UK vs US Tax in 2026/27: A Dual-Filer Guide for FATCA, FEIE, FTC and PFIC

1. Overview: two systems, one taxpayer

The fundamental friction in UK-US tax for dual filers is the citizenship-based US system colliding with the residence-based UK system. Almost every other developed country (with the narrow exception of Eritrea) taxes only its residents. The US is the structural outlier, and the result is a permanent dual filing obligation that follows a US citizen anywhere they go. A US citizen born in Boston who has lived in London since they were two years old, never worked in the US, holds no US assets and has never filed a US return is still legally required to file Form 1040 every year. The IRS has been increasingly aggressive about enforcement since FATCA's 2014 effective date, which conscripts foreign financial institutions (including every major UK bank) into reporting US-person accounts directly to the IRS.

The 2001 UK-US Double Taxation Convention and the 1984 Totalization Agreement together do most of the work of preventing literal double taxation. Three relief mechanisms matter most in practice. First, the Foreign Earned Income Exclusion on Form 2555 removes up to $130,000 (2026) of foreign salary from US federal tax for qualifying taxpayers. Second, the Foreign Tax Credit on Form 1116 credits UK tax paid against the US liability on the same income, with carry-forwards. Third, the Totalization Agreement allocates social security contributions to one system at a time, so a US citizen working in the UK pays NI and is exempt from US FICA on the same wages. What none of these does is remove the filing obligation - the obligation to file is unconditional and runs independently of whether any US tax is actually owed.

2. US worldwide taxation of citizens and green card holders

US federal income tax under the Internal Revenue Code applies to worldwide income of "US persons", defined to include US citizens (regardless of residence), lawful permanent residents (green card holders, until the green card is formally relinquished by filing Form I-407), and individuals meeting the Substantial Presence Test of 183 weighted days under IRC Section 7701(b). A US citizen abroad reports the same income categories on Form 1040 that a stateside filer reports: wages on line 1, interest on Schedule B, dividends ordinary and qualified, capital gains on Schedule D, business income on Schedule C or partnership and S-corp K-1 income, rental and royalty income on Schedule E, retirement distributions on lines 4 and 5, and so on.

The filing thresholds are the same as for US residents: $14,600 gross income for a single filer under 65 (2024 baseline, indexed), $29,200 for married filing jointly under 65. Self-employment income above $400 triggers Schedule SE filing regardless of total. A US citizen filing from the UK gets an automatic two-month extension to 15 June (with interest accruing on any unpaid tax from 15 April), and can file Form 4868 for a further extension to 15 October, and Form 2350 in narrow cases to push to 30 days after the bona fide residence threshold is met. The IRS Streamlined Filing Compliance Procedures remain available for non-wilful past delinquency: three years of back returns plus six years of FBARs, no penalties for non-wilful taxpayers resident outside the US.

Green card holders bear an additional structural risk. A green card remains effective for US tax purposes until the I-407 is filed - even if the card expires, even if the holder has not been to the US in a decade. Triggering treaty non-resident status under the Article 4 tie-breaker (see Section 4) treats the holder as having abandoned the green card for US tax purposes only - it does not protect the immigration status, and it triggers the same Exit Tax exposure under Section 877A that a citizenship renunciation would if the holder is a Covered Expatriate.

3. UK residence under the Statutory Residence Test

The UK side starts with the SRT, codified in Finance Act 2013 Schedule 45 and explained at length in HMRC's RDR3 guidance note. The SRT establishes residence for the UK tax year (6 April to 5 April) on a year-by-year basis. Three layers apply in order: the Automatic Overseas Tests (which conclusively make you non-resident if met), the Automatic UK Tests (which conclusively make you resident if met), and the Sufficient Ties Test (which combines a UK day count with a ties count where neither automatic test resolves). The full deep-dive on each test and the eight split-year cases is at our UK residence (SRT) guide - this section covers only the US-relevant interactions.

For a US citizen the SRT outcome decides whether the UK taxes them on worldwide income (UK resident) or only UK-source income (UK non-resident). The non-dom remittance basis was abolished from 6 April 2025; its replacement, the four-year Foreign Income and Gains regime, gives new UK arrivals 100 percent UK relief on foreign income and gains for the first four years of residence if they were not UK resident in any of the previous 10 tax years. For a US citizen arriving in the UK on a fresh assignment, the FIG regime can be genuinely useful - UK-source US-arising income (US dividends, US pension distributions, US rental) is shielded from UK tax under FIG, while the US continues to tax it under citizenship-based rules with FTC available for any UK tax that does land.

The interaction creates a planning window during the FIG years. US-source investment income flows into a US brokerage account, gets taxed in the US at preferential qualified dividend or long-term capital gains rates (0 / 15 / 20 percent), and is not topped up to the UK higher or additional rate because FIG excludes it from UK tax. Once the four-year window closes, the same income hits the full UK arising-basis schedule and the planning calculus changes sharply.

4. The 2001 UK-US treaty and the 1980 protocol legacy

The current UK-US Income Tax Convention was signed in 2001 and entered into force on 31 March 2003, replacing the 1975 treaty as amended by the 1980 protocol. The 2001 treaty was further amended by a 2002 exchange of notes. The structure follows the OECD Model Tax Convention with significant US-specific deviations: a broader Limitation on Benefits article (Article 23) to deter treaty-shopping, US-favourable Article 18 pension provisions, and the always-controversial saving clause in Article 1 paragraph 4 that reserves the US right to tax its citizens as if the treaty did not apply, with specific carve-outs.

The Article 4 residence tie-breaker resolves dual residence in the OECD-standard order: permanent home, centre of vital interests (economic and personal ties), habitual abode, nationality, and finally mutual agreement of the competent authorities. The tie-breaker only affects treaty-defined positions - a US citizen who is treaty-resident in the UK still files Form 1040 because of the saving clause, but can use the tie-breaker to claim certain categories of UK income as not US-taxable where the treaty so provides. Article 23 LOB tests must be met to access treaty benefits: the most common UK qualifier is the public-company test (parent company listed on a recognised exchange) or the active trade or business test.

The saving clause carve-outs that actually matter to dual filers: Article 17 (pensions paid by a Contracting State - government pensions, taxable only in the paying state), Article 18 (private pensions - generally exclusive residence-state taxation, with important exceptions discussed in Section 9), Article 19 (government service), Article 20 (students), Article 20A (teachers), and Article 24A (re-sourcing rule that allows US-source income to be treated as UK-source for FTC purposes to relieve double taxation that the ordinary FTC cannot cure). The re-sourcing rule on Article 24A paragraph 4 is the workhorse for US citizens facing dividend or capital gains double taxation that ordinary FTC categorisation cannot fix.

5. Foreign Earned Income Exclusion (FEIE, Form 2555)

The Foreign Earned Income Exclusion under IRC Section 911 lets a qualifying US citizen or resident alien exclude up to $130,000 ($130,000) of foreign earned income from US federal income tax for 2026, indexed annually. The 2025 limit was $126,500; the 2024 limit was $126,500 (no inflation adjustment that year); the 2023 limit was $120,000. The exclusion is claimed on Form 2555 attached to Form 1040.

Three eligibility gates must be met simultaneously. First, you must have foreign earned income - salary, wages, professional fees, self-employed profit attributable to services performed outside the United States. Passive income (dividends, interest, rent, royalties, capital gains, pensions, alimony, gambling winnings) is not foreign earned income and cannot be excluded under Section 911. Second, you must have a tax home in a foreign country, meaning your regular place of business is outside the US and you do not have an abode in the US. Third, you must satisfy either the Bona Fide Residence Test (BFRT - residence in a foreign country for an uninterrupted period that includes an entire tax year) or the Physical Presence Test (PPT - 330 full days physically outside the US in any consecutive 12-month period).

The BFRT is the cleaner test for a settled UK resident: a full UK tax year as a UK resident under the SRT, with intent to remain, satisfies the test in most cases. The PPT is the common backstop for an assignee in their first year of UK residence (where BFRT cannot yet be met because no full tax year has elapsed). Days in transit between foreign countries via the US can disqualify a PPT 12-month period - the test demands full days outside the US, where a "full day" is 24 hours starting and ending outside US territory.

FEIE has structural pitfalls that the cleaner FTC approach avoids. The stacking rule (IRC Section 911(f), in force since 2006) calculates the tax on non-excluded income as if the excluded amount were stacked on top - so the marginal rate on a single dollar of unexcluded income is the rate that would have applied at the full pre-exclusion income level. FEIE claimants also lose access to the refundable portion of the Child Tax Credit for the same income, cannot use the foreign income to fund a Traditional or Roth IRA contribution (because no compensation remains after exclusion), and face complicated interaction with the Net Investment Income Tax and the Additional Medicare Tax. For UK residents at middle-and-above income levels FTC is usually preferable - it preserves these credits, generates carry-forwards, and tracks the UK effective rate cleanly.

The foreign housing exclusion (Section 911(c)) is additional to FEIE: the qualifying housing cost above a base amount (16 percent of the FEIE limit) can be excluded up to a city-specific cap. The IRS publishes the per-city cap each year; London's 2024 cap was approximately $97,400 in qualifying housing cost. For a London-based US citizen with a high rent, the housing exclusion meaningfully expands the FEIE-protected band.

6. Foreign Tax Credit (FTC, Form 1116)

The Foreign Tax Credit credits foreign income tax paid against US income tax due on the same income, computed on Form 1116. Unlike FEIE it is a credit, not an exclusion - the foreign income still enters US gross income, but the US tax otherwise due is reduced dollar-for-dollar by the qualifying foreign tax. Excess credits carry back one year and forward ten under IRC Section 904(c).

FTC operates in income categories ("baskets"): general category (most foreign earned income), passive category (dividends, interest, capital gains and similar), section 951A (GILTI), foreign branch, and certain treaty-resourced amounts. Credits and losses are computed and carried forward by category; you cannot use excess general-category credit to offset US tax on passive-category income. This silo mechanic is why dividend income is the classic FTC pinch point: UK dividend rates run 8.75 / 33.75 / 39.35 percent across the bands, while US qualified dividend rates are 0 / 15 / 20 percent. The excess UK rate generates passive-basket credit that cannot offset US tax on US-source wages.

For UK-resident dual filers earning UK salary, the FTC calculation typically yields excess credits at any income above £50,270 (the UK higher-rate threshold), because UK effective rates above that point exceed marginal US federal rates after the standard deduction. The excess credit carries forward and can offset US tax on US-source income in later years - useful for US citizens who later return to the US and find themselves with accrued UK credit available against US passive income, or who realise a US-source capital gain while still UK-resident and can use Article 24A re-sourcing plus carry-forward credit to neutralise it.

The FTC versus FEIE election is irrevocable for the year on a per-category basis once filed, but you can switch in subsequent years. A common pattern: claim FEIE in the first year of UK residence (when PPT covers the year but BFRT does not yet apply to a full tax year, and salary is below the FEIE cap), then switch to FTC permanently from year two when the UK effective rate exceeds the US marginal rate. Once FEIE is revoked you cannot re-elect for five years without IRS consent under Rev. Proc. 2008-25.

7. The 1984 Totalization Agreement: NI vs FICA

The US-UK Agreement on Social Security entered into force on 1 January 1985, governing the interaction between US Social Security taxes (FICA, comprising the 6.2 percent OASDI employee contribution plus the 1.45 percent Medicare contribution, matched by employer) and UK National Insurance Contributions (Class 1 at 8 percent main rate between Primary Threshold and Upper Earnings Limit, 2 percent above UEL, plus the 13.8 percent employer secondary contribution).

The general rule: an employee pays social security in the country where they physically work. So a US citizen working for a UK employer in the UK pays UK NI and is exempt from US Social Security and Medicare on the same wages. Conversely a UK national working in the US pays FICA and is exempt from UK NI. A self-employed dual filer pays into the country of residence by default. The exception for short assignments: an employee sent on temporary assignment of under five years remains in the home-country system with a Certificate of Coverage from the home authority - HMRC Form CA3837 for UK-to-US assignments, IRS Form 8898 indirectly via the SSA for US-to-UK.

The agreement also lets you combine periods of coverage in both systems to qualify for benefits. A US citizen with seven years of UK NI credits and five years of US Social Security credits cannot ordinarily claim US Social Security (which requires 40 quarters / 10 years) - but under the totalization rules the UK credits count toward US eligibility (and vice versa). The benefit amount is then computed pro rata on actual US-covered earnings, so the dollar amount can be modest. For a US citizen who has lived in the UK most of their working life, the pro-rated benefit is typically a fraction of what a stateside worker on the same career earnings would receive, but it is positive rather than zero.

The Windfall Elimination Provision (WEP) historically reduced US Social Security for retirees with significant foreign pension income; it was repealed by the Social Security Fairness Act of January 2025, restoring full US benefits to dual-system retirees from 1 January 2024 onwards. A US citizen retiring with both a UK State Pension and US Social Security entitlement no longer faces the WEP haircut.

8. The PFIC trap: ISAs and non-US mutual funds

The Passive Foreign Investment Company rules in IRC Sections 1291 through 1298 are the single most damaging element of US tax law for UK-resident citizens, because almost every non-US-domiciled mutual fund, OEIC, unit trust and ETF traded on the LSE meets the PFIC tests. A PFIC is any non-US corporation where either 75 percent of gross income is passive (the income test) or 50 percent of assets produce or are held to produce passive income (the asset test). Most pooled investment vehicles meet the asset test by definition.

Holding a PFIC triggers Form 8621 reporting and one of three tax regimes. The default is the excess distribution regime under Section 1291: distributions in the current year above 125 percent of the average of the prior three years' distributions, and any gain on disposition, are allocated rateably across the entire holding period. The portion allocated to prior years is taxed at the highest ordinary rate for each such year (37 percent currently), and a non-deductible interest charge runs from each prior year's filing deadline to the current year's filing deadline. The compounding means a long-held PFIC sold at a large gain can face an effective tax rate well above 50 percent.

The two elective alternatives are Qualified Electing Fund (Section 1295, requires the fund to issue an Annual Information Statement that almost no non-US fund will provide) and Mark-to-Market (Section 1296, available for PFICs regularly traded on a qualified exchange - the LSE and most European exchanges qualify). Mark-to-market recognises unrealised gain at year-end at ordinary rates with a reverse mark for losses, which sidesteps the punitive Section 1291 calculation but loses qualified dividend and long-term capital gain treatment.

The structural workaround is to hold US-domiciled funds (Vanguard VWRA, iShares Core S&P 500 in USD, US-listed ETFs in general) inside a US brokerage account, or inside a UK SIPP where the pension wrapper sidesteps PFIC altogether under Article 18 treaty protection. UK retail investors are commonly told they cannot buy US-domiciled ETFs because of MiFID II KID requirements - but US citizens are exempt from that restriction when holding through a US brokerage. ISAs, despite being UK-tax-free, are not treated as a wrapper for US tax purposes: an ISA holding a UK-domiciled fund is treated as a regular taxable account holding a PFIC, with all the Form 8621 burden that implies.

9. UK pension treatment by the US

UK occupational and personal pensions broadly enjoy treaty parity with US-qualified retirement plans under Article 18 of the 2001 treaty. Employer contributions to a registered UK pension scheme are not currently US-taxable to the employee. Employee contributions are deductible against UK Income Tax under the relief at source or net pay arrangement but - critically - are not deductible against US Income Tax unless an Article 18 paragraph 5 election is made for that year on Form 8833. Most US tax preparers default to claiming the election where the employer contribution exceeds the employee contribution materially; the election covers a single tax year and must be re-made annually.

Growth inside the pension wrapper is deferred for US purposes under Article 18 paragraph 1 - the IRS does not tax annual investment growth in a registered pension scheme. SIPPs are explicitly within Article 18 scope per the technical explanation issued by Treasury. This is the structural reason a SIPP is the natural home for a US citizen's UK investment portfolio: the wrapper neutralises both UK tax and the PFIC reporting that would otherwise apply to US-domiciled or non-US-domiciled funds held inside.

The pinch point is the 25 percent Pension Commencement Lump Sum (PCLS). UK law allows up to 25 percent of the pension pot to be drawn tax-free from age 55 (rising to 57 from April 2028), capped by the Lump Sum Allowance of £268,275. The IRS view is that Article 18 does not extend the UK tax-free treatment to the US side: the PCLS is fully US-taxable as a pension distribution under Section 72 ordinary-income rules. The same lump sum is therefore £0 UK tax but potentially $40,000+ US tax on a large pot. Planning options: take PCLS in a year of low US income (after retirement, before US Social Security claim), spread the drawdown across multiple years to manage the US bracket, or - in narrow cases - take the lump sum after relinquishing US citizenship or green card (only realistic if the holder is not a Covered Expatriate and is genuinely planning to expatriate).

UK State Pension is taxable in the country of residence under Article 17 paragraph 1: a UK resident pays UK Income Tax on UK State Pension and the US does not tax it (subject to the saving clause caveat - for a US-resident UK retiree the State Pension is US-taxable). The treaty saving clause carve-out in Article 1 paragraph 5 expressly excludes Article 17 from the saving clause, so the UK-resident US citizen treatment is genuinely clean. US Social Security received by a UK resident is taxable only in the UK under Article 17 paragraph 3, on the same logic in reverse.

10. FBAR (FinCEN 114) and Form 8938 reporting

US persons with foreign financial accounts face two parallel disclosure regimes, with overlapping but not identical requirements.

FBAR (FinCEN Form 114, formerly Form TD F 90-22.1) is filed under the Bank Secrecy Act, not the Internal Revenue Code. The trigger is aggregate maximum balance of all foreign accounts above $10,000 at any single point in the calendar year. Filed online through the FinCEN BSA E-Filing System, separate from the Form 1040 return. Deadline: 15 April with automatic six-month extension to 15 October. Reportable accounts include foreign bank accounts, foreign brokerage accounts, foreign mutual funds, foreign pension accounts (in most cases), cryptocurrency accounts at foreign exchanges (from 2026 reporting year, anticipated), and foreign life-insurance products with cash value. Signature authority over an employer's foreign account is reportable even without financial interest. Civil penalties: up to $16,536 (inflation-adjusted 2026) per non-wilful violation per year, and the greater of $165,353 or 50 percent of account balance for wilful violations.

Form 8938 (Statement of Specified Foreign Financial Assets) is filed under FATCA (Foreign Account Tax Compliance Act, IRC Section 6038D) attached to Form 1040. Filing thresholds for taxpayers living abroad are higher than FBAR: $200,000 end of year or $300,000 at any point during the year for single filers ($400,000 / $600,000 for married filing jointly). For US-resident filers the thresholds are dramatically lower: $50,000 / $75,000 single, $100,000 / $150,000 joint. The 8938 universe extends beyond accounts to include foreign stock and securities held outside accounts, foreign-issued life insurance with cash value, interests in foreign entities not classified as financial accounts, and foreign hedge funds and private equity interests. Penalty: $10,000 for failure to file, rising to $50,000 after 90 days of continued failure post-IRS notice, plus a 40 percent accuracy-related penalty on understatements attributable to undisclosed 8938 assets.

Both forms are commonly missed by UK-side accountants who handle Self Assessment only, and by US-side preparers unfamiliar with UK product structures. The Streamlined Filing Compliance Procedures for non-wilful non-compliance cover both: three years of amended Forms 1040 plus six years of FBARs, no penalty for qualifying foreign-resident filers. The Streamlined procedures remain available only to genuinely non-wilful taxpayers, and the certification is signed under penalty of perjury.

11. Worked example: £100,000 UK salary, US citizen

Take a US citizen UK-resident in 2026/27 earning a flat £100,000 of UK salary, no other income, no UK pension contribution, single filer for US purposes, standard deduction. The UK side is computed by the salary calculator engine that powers this site; the US side is illustrative under FTC.

UK side (2026/27)

• Gross: £100,000
• Personal Allowance: £12,570 (fully tapered out at £100,000 income; at £100,000 exactly the PA is still preserved, but at any income above the taper begins at £1 of allowance lost per £2 of income)
• Income Tax: £27,432
• Employee National Insurance (Class 1): £4,011
• Take-home: £68,557
• UK effective rate: 31.4% (Income Tax + employee NI as a share of gross)

The 60 percent marginal trap between £100,000 and £125,140 (Personal Allowance taper) does not bite at exactly £100,000 - it bites on every pound above. See the £100k tax trap explainer for the full mechanics.

US side (2026/27, FTC method)

Convert the salary to USD at the IRS yearly average exchange rate (illustrative 1.27 USD per GBP): $127,000 gross income on Form 1040 line 1. Standard deduction for single filer ($14,600 indexed). Taxable income approximately $112,400. US federal tax under 2025 brackets (single filer, illustrative): roughly $19,300 to $19,800 before credits. UK Income Tax in USD at the same FX: approximately $34,839. UK NI is not creditable for US FTC under IRC Section 901 (it is social security, not income tax, despite functioning economically as such in the UK). Foreign Tax Credit limitation calculation on Form 1116 general category: UK income tax paid $34,839 comfortably exceeds the US tax of approximately $19,500 on the same income. Result: zero net US federal tax owed, with excess FTC of roughly $8,000 carried forward 10 years.

The Net Investment Income Tax (3.8 percent on net investment income above the threshold) does not apply here because the income is earned, not investment. The Additional Medicare Tax of 0.9 percent on wages above $200,000 single does not apply either. If the same taxpayer also had $30,000 of UK dividend income, the UK side would tax it at 33.75 percent higher-rate dividend (£10,125, roughly $12,860), the US side at qualified-dividend rates of 15 percent (about $4,500), and the passive-basket FTC would absorb the US tax with excess credit of about $8,360 carrying forward.

For comparison the FEIE alternative would exclude the first $130,000 of earned income, leaving zero taxable US income on Form 1040, but generates no FTC carry-forward and loses access to the Child Tax Credit refundable portion (which matters at lower incomes with qualifying children). At £100,000 of salary FTC strictly dominates because the credit fully neutralises the US liability and the carry-forward has option value. At a £60,000 salary - calculator output £45,357 take-home, UK tax £11,432 - FEIE becomes more competitive because UK effective rate has not yet outrun US marginal rates, and the carry-forward value is lower.

12. Renouncing US citizenship and state-tax exposure

US citizenship renunciation has become a common topic in cross-border tax planning as compliance costs and PFIC complications mount. The procedural steps: book an appointment at a US embassy or consulate (post-pandemic backlog reached 2+ years in London, currently around 6 months), pay the $2,350 consular fee, take the Oath of Renunciation, receive a Certificate of Loss of Nationality a few months later, and file a final Form 1040 plus Form 8854 for the year of renunciation. Until the Certificate is issued and the State Department processes the case, the taxpayer remains a US citizen.

The financial sting comes from IRC Section 877A, the Exit Tax for Covered Expatriates. You are a Covered Expatriate if any of three tests apply on the expatriation date: (a) net worth of $2 million or more, including the present value of all retirement and pension interests, vested options, and beneficial interests in trusts; (b) average annual net US income tax liability for the prior 5 years above an indexed threshold (around $206,000 for 2026); or (c) failure to certify on Form 8854 that all federal tax obligations for the prior 5 years have been met. Covered Expatriates face a mark-to-market deemed sale of worldwide assets on the day before expatriation, with the first $890,000 (2026 indexed) of gain excluded. Specified tax-deferred accounts (US retirement plans, foreign pension plans subject to election) face a separate regime that taxes future distributions at a flat withholding rate. Gifts and bequests from Covered Expatriates to US persons trigger a separate transfer tax under Section 2801 at the highest applicable estate-tax rate.

For a green card holder the same exit-tax exposure applies on formal relinquishment if the holder was a long-term resident (lawful permanent resident for at least 8 of the last 15 tax years). The strategic implication is that a UK-resident green card holder approaching the 8-year mark should evaluate whether to abandon the card before crossing the threshold, particularly where net worth is approaching the $2 million test.

State tax persistence after the move

US state tax is the second invisible variable. Federal renunciation does not change state residency analysis - and several states (most notoriously California, but also New York, Virginia, New Mexico, South Carolina, Maryland and others) apply domicile-based tests that can keep a former resident on the state tax rolls for years after physical departure. California's Franchise Tax Board uses a "closest connections" test that examines bank accounts, driver's license, voter registration, real property ownership, vehicle registration, professional licenses, where children attend school, and where the taxpayer files their federal return from. Severing California domicile is a multi-step process that benefits from documented contemporaneous evidence: sell or rent out California real property, cancel California driver's license and voter registration, file a part-year return for the year of departure, and avoid extended visits back in subsequent years.

The cleanest approach is to relocate to a no-state-income-tax state (Florida, Texas, Tennessee, Washington, Nevada, South Dakota, Wyoming, Alaska, New Hampshire excludes wages but taxes interest and dividends) for a year or more before the international move, establishing residence there in the intervening period and thereby severing the original state's claim. This is not always feasible practically but is the cleanest paper trail when it is.

Methodology and sources

UK numbers on this page (worked example Section 11) are computed by the salary calculator engine that powers salarytax.uk, drawing rates from the 2026/27 HMRC ruleset cited at the foot of the page. The engine is verified against HMRC worked examples in the golden-fixtures test suite. Inputs: single individual, England rest-of-UK bands, no pension contribution, no student loan, no benefits in kind, no bonus.

US figures are illustrative under 2024 / 2025 IRS schedules and the 2026 indexed limits announced in Rev. Proc. 2025-32 (FEIE $130,000) and the corresponding inflation-adjusted penalty amounts. The illustrative FX rate of 1.27 USD per GBP is a 2026-05-25 mid-market reference - actual conversion for US filings uses the IRS yearly average rate published in early February of the following year. None of the numbers in this guide are personal advice; verify against a current dual-qualified adviser.

Source list:

• IRS: Foreign Earned Income Exclusion (retrievedOn 2026-05-25)
• IRS: Foreign Tax Credit (retrievedOn 2026-05-25)
• IRS: Publication 519, US Tax Guide for Aliens (retrievedOn 2026-05-25)
• IRS: Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad (retrievedOn 2026-05-25)
• IRS: About Form 2555 (FEIE)
• IRS: About Form 1116 (FTC)
• IRS: About Form 8938 (FATCA)
• IRS: About Form 8621 (PFIC)
• FinCEN: Report of Foreign Bank and Financial Accounts (FBAR)
• US Treasury: International Tax Policy
• HMRC: UK-USA Double Taxation Convention (2001)
• Social Security Administration: US-UK Totalization Agreement
• HMRC: National Insurance if you go abroad
• HMRC: RDR3: Statutory Residence Test

Frequently asked questions

Do US citizens living in the UK have to file US tax returns?

Yes. The United States taxes its citizens and green card holders on worldwide income regardless of where they live. A US citizen resident in London still files Form 1040 every year with the IRS, declaring UK salary, UK rental income, UK savings interest and UK capital gains alongside any US-source income. The UK side filing (Self Assessment SA100 if you meet a filing trigger, plus SA109 if you claim non-resident or treaty positions) is separate. Most middle-income dual filers owe zero US tax once Foreign Earned Income Exclusion or Foreign Tax Credit is claimed, but the filing obligation itself is unconditional.

What is the Foreign Earned Income Exclusion (FEIE)?

The FEIE lets a qualifying US citizen or resident alien exclude up to $130,000 (2026 limit) of foreign earned income from US federal income tax. You claim it on Form 2555 attached to Form 1040. To qualify you must have foreign earned income, a tax home in a foreign country, and meet either the Bona Fide Residence Test (a full UK tax year as a UK resident, broadly aligned with the SRT) or the Physical Presence Test (330 full days outside the US in any 12-month period). FEIE only covers earned income - salary, self-employed profit - not dividends, interest, rent, pensions or capital gains. A separate housing exclusion is available on top, capped by city.

Is the Foreign Tax Credit (FTC) better than FEIE for UK residents?

For most UK-resident US citizens at middle-to-higher incomes the FTC is the cleaner choice. UK effective tax rates above £50,270 routinely exceed US federal rates, so FTC carries forward more excess credit and avoids the FEIE pitfalls (stacking rule, AMT interaction, and the loss of certain credits like the Child Tax Credit refundable portion). FTC is claimed on Form 1116 with categories for general income, passive income and re-sourced by treaty. FEIE typically wins for lower earners in low-tax jurisdictions; in the UK the breakeven is usually around £40,000 to £50,000 of earned income for a single filer with no children, lower if you have qualifying children for the Child Tax Credit.

What is the UK-US Totalization Agreement?

The 1984 US-UK Totalization Agreement (Social Security Agreement) prevents dual contributions to UK National Insurance and US Social Security on the same earnings. A US citizen working in the UK pays UK NI and is exempt from US FICA on the same wages; a UK national on temporary assignment to the US for under 5 years can stay in UK NI with a Certificate of Coverage (form CA3837 from HMRC) and avoid US FICA. Self-employed dual filers default to the country of residence. The agreement also lets you combine periods of coverage to qualify for benefits in either system, though benefit amounts are still computed pro rata on each country's covered earnings.

Why are UK ISAs a tax trap for US citizens?

UK ISAs are tax-free wrappers under UK law - but the United States does not recognise the wrapper. A Stocks and Shares ISA holding UK or non-US-domiciled funds is treated by the IRS as a regular taxable account, and the underlying funds are almost always classified as Passive Foreign Investment Companies (PFICs). PFIC reporting on Form 8621 is punishing: the default excess distribution regime taxes gains at the highest ordinary income rate plus an interest charge on the deferred tax, retroactive to the earliest holding year. Cash ISAs and Lifetime ISAs holding cash avoid PFIC but the interest is still US-taxable. Junior ISAs in a child's name (if the child is a US citizen) create the same issue.

How is a UK pension taxed by the US?

UK employer pensions broadly enjoy treaty parity with US-qualified plans under Article 18 of the 2001 UK-US treaty. Employer and employee contributions to UK occupational and personal pensions are generally not currently US-taxable, and growth inside the plan is deferred. The 25% Pension Commencement Lump Sum (PCLS, the tax-free lump sum under UK rules) is the main pinch point: the IRS position is that the 25% PCLS is fully US-taxable as a pension distribution, with no treaty exemption, because the US does not recognise a tax-free lump sum within a foreign pension. UK State Pension is taxable in the country of residence under the treaty saving clause carve-out, so US-resident UK retirees report it on Form 1040 line 5; UK-resident US citizens report US Social Security only in the UK.

What is FBAR and who has to file it?

FBAR (FinCEN Form 114, Report of Foreign Bank and Financial Accounts) must be filed by any US person with signature authority or financial interest in foreign accounts whose aggregate maximum balance exceeded $10,000 at any point in the calendar year. Filed online through the BSA E-Filing System, not with Form 1040 - separate system, separate deadline (15 April with automatic extension to 15 October). Penalties for non-wilful failure are up to $10,000 per violation per year (inflation-adjusted); wilful failures can hit the greater of $100,000 or 50 percent of the account balance. Common gotchas: joint UK accounts with a non-US spouse, UK pension accounts, ISAs and signature authority over an employer's UK accounts.

How does Form 8938 differ from FBAR?

Form 8938 (Statement of Specified Foreign Financial Assets) is filed with Form 1040 under FATCA. Thresholds are higher than FBAR: $200,000 end-of-year or $300,000 any-time during the year for a single filer living abroad ($400,000 / $600,000 for joint). The asset universe is broader than FBAR - it captures financial accounts plus foreign securities held outside accounts, foreign-issued life insurance with cash value, certain interests in foreign entities. Penalties: $10,000 for failure to file, rising to $50,000 for continued failure, plus a 40 percent accuracy-related penalty on understatements attributable to undisclosed assets. Filing 8938 does not relieve the FBAR obligation - if both apply, both must be filed.

What is the PFIC trap for non-US mutual funds?

A Passive Foreign Investment Company is any non-US corporation where 75 percent or more of gross income is passive, or 50 percent or more of assets produce passive income. UK-domiciled UCITS funds, OEICs, unit trusts and most exchange-traded funds traded on the London Stock Exchange meet this test by default. Holding them as a US citizen triggers Form 8621 reporting plus tax under one of three regimes: the punitive excess distribution default (highest ordinary rate plus interest on deferred tax), Qualified Electing Fund (requires the fund to provide annual statements that almost no non-US fund does), or mark-to-market for publicly traded PFICs (annual recognition of unrealised gain at ordinary rates). The clean workaround is to hold US-domiciled ETFs in a US brokerage account or a UK Self-Invested Personal Pension (SIPP) that holds them.

How does the UK-US treaty tie-breaker work?

The 2001 UK-US Income Tax Convention contains Article 4 tie-breaker rules that resolve dual residence. The OECD-pattern tests apply in order: permanent home, centre of vital interests (economic and personal ties), habitual abode, and nationality. The treaty saving clause in Article 1 paragraph 4 means the US reserves the right to tax its citizens as if the treaty did not apply, with specified carve-outs (notably pensions under Article 17 and 18, government service, students, teachers). For a US citizen UK-resident under the SRT and treaty-resident in the UK under the tie-breaker, the practical effect is: the UK taxes worldwide income as the residence country, the US taxes worldwide income too, and the treaty plus FTC plus totalization resolves the overlap.

What about US state taxes after I move to the UK?

Federal-only tax planning misses a major variable. Some US states (notably California, New York, Virginia, New Mexico, South Carolina) apply a strict domicile-based test rather than residence and continue to claim you as a state taxpayer for years after you physically leave, unless you affirmatively sever state ties. California's "safe harbor" requires an absence under an employment contract of 546+ days, with strict day-count limits on California visits. Other states (Florida, Texas, Washington, Nevada, South Dakota) have no state income tax so the question is moot. Severance steps: file a part-year resident return for the year of departure, change driver's license and voter registration, sell or rent out US real property, close state-licensed professional registrations, and document the move with utility shutoffs and lease termination.

Can I renounce US citizenship to escape filing?

Yes, but it is costly and procedurally heavy. Renunciation costs $2,350 in consular fees and requires an oath at a US embassy or consulate. Covered Expatriates (net worth $2 million plus, or 5-year average US tax liability above an indexed threshold of around $206,000, or non-compliance with the last 5 years of filing) trigger the Exit Tax under IRC Section 877A - a mark-to-market deemed sale of worldwide assets on the day before expatriation, with a $890,000 (2026) exclusion. Specified tax-deferred accounts (US retirement plans) face a separate regime. After renunciation US-source income (US property rental, US dividends, US Social Security) remains US-taxable for life under the non-resident alien rules. Five years of clean US filing before renouncing is the minimum baseline most advisers require.

Related

• UK salary calculator
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• UK tax vs EU comparison
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• UK pension tax relief guide
• Methodology and HMRC sources