS). This policy creates a dual-taxation scenario where Americans in the United Kingdom are subject to the tax laws of both countries and must file returns in both nations. To address this, the United States and the United Kingdom established the US-UK Tax Treaty, which provides mechanisms to alleviate the tax burden.

Core US Tax Obligations for Expats

To prevent double taxation, the IRS provides two primary tools for expats: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). The FEIE allows qualifying individuals to exclude a significant portion of their foreign-sourced earnings from their U.S. income tax. For the 2025 tax year, this exclusion is capped at $130,000 per person. If an expat’s foreign earnings are below this amount, they may not owe any U.S. income tax but must still file a return.

To use the FEIE, an individual must have a tax home in a foreign country and meet either the Bona Fide Residence Test or the Physical Presence Test. The Bona Fide Residence Test requires living in a foreign country for an entire tax year. The Physical Presence Test is met by being physically in a foreign country for at least 330 full days during any 12-month period. The FEIE is claimed by filing Form 2555 and applies only to earned income like salaries, not to passive income such as interest or dividends.

The Foreign Tax Credit, claimed using Form 1116, offers a dollar-for-dollar reduction of a U.S. tax bill for income taxes paid to a foreign government. This credit is often more advantageous for expats in high-tax countries like the UK. Unlike the FEIE, the FTC can be applied to both earned and unearned income. If the foreign taxes paid exceed the U.S. tax liability, the excess credits can be carried back to the previous tax year or forward for up to ten years.

Beyond income tax, U.S. expats face information reporting requirements. The Report of Foreign Bank and Financial Accounts (FBAR) must be filed with the Financial Crimes Enforcement Network (FinCEN) using Form 114. This report is required if the aggregate value of all foreign financial accounts exceeds $10,000 at any point during the calendar year. This threshold is for the combined total, not per account, and includes bank accounts, brokerage accounts, and certain foreign mutual funds.

A separate reporting requirement falls under the Foreign Account Tax Compliance Act (FATCA), which mandates filing Form 8938. The filing thresholds for Form 8938 are higher and depend on filing status and residency. For a single individual living abroad, the threshold is having specified foreign financial assets worth more than $200,000 on the last day of the tax year, or more than $300,000 at any time during the year. For married couples filing jointly, these thresholds are doubled to $400,000 and $600,000.

Understanding the UK Tax System

The United Kingdom’s tax system differs from that of the United States, starting with its definition of tax residency. An individual is considered a UK tax resident if they spend 183 or more days in the UK during a tax year. The UK’s Statutory Residence Test provides more detailed rules to determine residency for those with complex circumstances. UK tax residents are taxed on their worldwide income.

A significant difference is the UK tax year, which runs from April 6th to April 5th, unlike the U.S. calendar year. This misalignment requires careful record-keeping, as income and deductions must be allocated to the correct periods for each government.

Previously, some UK residents could opt for the “remittance basis” of taxation, which taxed foreign income only when brought into the country. This was replaced by a new residency-based framework starting April 6, 2025.

Under the new rules, individuals becoming UK tax resident after at least 10 consecutive years of non-residence receive full tax relief on foreign income and gains for their first four years of UK residency. After this four-year period, they are taxed on their worldwide income.

The US-UK Tax Treaty in Practice

The US-UK Tax Treaty resolves potential double taxation by assigning taxing rights for specific types of income. A central element is the “tie-breaker” rule, which determines a single country of residence for tax purposes when an individual might be considered a resident of both. This determination is based on factors like the location of a permanent home, personal and economic relations, and habitual abode.

Pensions

For pensions, the treaty grants the primary right to tax periodic payments to the country where the recipient resides. A U.S. citizen in the UK receiving distributions from a U.S. 401(k) or IRA would pay UK tax on that income. Lump-sum distributions are also subject to UK tax, with the UK providing a foreign tax credit for any U.S. taxes paid. The treaty also allows tax relief on contributions to a foreign pension plan, preventing a situation where contributions are made with after-tax money in one country and then taxed again upon distribution.

Social Security

The treaty also specifies the treatment of government retirement benefits. Social Security payments are taxable only in the country of residence. A U.S. citizen residing in the UK and receiving U.S. Social Security would be subject to UK income tax on those payments, not U.S. tax. The totalization agreement also allows individuals to combine work credits from both countries to qualify for benefits.

Capital Gains and Dividends

The treaty has provisions for capital gains and dividends to prevent double taxation. For dividends, the treaty limits the tax that the source country can withhold, which is 15% for a UK resident receiving dividends from a U.S. company. The UK then allows a credit for the U.S. tax paid. For capital gains, the treaty assigns the exclusive right to tax the gain to the seller’s country of residence, except for gains from the sale of real property.

Navigating Special UK Investment and Savings Accounts

UK tax-advantaged savings and investment vehicles often lose their favorable status when held by a U.S. person. Winnings from UK Premium Bonds, for example, are tax-free in the UK but are treated as taxable gambling income in the United States.

Similarly, the Individual Savings Account (ISA) is fully taxable in the U.S. An expat must report all interest, dividends, and capital gains generated within an ISA on their U.S. tax return. The underlying investments within a Stocks and Shares ISA are often non-U.S. funds that the IRS classifies as Passive Foreign Investment Companies (PFICs). This classification can lead to complex and punitive U.S. tax treatment.

The stringent PFIC tax rules are designed to discourage U.S. investors from using foreign funds to defer U.S. tax. This classification applies to foreign corporations that primarily generate passive income or hold passive assets.

When a U.S. person owns shares in a PFIC, any distributions or gains are subject to punitive tax treatment unless specific elections are made annually. The default tax method treats gains as if earned evenly over the holding period and taxes them at the highest ordinary income tax rate for each year, plus an interest charge. Reporting these investments requires filing the complex Form 8621 for each PFIC owned, making standard UK investment funds a significant tax trap for American expats.

Filing Your US and UK Tax Returns

The process of filing tax returns in both the U.S. and the UK requires attention to different forms and deadlines. For the U.S. return, expats use Form 1040, the standard individual income tax return. U.S. citizens abroad receive an automatic two-month extension to file, moving the deadline from April 15 to June 15. This is an extension to file, not to pay, as any tax owed is still due by the April deadline.

A further extension to October 15 can be requested by filing Form 4868. The FBAR is filed separately with FinCEN and is also due on April 15, with an automatic extension to October 15.

In the UK, the tax return is known as the Self Assessment tax return. The deadline for filing a paper tax return is October 31 following the end of the tax year. For those who file online, the deadline is January 31. Any tax owed for the year is also due by this January 31 deadline.

Finally, U.S. expats must not overlook potential state tax obligations. Living abroad does not automatically terminate state tax residency, as each state has its own rules. Some states may continue to consider an individual a resident and liable for state income tax. You must formally sever ties with a previous state of residence to avoid ongoing state filing requirements.