U.S. taxes for Americans in the UK

The United Kingdom has one of the largest U.S. expat populations in Europe and one of the better tax treaties for cross-border filers. The U.S.–UK income tax treaty (in force since 2003) provides clean source rules for most income types, and the totalization agreement handles the Social Security side.

For most Americans in the UK, the right combination is Foreign Tax Credit (not FEIE) for income tax and the totalization Certificate of Coverage for Social Security. This article covers the country-specific decisions.

Why FTC beats FEIE in the UK

The UK's top marginal income tax rate is 45% (above £125,140), and the basic rate is 20%. For almost any salaried American in the UK, the UK tax rate on your income exceeds what the U.S. would charge. That means:

• FTC zeros out your U.S. tax on the same income, just from the UK tax already paid.
• You generate carryforward credits — unused FTC carries forward 10 years and can absorb future U.S. tax (a bonus, a sale, a partial-U.S.-year).
• You can contribute to a Roth IRA because your income remains taxable on your U.S. return (FEIE would exclude it and disqualify the Roth).
• You can claim the refundable Child Tax Credit for U.S.-citizen kids.

See FEIE vs. Foreign Tax Credit for the framework.

The ISA trap

The UK's Individual Savings Account (ISA) is the British equivalent of a Roth IRA — tax-free growth, no annual UK tax on dividends or gains inside the wrapper.

The U.S. does not recognize the ISA. Specifically:

• Cash ISAs: the interest is still U.S.-taxable. The UK tax-free status doesn't carry over.
• Stocks & shares ISAs: investments inside are U.S.-taxable on a current basis. If they hold UK funds or ETFs, those are PFICs — devastating U.S. tax treatment.

For U.S. expats in the UK, the ISA is mostly a U.S. tax disaster. The fix:

• Cash ISAs only for U.S. expats — and you still report the interest on your 1040.
• Avoid stocks & shares ISAs entirely (PFIC trap).
• For investing as an American in the UK: use a U.S. brokerage (Schwab International, Interactive Brokers) and buy U.S.-domiciled ETFs. Far better tax outcome.

SIPP — the one UK retirement account that works

The Self-Invested Personal Pension (SIPP) is U.K. retirement savings. Unlike the ISA, the U.S.–UK treaty provides explicit recognition:

• Treaty Article 18 treats SIPP contributions as deductible / non-taxable for U.S. purposes, similar to a U.S. 401(k).
• Growth inside the SIPP is U.S. tax-deferred under the treaty.
• Distributions are taxable at retirement, in the U.S. and the UK with FTC offset.

A SIPP holding UK funds (PFICs) is generally protected by the treaty — but treaty interpretation here is contested by some practitioners. The conservative path: hold individual stocks or U.S.-domiciled funds inside the SIPP if possible.

Workplace pensions (occupational pensions) typically get similar treaty treatment.

National Insurance / Social Security totalization

The U.S.–UK totalization agreement (in force since 1985) handles Social Security cleanly:

• If you're employed in the UK by a UK employer, you pay UK National Insurance and owe no U.S. FICA.
• If you're self-employed and tax-resident in the UK, you pay UK NI Class 2/Class 4 contributions and owe no U.S. Self-Employment tax.
• Apply for a Certificate of Coverage from HMRC (Form CA3837 / A1) and attach to your U.S. return.

See totalization agreements. Without this, U.S. self-employed in the UK would pay 15.3% U.S. SE tax on top of UK NI — a 25%+ Social Security stack.

Capital gains and the foreign tax credit

The UK taxes capital gains at 10%/20% (basic / higher rate, plus 24% on residential property). The U.S. taxes long-term capital gains at 0%/15%/20% + NIIT.

For most expat-in-UK situations:

• UK CGT > U.S. cap-gains tax for most filers in higher brackets → FTC offsets the U.S. tax entirely.
• UK CGT < U.S. cap-gains tax for filers in the U.S. 20% + 3.8% NIIT bracket and the UK basic-rate bracket → small residual U.S. tax owed after FTC.

The U.S. NIIT (3.8% on investment income above MAGI thresholds) is not creditable against UK tax, so it remains as a U.S. tax bill regardless of FTC carryforward.

UK dividends

The UK doesn't withhold tax on UK-source dividends paid to U.S. tax residents under treaty Article 10 (zero withholding for portfolio investors). Dividends are taxable on your UK return at UK dividend rates (8.75%/33.75%/39.35%) and on your U.S. return at qualified-dividend or ordinary rates.

FTC in the passive basket offsets U.S. tax on UK-sourced dividends. See Form 1116.

FBAR and 8938 for UK accounts

• UK current accounts (Barclays, HSBC, NatWest, Lloyds): FBAR-reportable once aggregate > $10K.
• UK savings accounts and Cash ISAs: same.
• UK stockbrokers (Hargreaves Lansdown, AJ Bell, Interactive Investor): FBAR-reportable.
• SIPPs: FBAR-reportable.
• Workplace pensions: usually reportable if you have a defined-contribution plan with vested balance.

Form 8938 thresholds: $200K year-end / $300K mid-year for single filers abroad. See FATCA / Form 8938.

The "domicile" angle (UK side)

The UK historically had a special tax regime for "non-domiciled" residents (the "non-dom" rules) allowing UK residents whose domicile was elsewhere to avoid UK tax on foreign income/gains kept offshore. This regime is being phased out as of April 2025, replaced by a 4-year foreign-income-and-gains relief for new arrivals.

For Americans newly arrived in the UK, the new 4-year FIG regime offers significant tax savings on U.S.-source investment income for the first four UK tax years. After that, all worldwide income is UK-taxable.

Check with a UK tax adviser on whether you qualify for the new regime — this is a moving target as HMRC issues guidance.

State residency (U.S. side)

UK residents who came from sticky U.S. states (California, New York, New Mexico, Virginia, South Carolina) face the same state-residency severance challenge as other expats. See state residency when abroad. The fact that the UK has high tax doesn't help — those states tax their domiciliaries on worldwide income regardless.

The annual rhythm for U.S.-expat-UK

• April 6 – April 5: UK tax year. P60 issued around May–June.
• January 31: UK Self Assessment deadline if you have non-PAYE income.
• April 15 / June 15 / October 15: U.S. tax deadlines (see expat tax deadlines).
• October 15: FBAR deadline (auto-extended).

The UK tax year offset from the U.S. calendar year complicates allocation. For 1116 purposes, allocate UK tax paid to the U.S. tax year on a reasonable basis (usually paid basis: tax actually paid during the U.S. calendar year).

Common Americans-in-the-UK mistakes

• Defaulting to FEIE. Almost always worse than FTC for UK income.
• Using a stocks & shares ISA. PFIC trap inside; tax-free UK status doesn't help U.S. side.
• Forgetting to claim the totalization Certificate of Coverage. Double Social Security tax stacks up fast.
• Not filing 8621 when holding UK unit trusts or OEICs even outside an ISA.
• Missing FBAR on Wise / Revolut. These are foreign financial institutions for FBAR purposes.
• Letting California or New York continue to claim residency. State tax piles on top of UK + U.S. federal.

Next steps

• FEIE vs. Foreign Tax Credit
• Foreign Tax Credit (Form 1116)
• Totalization agreements
• The PFIC trap
• Foreign mutual funds