How American Expats in the UK Can Avoid Double Taxation
How the foreign tax credit, the earned income exclusion and the US-UK treaty stop the same income being taxed twice, and where each one is claimed.
Written by the US UK Tax Experts team, cross-border tax specialists
Will I be taxed twice as an American living in the UK?
You should not be. Both countries can tax the same income, but the foreign tax credit, the Foreign Earned Income Exclusion and the US-UK tax treaty exist to prevent it. None of them applies automatically. Each one has to be claimed on the return.
How does the foreign tax credit work?
The foreign tax credit, claimed on Form 1116, reduces your US tax by the UK tax you paid on the same income. Because UK rates are usually higher than US rates, the credit often removes the US tax on UK earnings completely.
Credits are calculated separately for different categories of income, such as earnings and investment income, and unused credits can be carried forward for up to ten years. The timing matters: UK tax is paid on a 6 April to 5 April year, and it has to be matched to the US calendar year.
What is the Foreign Earned Income Exclusion?
The Foreign Earned Income Exclusion, claimed on Form 2555, removes foreign earned income from US tax up to a limit that is set each year. You qualify through the bona fide residence test or by spending 330 full days outside the US in a twelve-month period.
It covers salary and self-employment income only. It does not cover dividends, interest, rent, pensions or capital gains, and it can reduce other reliefs, such as the ability to fund a US retirement account.
Foreign tax credit or exclusion: which is better in the UK?
| Question | Foreign tax credit (Form 1116) | Earned income exclusion (Form 2555) |
|---|---|---|
| What it covers | Most income taxed in the UK | Earned income only |
| Works best when | UK tax is higher than US tax, the usual case | Foreign tax is low or nil |
| Unused relief | Carried forward up to ten years | Lost |
| Changing your mind | Can be chosen year by year | Revoking it bars re-election for five years without IRS consent |
For most people employed in the UK the credit gives the better result, but the answer depends on your income mix and should be worked out on your own figures.
What does the US-UK tax treaty actually do?
The treaty decides which country taxes which income first and requires the other to give relief. It does not stop the US taxing its own citizens, because of a clause that preserves that right, so for Americans in the UK the practical relief usually comes through credits.
The treaty still matters in specific places: UK pensions are generally not taxed by the US while they grow, certain US-source income is treated as UK-source so a credit can be claimed, and the tie-breaker rules settle residence when both countries claim you. A treaty position is disclosed on Form 8833.
Does the UK give relief for US tax too?
Yes. If you are UK resident and the US has taxed income that arises there, such as rent from a US property, the UK gives Foreign Tax Credit Relief through your Self Assessment return. The relief is limited to the amount the US was entitled to charge under the treaty.
Where does double taxation still catch people out?
- ISAs: tax free in the UK, taxable in the US, with no UK tax to credit.
- UK funds: most are passive foreign investment companies with a punitive US regime and a Form 8621 for each.
- Selling your home: UK private residence relief can exempt the whole gain, while the US exclusion stops at $250,000, or $500,000 for a joint return, and counts currency movement.
- Pension lump sums: the UK tax-free lump sum is not automatically tax free in the US.
- Social security: the totalisation agreement between the two countries prevents paying into both systems on the same earnings.
We prepare both returns together and claim the credit, exclusion or treaty relief that fits your income, so the same earnings are not taxed twice.
