US UK Income Tax Treaty – Avoid Double Taxation Cross Border

Why You Might Be Losing Thousands

Key Updates for 2025

Before we dive into how the treaty actually works, there are some major changes you need to know about this year.

The UK non-dom tax status officially ended on April 6, 2025. This shift means UK tax residents with interests in foreign structures now face comprehensive UK taxation on their worldwide income and gains. The government replaced the non-dom regime with a new four-year foreign income and gains (FIG) exemption, but this applies only to individuals who have been non-UK tax resident for at least 10 years before arriving. If you’re a US citizen living in the UK, you might now face UK tax on LLC income previously sheltered under the remittance basis. That creates some new compliance headaches.

The US also withdrew from the OECD global tax deal in January 2025, signalling a more go-it-alone approach to international taxation. The US-UK treaty remains in force, but this development underscores the need to understand bilateral provisions rather than rely on evolving multilateral frameworks.

For 2025, the Foreign Earned Income Exclusion cap stands at $130,000 per qualifying taxpayer. UK tax rates for 2025/26 remain progressive: England, Wales, and Northern Ireland residents pay 0% to 45%, while Scotland maintains rates from 0% to 47%. The personal allowance remains £12,570 for those earning less than £125,140, and dividend income is taxed from 0% to 39.35%.

Moving between the United Kingdom and the United States brings different income tax rates and filing procedures that demand careful navigation. Many expats assume the US-UK tax treaty automatically shields them from double taxation. That assumption leads to expensive mistakes every tax season.

Take Sarah, who relocated from London to New York for a career opportunity. She kept her UK rental property generating £24,000 annually, thinking the treaty exempted her from reporting it to the IRS. Without proper documentation under the Non-Resident Landlord Scheme, her letting agent withheld 20% UK tax. Meanwhile, the IRS assessed US tax on the same income because Sarah hadn’t claimed foreign tax credits correctly. By the time she got professional help, she’d paid tax twice on £24,000 over three years. She lost roughly £14,400 that proper planning could have saved.

Mike’s situation shows another common trap. Moving from California to London for a tech position, he kept his US brokerage account, generating $15,000 in annual dividends. He filed his US return claiming the exclusion but forgot that UK residents pay tax on worldwide investment income. HMRC assessed UK tax on the dividends, but Mike couldn’t claim relief because he hadn’t reported the US tax properly on his UK self-assessment return. He eventually got it sorted with professional help, but not before penalties and interest piled up over two tax years.

What Is the US UK Income Double Taxation Agreement (DTA)?

What Is the US-UK Tax Treaty?

The Convention between the United States and the United Kingdom for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains took effect on 31st 31 March 2003. The treaty divides taxing rights between the two countries for different income types while providing mechanisms to prevent double taxation through credits and exemptions.

The treaty covers US federal income taxes and UK income tax, corporation tax, and capital gains tax. It establishes residency rules, defines permanent establishments for business taxation, and sets reduced withholding rates for cross-border payments. Article 26’s mutual agreement procedure allows taxpayers to request resolution of disputes through direct consultation between the IRS and HMRC, bypassing lengthy court proceedings.

You need to understand Article 23, the limitation-on-benefits provision designed to prevent treaty shopping. This anti-abuse rule denies treaty benefits to entities lacking a substantial connection to either country. Only persons meeting specific ownership, business activity, or derivative benefits tests can access reduced withholding rates and other treaty advantages.

The Savings Clause and Its Exceptions

Here’s something that surprises many US citizens: the Savings Clause. Found in Article 1(4), this rule preserves the US government’s right to tax its citizens and residents as if the treaty didn’t exist. The United States maintains citizenship-based taxation, meaning US citizens living anywhere in the world must continue filing returns and paying tax on worldwide income.

But the Savings Clause includes important exceptions. Article 17(1)(b) protects UK pension lump-sum withdrawals, exempting them from US taxation when they qualify as tax-free in the UK. Article 18 governs Social Security payments, allowing US Social Security received by UK residents to be taxed only in the UK. These exceptions represent rare instances in which US citizens can claim a complete exemption from US tax on specific types of income.

Here’s an example: if you’re a US citizen living in London receiving £100,000 from a UK pension, you can withdraw £25,000 as a tax-free lump sum under UK rules. Thanks to Article 17(1)(b), this £25,000 remains exempt from US taxation as well, provided you properly claim the treaty position on Form 8833. Without filing this disclosure form, the IRS may challenge your position and assess tax plus penalties.

The distinction between US citizens and non-citizen residents matters significantly. A UK citizen residing in the US on a visa can often access full treaty benefits that override US domestic law. Once that same person becomes a US citizen or green card holder, the Savings Clause kicks in, dramatically limiting available treaty protections. Many newly naturalised citizens discover this harsh reality only after receiving IRS notices for unreported foreign income.

Article No.	Title	Brief Description	Key % / Rates / Forms to Reference
1	General Scope	Defines the persons and taxes covered, includes a “saving clause” for U.S. citizens/residents. (U.S. Department of the Treasury)	No direct rate; note: U.S. citizens may still be taxed as if treaty didn’t apply (saving clause) (Freeman Law)
2	Taxes Covered	Specifies which taxes of each country are covered by the treaty. (U.S. Department of the Treasury)	N/A
3	General Definitions	Defines terms like “resident”, “company”, etc., for treaty purposes. (IRS)	N/A
4	Residence	Defines who is a resident of which Contracting State for treaty purposes (tie-breaker rules)	N/A
5	Permanent Establishment	Sets out when an enterprise of one state has a PE in the other state so that business profits may be taxed there.	N/A
6	Income from Immovable Property	Taxation rights for real property income (e.g., rental) situated in the other state. (U.S. Department of the Treasury)	N/A
7	Business Profits	Profits of an enterprise of one state are taxable only in that state unless attributable to a PE in the other state. (GOV.UK)	N/A
8	Shipping & Air Transport	Profits from international shipping/air transport are taxable only in the state of residence of the enterprise. (GOV.UK)	N/A
9	Associated Enterprises	Deals with transfer-pricing adjustments and profits between related enterprises. (GOV.UK)	N/A
10	Dividends	Sets maximum withholding tax rates in the source state on dividends paid by a resident of one state to a resident of the other. (U.S. Department of the Treasury)	– 5% of gross if the beneficial owner holds ≥10% of the voting power of the company paying the dividend. (U.S. Department of the Treasury)– 15% in other cases. (U.S. Department of the Treasury)
11	Interest	Interest arising in one state and beneficially owned by a resident of the other state is generally taxable only in the resident state. (U.S. Department of the Treasury)	Typically 0% withholding in the source state (i.e., exempt) under paragraph 1. (U.S. Department of the Treasury)
12	Royalties	Royalties arising in one state and beneficially owned by a resident of the other state are taxable only in the resident state. (U.S. Department of the Treasury)	Typically 0% withholding in source state (i.e., exempt) under paragraph 1. (Steptoe)
13	Capital Gains	Gains from the alienation of property are generally taxable only in the state of residence, with exceptions (e.g., real property situated in the other state). (U.S. Department of the Treasury)	N/A
14	Income from Employment	Specifies taxation rules for salaries, wages, etc., when employment is exercised in one or other state; includes 183-day rule. (U.S. Department of the Treasury)	N/A
15	Directors’ Fees	Deals with taxation of directors’ fees paid to a resident of one state for services rendered in the other. (U.S. Department of the Treasury)	N/A
16	Entertainers & Sportsmen	Provides taxing rights for income of entertainers/sportsmen exercising activities in the other state; contains exception for small receipts. (U.S. Department of the Treasury)	N/A
17	Pensions, Social Security, Annuities, Alimony & Child Support	Sets taxation rights for private pensions, social security payments, annuities, etc. (Bright!Tax Expat Tax Services)	– Pension distributions: taxable only in the state of residence of the recipient (Art 17(1)(b)). (Bright!Tax Expat Tax Services)
18	Pension Schemes	Special rules for pension schemes established in one state and participants resident in the other. (U.S. Department of the Treasury)	N/A
22	Other Income	Addresses items of income not dealt with in other Articles (residual category). (U.S. Department of the Treasury)	N/A
23	Limitation on Benefits (LOB)	Anti-treaty shopping provisions; sets tests for eligibility for treaty benefits. (KPMG)	N/A (but key for eligibility)
24	Relief from Double Taxation	How double taxation is relieved (credit method, exemption, etc.). (IRS)	N/A
25	Non-discrimination	Prevents discrimination in taxation of residents of one state by the other state. (GOV.UK)	N/A
26	Mutual Agreement Procedure	Establishes competent authorities and how disagreements are resolved. (GOV.UK)	Form reference: when claiming treaty-based return positions, must consider Form 8833 for U.S. taxpayers. (IRS)

How to Avoid Double Taxation

The treaty provides several mechanisms to prevent paying full tax to both governments on the same income. Understanding which tools apply to your situation requires analysing your residency status, income sources, and filing obligations in both countries.

Foreign Tax Credit vs Foreign Earned Income Exclusion

US taxpayers have two primary methods to reduce double taxation: the Foreign Tax Credit (FTC) and the Foreign Earned Income Exclusion (FEIE). These aren’t treaty provisions but rather US tax code benefits that work alongside the treaty to minimise your total tax burden.

The Foreign Tax Credit lets you offset foreign income taxes paid against your US tax liability. If you pay £30,000 in UK income tax on employment income, you can claim that amount as a credit on Form 1116 attached to your US return. The credit is limited to the US tax that would apply to that same income, preventing refunds but ensuring you never pay more than the higher of the two countries’ tax rates.

The Foreign Earned Income Exclusion lets qualifying taxpayers exclude up to $130,000 (for 2025) of foreign earned income from US taxable income. You must meet either the Physical Presence Test or the Bona Fide Residence Test to qualify. You can’t claim both the FTC and FEIE on the same income, so you need a strategic analysis of which produces better results.

Physical Presence Test

The Physical Presence Test requires you to be physically present in a foreign country or countries for at least 330 full days during any 12-month period. The days don’t need to be consecutive, and the 12-month period can begin on any day, not just January 1st. Each partial day spent traveling counts as a US day unless you’re in transit between foreign countries.

Let’s say you arrived in London on March 15, 2024, and stayed through the end of February 2025 with only brief US visits totaling 25 days. You’d satisfy the test for a 12-month period beginning March 15, 2024. You could then claim the FEIE for income earned during that 12-month period, prorated to match your actual qualifying days in any given tax year.

Bona Fide Residence Test

The Bona Fide Residence Test requires you to be a resident of a foreign country for an uninterrupted period that includes an entire tax year (January 1 to December 31). This test is more subjective, examining factors like whether you maintain a permanent home abroad, your intention regarding length of stay, and ties to the foreign country versus the US.

Unlike the Physical Presence Test, brief trips back to the US don’t automatically disqualify you. If you moved to London in July 2023, established a permanent home, got a long-term work visa, and enrolled children in local schools, you might qualify as a bona fide UK resident starting January 1, 2024, even if you visit family in the US for a few weeks each year. However, maintaining a US home that remains available for your return or taking temporary assignments abroad while your employer expects your return to the US weighs against bona fide residence.

Calculating and Claiming Relief

When you qualify for the FEIE, you file Form 2555 with your Form 1040, excluding up to $130,000 of earned income. Any amount above this exclusion remains taxable, but you can claim the Foreign Tax Credit for foreign taxes paid on that excess. You may also qualify for the foreign housing exclusion or deduction to exclude or deduct certain housing costs exceeding a base amount.

For investment income like dividends, interest, and capital gains, the FEIE never applies since it covers only earned income from employment or self-employment. You must use the Foreign Tax Credit on Form 1116 to reduce double taxation on passive income. This requires calculating your foreign tax credit limitation, often with separate calculations for different income categories.

UK residents claiming relief for US taxes paid report foreign income on their Self-Assessment tax return and claim relief using HMRC’s helpsheet HS263 for calculating foreign tax credit relief. The credit is limited to the lower of the foreign tax paid or the UK tax liability on that income, preventing refunds of foreign taxes but ensuring you pay no more than the UK rate on properly reported income.

Form 8833: Treaty-Based Return Position Disclosure

Many taxpayers overlook Form 8833, not realizing that claiming certain treaty benefits requires explicit disclosure to the IRS. This form must be attached to your tax return whenever you take a treaty-based position that overrides an Internal Revenue Code provision.

Common scenarios requiring Form 8833 include claiming that UK pension income is exempt from US tax under Article 17, asserting that a UK pension lump sum qualifies for treaty exemption, claiming reduced withholding rates that differ from statutory rates, or taking the position that you’re not a US resident due to the treaty’s tiebreaker rules despite meeting the substantial presence test.

Say you’re a US citizen receiving a £25,000 tax-free lump sum from your UK pension. You must file Form 8833 with your Form 1040 explaining that Article 17(1)(b) of the US-UK treaty exempts this lump sum from US taxation. The form requires a detailed explanation of the treaty article, the IRC provision being overridden (typically Section 61 requiring all income to be reported), and the amount of income affected.

Failure to file Form 8833 when required triggers a $1,000 penalty per failure, though the IRS may waive penalties for reasonable cause. The form also serves an important protective function: by disclosing your treaty position upfront, you reduce the risk of IRS challenges years later after the statute of limitations for amendments has expired.

Pension Planning Across Borders

Retirement accounts create some of the most complex cross-border tax issues because the US and UK structure pensions differently and apply contrasting tax timing rules.

UK Pensions and US Taxation

The UK system offers several pension types: workplace pensions, personal pensions, and the State Pension. UK pensions typically grow tax-free, and individuals can withdraw up to 25% as a tax-free lump sum at retirement. Regular pension income gets taxed as ordinary income at marginal rates.

For US citizens living in the UK, IRS Revenue Ruling 2003-99 permits UK pension contributions to be deductible for US tax purposes if the pension qualifies under Article 18 of the treaty. However, the IRS doesn’t recognize UK pensions as qualifying retirement plans for all purposes, meaning contributions may face limits and investments inside the pension may generate annually taxable income to US persons.

The treatment of UK pension lump sums illustrates the Savings Clause exceptions perfectly. Under Article 17(1)(b), a lump sum withdrawal that qualifies as tax-free in the UK also remains exempt from US taxation. This represents a rare complete exemption for US citizens, but you must file Form 8833 to claim it. Regular pension income remains taxable in the country of residence, meaning a US citizen living in the UK pays UK tax on UK pension income but must report it on their US return and claim a foreign tax credit.

US Retirement Accounts and UK Taxation

Traditional IRAs, 401(k)s, and Roth IRAs create the opposite problem. These accounts qualify as pensions under Article 17, but UK domestic law doesn’t automatically recognize their tax-deferred status. Without making a protective election to HMRC, UK residents with US retirement accounts face annual UK taxation on growth inside the account, even when no distributions occur.

Article 17(1)(a) permits UK residents to elect not to be taxed on undistributed US pension income, preserving tax deferral. You make this election by writing to HMRC during your first UK tax year. Once made, the election remains effective for subsequent years unless revoked. Distributions from traditional accounts remain taxable in the UK at marginal rates, while Roth distributions pose more complexity since the UK doesn’t recognize the concept of tax-free retirement income.

Foreign Account Reporting Requirements

Beyond income tax returns, US and UK taxpayers face significant reporting obligations for foreign financial accounts and assets. These requirements carry severe penalties for non-compliance and operate independently of income tax liability.

FBAR Requirements

The Foreign Bank Account Report (FBAR), filed on FinCEN Form 114, requires US persons to report foreign financial accounts with an aggregate balance exceeding $10,000 at any point during the calendar year. The threshold applies to combined balances across all foreign accounts, not per account. UK bank accounts, investment accounts, and certain pension accounts may require reporting.

FBAR filing is due on 15th April of the following calendar year, with an automatic extension to 15th October. Unlike tax returns, you can’t request an extension beyond 15th October. Non-willful violations carry penalties up to $10,000 per violation, while willful violations can result in the greater of $100,000 or 50% of the account balance per violation per year. Criminal prosecution is possible for willful violations.

Form 8938 Requirements

In addition to FBAR, US taxpayers may need to file Form 8938 (Statement of Specified Foreign Financial Assets) with their tax return. This IRS form has higher thresholds than FBAR: $200,000 on the last day of the tax year or $300,000 at any time during the year for US taxpayers living abroad (filing jointly; half these amounts for single filers).

Form 8938 requires reporting additional asset types beyond financial accounts, including direct ownership of foreign stock or securities, partnership interests in foreign entities, and interests in foreign trusts. The penalty for failure to file is $10,000, with an additional $10,000 for each 30 days of continued non-filing after IRS notice, up to $50,000. The statute of limitations for the entire tax return remains open if Form 8938 should have been filed but wasn’t.

UK Reporting for US Assets

UK tax residents with foreign assets exceeding £300,000 must report them in the “Foreign” section of their Self-Assessment returns. This includes US bank and investment accounts, as well as property. While less stringent than US reporting, UK residents must report foreign income and gains accurately, with HMRC increasingly using international information exchange agreements to verify compliance.

The Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA) require US and UK financial institutions to automatically report account information to both governments annually. This information sharing makes non-compliance increasingly risky and easily detected.

What Could Go Wrong?

Many people don’t take the time to understand the US UK Income Tax Treaty. And it can lead to serious mistakes by US or UK citizens living abroad. For example, if you don’t know that certain types of income are treated differently, you could pay tax twice on your salary, dividends, or investments. This can be disastrous. Let’s look at two examples

Example 1: Moving from London to New York

Sarah moved from London to New York to get a higher-paying job. She thinks she’s covered under the US UK Income Tax Treaty. She forgets that the US taxes its citizens and residents on worldwide income. She also keeps a rental property in the UK, which earns her extra money, but Sarah doesn’t know she’s supposed to report this to the US tax authorities. She pays tax on the same income in both countries, losing thousands.

Example 2: Moving from California to London

Mike is an American citizen moving from California to London to work in a tech role. He assumes the US UK DTA covers him entirely. He keeps his investments in a US brokerage account. The UK taxes him on this income as well. He ended up paying taxes in both countries on his investment earnings because he didn’t know how to apply the treaty.

Americans have a lot to consider as they must continue to file 1040 returns to the Internal Revenue Service (IRS), no matter where they live. There are two ways of treating foreign earnings when living in the UK. The first is the Foreign Earned Income Exclusion (FEIE). The second is claiming the Foreign Tax Credit (FTC) on tax charged in the UK by HMRC.

How to Avoid Double Taxation

The treaty is there to protect you. But you must know how to use it. Some rules allow you to claim tax credits paid in another country. For example, if you pay tax in the UK, you can offset this against your US tax liability, and vice versa. But it’s not automatic. You need to file the correct forms and provide proof of taxes paid.

If you don’t file the correct forms on time, the tax authorities in both countries might demand you pay taxes. That’s the nightmare scenario. You can avoid this by understanding how to apply the treaty properly.

What You Should Do Next

First, make sure you understand your tax obligations in both countries. This includes knowing which forms to file and when. Always declare your foreign income to both tax authorities, even if you think it’s not taxable in one country. Use the US UK Income Tax Treaty to reduce or eliminate double taxation. You’ll also need to keep records of any taxes you’ve paid abroad to claim credits later.

If this sounds complicated, it’s because it can be. But don’t panic. Some experts can help you navigate the system and avoid costly mistakes.

If you are British and have moved to the United States while earning rental income from your buy-to-let properties, you will still need to file self-assessment tax returns to HMRC as a non-resident landlord.

Withholding Taxes

Income Type	US Withholding (without treaty)	UK Withholding (without treaty)	US / UK Withholding (with treaty)	Key Treaty Article / Forms
Dividends	30% (default NRA rate on US-source dividends)	0% (UK does not levy dividend withholding tax)	US: 15% (5% if ≥10% voting stock; 0% for certain pension funds) / UK: 0%	Article 10 – Form W-8BEN / W-8BEN-E
Interest	30% (US-source interest, unless portfolio interest exemption applies)	20% (on yearly interest paid to non-residents)	US: 0% / UK: 0% (treaty relief)	Article 11 – Form W-8BEN / W-8BEN-E, HMRC DT-Individual / DT-Company
Royalties	30% (default US withholding on royalties)	20% (standard UK withholding on royalties)	US: 0% / UK: 0% (treaty exemption for beneficial owner)	Article 12 – Form W-8BEN / W-8BEN-E, HMRC DT-Company / DT-Individual
Rental Income (property)	30% if US real property income (or FIRPTA 15% on sale proceeds)	20% under the UK Non-Resident Landlord Scheme	US: Withheld at statutory rate but reclaimable via Form 1040-NR / UK: 0% if NRL approval granted	Article 6 (Immovable Property), FIRPTA rules – Forms 8288, 8288-B, NRL1 / NRL2

How Withholding Works in Practice

Dividends:

Without a treaty, US corporations must withhold 30% from dividends paid to foreign shareholders. The US–UK treaty reduces this to 15%, or 5% if the shareholder is a UK company owning at least 10% of the voting stock.
Example: A UK investor receiving a $10,000 dividend from Apple Inc. would normally lose $3,000 to US withholding. By submitting Form W-8BEN, the withholding drops to $1,500 (15%), saving $1,500 immediately.

Interest:
US-source interest payments to UK residents are generally subject to 30% withholding unless a statutory or treaty exemption applies. Under Article 11 of the US–UK treaty, most interest is exempt (0%), including bank deposits and corporate bonds.

Example: A UK company earning $5,000 interest from a US corporate bond files Form W-8BEN-E with the US paying agent. As a result, no withholding tax is deducted, and the income is reported and taxed only in the UK under local rules.

Royalties:
Royalties (e.g., payments for intellectual property, software, or trademarks) are also subject to 30% US withholding under domestic law, but Article 12 of the treaty grants a 0% rate. The same applies to UK-source royalties paid to US residents, where the UK normally withholds 20% unless the treaty is claimed in advance.
Example: A UK software firm licenses code to a US company. Without a treaty claim, the US company withholds $3,000 on a $10,000 royalty. By providing Form W-8BEN-E, the withholding drops to 0%, and the UK company declares the income in its UK tax return.

Rental Income:
For UK property, tenants or letting agents must withhold 20% tax when paying rent to non-resident landlords. However, if the landlord registers under the Non-Resident Landlord Scheme (NRLS) using Form NRL1 (individual) or NRL2 (company), HMRC grants permission to receive gross rents (0% withholding). The landlord then reports and pays any tax due via the UK Self-Assessment system.

Example: A US-based investor earning £24,000 annual rent from a London flat would otherwise lose £4,800 to withholding each year. After applying under the NRLS, rent is paid in full, and the taxpayer settles the actual liability on their UK return.

Filing Obligations and Strategic Choices

Even if the correct withholding rate is applied, filing a tax return can often yield further benefits or refunds:

• In the US, Non-resident investors can file Form 1040-NR to reclaim excess withholding or to report property sales (FIRPTA transactions) on a net-gain basis. If the correct treaty rate was applied and no refund is due, a filing may not be necessary. However, US citizens and green card holders must file annually on worldwide income regardless of the treaty.

• In the UK, UK residents receiving US income may claim a foreign tax credit for US withholding. Where US income is fully relieved under a treaty (e.g., 0% interest), it is simply taxed in the UK under domestic law. For UK property income, registration under the NRL Scheme usually means no tax is deducted at source, but the income must still be declared annually via Self-Assessment.

In summary:

The US–UK tax treaty largely eliminates or reduces withholding on passive income — dividends (to 15%/5%), interest (to 0%), and royalties (to 0%) — while administrative schemes like the UK’s NRL programme manage property income for non-residents. Proper form filing (W-8BEN, DT forms, NRL1) and understanding of dual-filing obligations ensures that taxpayers avoid double taxation while staying compliant in both jurisdictions.

Practical Steps for Compliance

Given the complexity of dual US-UK taxation, systematic compliance procedures protect you from penalties and minimise double taxation.

Annual Tax Calendar

Maintaining a compliance calendar ensures you meet all deadlines. US tax returns are due 15th April (15th October with extension, automatic for expats). UK Self-Assessment returns are due January 31 following the tax year ending April 5. FBAR filing is due on 15th April (with an automatic extension to 15th October). Estimated tax payments for the US are due quarterly, and UK self-assessment taxpayers with tax liabilities exceeding £1,000 must make payments on account by 31st January and 31st July.

Documentation Requirements

Maintaining comprehensive records throughout the year simplifies tax preparation and substantiates treaty claims. Keep records of all foreign taxes paid (official tax bills, payment confirmations, tax returns filed abroad), days spent in each country to support residency and physical presence claims, employment contracts and payslips showing income sources, and correspondence with HMRC or the IRS regarding elections, rulings, or treaty claims.

Proactive Professional Advice

Tax advisors specialising in US-UK taxation can identify planning opportunities and compliance risks that general practitioners might miss. Cross-border specialists understand how to coordinate income recognition timing, structure investments to minimise withholding taxes, and navigate both HMRC and IRS procedures simultaneously. Engaging advisors before relocating internationally, not after problems arise, prevents costly mistakes.

Frequently Asked Questions

Does the treaty mean I only pay tax in one country?

No. The treaty doesn’t automatically prevent taxation in both countries. It allocates taxing rights and provides mechanisms to reduce or eliminate double taxation through credits, exemptions, and reduced withholding rates. You must actively claim these benefits by filing proper forms and documentation in each country.

Can I stop paying US taxes if I move from the US to the UK?

No. US citizens and green card holders remain subject to US taxation on worldwide income regardless of where they live. The US maintains citizenship-based taxation, unlike most countries that tax only based on residence. You can reduce or eliminate US tax liability through the Foreign Tax Credit or Foreign Earned Income Exclusion, but you must continue filing annual US tax returns and FBAR reports.

How do I know if I qualify as a UK tax resident?

UK residence is determined by the Statutory Residence Test, which examines your days spent in the UK, ties to the UK (family, accommodation, work, days spent in previous years), and status in prior tax years. Generally, spending 183 or more days in the UK during a tax year makes you automatically resident. Fewer days may still result in residence if you have multiple UK ties.

What happens if I don’t file my US taxes while living in the UK?

Failure to file US tax returns and FBAR reports can result in substantial penalties, even if you owe no tax due to foreign tax credits or exclusions. Penalties for willful FBAR violations can exceed 50% of account balances per year. Criminal prosecution is possible for willful failures. The IRS Streamlined Filing Procedures offer penalty relief for non-willful failures, allowing you to catch up on up to three years of unfiled returns and six years of FBAR reports without penalties if you qualify.

Do I have to pay taxes in both countries on my pension?

Generally, pension income is taxable only in your country of residence under Article 17 of the treaty. A US citizen living in the UK receiving UK pension income pays UK tax and reports it on their US return, claiming a Foreign Tax Credit to eliminate double taxation. UK pension lump sums that are tax-free in the UK may also qualify for exemption from US tax under Article 17(1)(b), provided you file Form 8833 to claim the treaty position.

Can I claim treaty benefits without filing specific forms?

No. Treaty benefits aren’t automatic. To claim reduced withholding rates on dividends, interest, or royalties, you must submit Form W-8BEN (individuals) or Form W-8BEN-E (entities) to the payer. To claim treaty positions that override domestic tax law, you must file Form 8833 with your tax return. Failure to file required forms results in statutory withholding rates applying and potential penalties.

How does the Foreign Tax Credit work with the Foreign Earned Income Exclusion?

You can’t claim both the FTC and FEIE on the same income. However, if your earned income exceeds the FEIE limit ($130,000 for 2025), you can exclude the first $130,000 and claim FTC on the excess. You must use the FTC (not FEIE) for passive income, such as dividends and interest, since FEIE applies only to earned income.

What is the Savings Clause, and how does it affect me?

The Savings Clause in Article 1(4) of the treaty allows the US to tax its citizens and residents as if the treaty didn’t exist, subject to specific exceptions. This means most treaty benefits that would exempt income from US tax don’t apply to US citizens. Key exceptions include the treatment of UK pension lump sums under Article 17(1)(b) and Social Security benefits under Article 18.

How do I report my foreign accounts to avoid FBAR penalties?

File FinCEN Form 114 (FBAR) online through the BSA E-Filing System by April 15 following the calendar year (automatic extension to October 15) if your aggregate foreign account balances exceeded $10,000 at any point during the year. File Form 8938 with your tax return if your foreign financial assets exceeded the applicable threshold ($200,000 year-end / $300,000 anytime for expats filing jointly). Failure to file these forms when required carries penalties of $10,000 to $50,000 or more, even if you owe no income tax.

Can I deduct my UK mortgage interest on my US tax return?

For personal residences, US taxpayers can deduct qualified residence interest on Schedule A (itemised deductions), subject to limitations. Foreign mortgage interest on a primary or secondary home is treated the same as US mortgage interest. However, for rental properties, UK mortgage interest is deductible against UK rental income on Schedule E, but US tax law limits deductions for rental real estate to the amount of rental income unless you qualify for the real estate professional exception.

Common US–UK Treaty Disputes & Recent Rulings

Conclusion

The US-UK tax treaty provides essential relief from double taxation, but achieving that relief requires proactive compliance, accurate filings, and strategic planning. Understanding the treaty’s core provisions, the Savings Clause exceptions, withholding mechanisms, and reporting requirements empowers you to navigate both tax systems successfully.

Recent changes, including the UK’s elimination of non-dom status from April 2025 and evolving international tax frameworks, demand ongoing attention to your tax situation. Whether you’re moving between countries, managing cross-border investments, or planning retirement, professional guidance from specialists in US-UK taxation helps you minimise tax liability while maintaining full compliance in both jurisdictions. When properly applied, the treaty’s mechanisms work effectively. But costly mistakes await those who assume automatic protection or delay addressing their dual-jurisdiction obligations.

Author Credentials & Expertise

Simon Misiewicz, FCCA, ATT, EA, MBA
Director, Optimise Accountants & InternationalTaxesAdvice.com

Simon is a UK-qualified Chartered Certified Accountant (FCCA), UK Chartered Tax Adviser (ATT), and US IRS Enrolled Agent (EA) with over 20 years of cross-border tax experience. He specialises in US–UK tax coordination, dual-resident structures, FIRPTA compliance, and international property and pension taxation.

As co-founder of Optimise Accountants (est. 2003), Simon leads the firm’s international tax and estate planning division, advising private clients, property investors, and family offices on treaty-based relief, foreign tax credits, and succession planning across the UK, US, and Spain.

He regularly presents webinars on US/UK tax treaty application, estate planning under residence-based IHT reform, and foreign income disclosure for international professionals.