US-UK Double Taxation – Do I Pay Taxes Twice?

Understanding tax obligations for US citizens and UK residents with cross-border income.

How Does Double Taxation Work Between the US and UK?

For individuals earning income in both the US and UK, understanding how double taxation works is essential to avoid overpayment and ensure compliance with both tax authorities. While the US taxes its citizens on worldwide income, the UK applies taxation based on residency rules, often creating dual tax obligations.

Why the US Taxes Citizens on Worldwide Income

The United States follows a citizenship-based taxation system, meaning US citizens and Green Card holders must report and pay taxes on worldwide income, regardless of where they live. Income from employment, rental properties, dividends, or capital gains must be reported to the IRS.

All US taxpayers must file Form 1040 annually, even if they live abroad and even if their income is taxed in another country. Those with foreign financial accounts exceeding $10,000 at any point in the year must also file FBAR (Foreign Bank Account Report), and those with foreign assets above IRS thresholds may need to submit FATCA (Foreign Account Tax Compliance Act) disclosures.

As a result, US citizens in the UK must file tax returns in both countries, even if their income is already taxed by HMRC.

UK Taxation Based on Residency Rules

Unlike the US, the UK taxes individuals based on residency rather than citizenship. Tax residency is determined by the Statutory Residence Test (SRT), which assesses:

• Days spent in the UK – Spending 183+ days in a tax year makes you a UK tax resident.

• UK ties and connections – A permanent home, family, or significant work presence in the UK can trigger tax residency.

• Split-Year Treatment – Those moving into or out of the UK mid-tax year may only be taxed as UK residents for part of the year.

If you are a UK tax resident, you must report worldwide income to HMRC. If you are also required to file US taxes, this could potentially lead to dual taxation.

When Do You Have to File Taxes in Both Countries?

A taxpayer may be required to file tax returns in both the US and UK if:

1. You are a US citizen or Green Card holder living in the UK – You must file a US tax return annually, even if you owe no US taxes.

2. You are a UK tax resident with US-sourced income – If you earn dividends, rental income, or wages from a US employer, you may need to file a US tax return (Form 1040 or 1040NR).

3. You are an expat moving between the US and UK – If you meet UK residency thresholds and still qualify as a US taxpayer, you must file in both countries.

4. You exceed US foreign asset reporting limits – If your foreign bank accounts exceed $10,000, you must file FBAR (FinCEN Form 114), and if assets exceed $200,000 (single filers), FATCA reporting applies.

   
   

How the US-UK Tax Treaty Helps Avoid Double Taxation

The US-UK Tax Treaty is designed to prevent double taxation by outlining which country has the primary right to tax different types of income. By using tax treaty provisions, Foreign Tax Credits (FTC), and the Foreign Earned Income Exclusion (FEIE), individuals can reduce their tax burden while remaining compliant.

The Role of the US-UK Tax Treaty in Tax Relief

The US-UK Tax Treaty ensures that taxpayers are not taxed on the same income by both countries. It defines which types of income are taxable in the US, the UK, or both, including:

• Employment income – Generally taxed in the country where the work is performed.

• Dividends and capital gains –These are typically taxed in the taxpayer’s country of residence, with treaty provisions limiting double taxation.

• Pension income – May be taxed in the country where the pension was earned, with tax relief options available under the treaty

• Rental income – This is taxed in the country where the property is located, but FTC can help offset taxes owed.
  
  

How Foreign Tax Credits (FTC) Work for US Filers

US citizens and Green Card holders living in the UK can use the Foreign Tax Credit (FTC) to reduce their US tax liability by offsetting income taxes paid to the UK. However, FTC does not apply to the Net Investment Income Tax (NIIT) since NIIT is considered a Medicare surtax rather than a standard income tax.

Taxpayers must decide between claiming the FTC or using the Foreign Earned Income Exclusion (FEIE), as both cannot be applied to the same income. To prevent double taxation, FTC must be reported on IRS Form 1116, ensuring that UK taxes paid on eligible income offset US tax obligations.

The Foreign Earned Income Exclusion (FEIE) and When It Applies

The Foreign Earned Income Exclusion (FEIE) allows US expats to exclude up to $120,000+ (2024 limit) of foreign-earned wages from US taxation, provided they:

1. Meet the Bona Fide Residence Test – Live in a foreign country for an entire calendar year.

2. Meet the Physical Presence Test – Spend at least 330 full days outside the US within 12 months.

3. Earn income from employment or self-employment abroad (investment and rental income are NOT covered by FEIE).

FEIE is reported on IRS Form 2555 and can significantly reduce US tax liability for qualifying expats.

Tax Treaty Tie-Breaker Rules for Dual Residents

For individuals who qualify as tax residents of both the US and UK, the US-UK Tax Treaty includes tie-breaker rules to determine which country has primary taxing rights based on:

Permanent home - The country where the taxpayer has a permanent place of residence.

Center of vital interests - Where the individual’s personal and economic ties are strongest.

Habitual abode - The country where the taxpayer spends most of their time.

Nationality - If previous factors do not resolve residency, nationality may determine the tax residency status.

Mutual Agreement Procedure (MAP) - If residency remains unclear, tax authorities from both countries consult to resolve the issue.

Common Income Types and How They Are Taxed in the US & UK

Employment & Self-Employment Income

Salaries and self-employment income are generally taxed in the country where the work is performed. However, US citizens and Green Card holders must still report all worldwide income to the IRS, even if they pay taxes in the UK.

For self-employed individuals, taxation depends on where services are provided and whether they qualify for tax treaty relief. Social Security contributions may also be required in both countries, though the US-UK Totalization Agreement determines which system applies.

Rental Income from US or UK Properties

Rental income is taxable in the country where the property is located. This means:

US rental income must be reported to the IRS (on Form 1040) and may also be taxed in the UK if the owner is a UK tax resident.

UK rental income is taxed by HMRC but must also be reported to the IRS by US citizens.

Capital Gains Taxation on Stocks & Real Estate

Capital gains tax is triggered when assets such as stocks or real estate are sold for a profit.

In the US, capital gains tax rates range from 0% to 20%, depending on income and how long the asset was held.

In the UK, gains on properties and investments are subject to Capital Gains Tax (CGT), with rates of 18% or 24% for residential property and 10% or 20% for other assets.

US citizens must report worldwide capital gains on their IRS tax return, while UK residents must report UK-based gains to HMRC. The US-UK Tax Treaty does not provide full relief for capital gains, meaning taxpayers may need to use FTC to offset potential double taxation.

 Pension and Social Security Taxation for Expats

US and UK pension schemes are treated differently under each country's tax system:

US pensions (401(k), IRA) for UK residents 

The UK may tax withdrawals, even if they were tax-deferred in the US.

UK pensions (SIPP, employer pensions) for US citizens 

Contributions and growth may still be taxable in the US, even if they are tax-deferred in the UK.

Social Security benefits are taxed based on residency. Under the US-UK Tax Treaty, only the country of residence has taxation rights on Social Security payments.

Dividends and Investment Income – Which Country Taxes You?

Dividend and investment income taxation varies based on residency and tax treaty provisions

US citizens must report all worldwide investment income and may owe Net Investment Income Tax (NIIT) at 3.8% if they exceed income thresholds.

UK residents pay tax on dividends at rates between 8.75% and 39.35%, depending on their income level.

The US-UK Tax Treaty reduces withholding taxes on dividends, but foreign tax credits (FTC) must be used to avoid double taxation.

What If There Is No Tax Treaty Protection?

While the US-UK Tax Treaty helps prevent double taxation, there are situations where gaps in treaty provisions or tax mismatches still result in taxation in both countries. Without proper tax planning, individuals may face higher tax liabilities and compliance challenges.

Situations Where Double Taxation May Still Apply

Even with a tax treaty in place, certain types of income may still be taxed in both the US and UK. Common scenarios include:

Capital gains taxation 

The US and UK do not have aligned tax treaty provisions on capital gains, meaning taxpayers may owe taxes in both countries.

Foreign pensions 

US tax law does not always recognize UK pension tax deferrals, leading to potential double taxation.

Passive income taxation – Rental income, dividends, and royalties may be taxed at different rates in both countries, creating potential mismatches in tax liabilities.

Trust and estate taxation 

The US and UK have differing rules on trusts and estate planning, which can lead to unexpected tax exposure in both jurisdictions.

Without tax treaty relief, taxpayers must explore alternative ways to mitigate double taxation through available US and UK tax provisions.

How gaps in the tax treaty can lead to taxation in both countries.

When Foreign Tax Credits Do Not Fully Offset Tax Liability

The Foreign Tax Credit (FTC) is a key mechanism to offset foreign taxes paid, but it does not always eliminate double taxation.

Tax rates differ between the US and UK 

If UK taxes are lower than US taxes, FTC may not fully cover US tax obligations.

Income is taxed in different years 

The US and UK have different tax years, leading to timing mismatches in tax liabilities.

FTC does not apply to certain taxes 

The Net Investment Income Tax (NIIT) in the US is classified as a Medicare tax, meaning FTC cannot be used to offset it.

Carryforward and carryback limitations 

If taxpayer cannot fully use FTC in a given year, they may need to carry it forward, which may not always align with future tax liabilities.

How to Minimize Double Taxation With Strategic Tax Planning

To avoid excessive taxation, several steps can be taken: 

Optimizing income classification 

Structuring income as employment wages instead of dividends or capital gains may result in lower taxation in certain cases.

Using tax-advantaged accounts 

US expats can contribute to 401(k)s or IRAs, while UK residents can invest in ISAs or UK pensions to shield income from taxation.

Coordinating tax filing with foreign income timing 

Matching income recognition across tax years can help maximize FTC benefits.

Estate and trust planning 

Understanding differences in inheritance tax and estate planning rules can helpyou avoid unnecessary double taxation.

How to Stay Compliant and Avoid Tax Penalties

When to File US and UK Tax Returns to Stay Compliant

Taxpayers with income in both the US and UK must adhere to the filing deadlines for each country to avoid penalties:

US Tax Filing Deadlines:

UK Tax Filing Deadlines:

Failing to file on time can result in late fees, interest charges, and potential audits from HMRC or the IRS

Reporting Foreign Bank Accounts (FBAR & FATCA Compliance)

US citizens and Green Card holders with foreign financial accounts exceeding certain thresholds must file additional reports to remain compliant with US tax laws.

Foreign Bank Account Report (FBAR) Requirements:

Who must file? 

Any US person with foreign financial accounts exceeding $10,000 at any time during the year.

What to report? 

Bank accounts, brokerage accounts, pensions, and trusts held outside the US.

How to file? 

Submit FinCEN Form 114 electronically through the BSA e-filing system.

Need Expert Guidance on US-UK Double Taxation?

Our team specialise in in cross-border tax compliance, foreign tax credits, and treaty relief strategies to help you minimize tax liabilities and stay compliant.

Schedule a consultation with our US-UK double taxation specialists.