The US-UK tax treaty explained for US taxpayers
If you're a US citizen or green card holder living in the UK, it's important to understand the US–UK tax treaty. It can help you avoid double taxation, meaning you won’t be taxed twice on the same income in both the US and the UK, potentially saving you thousands of dollars in taxes.
In this article, we'll break down the key provisions of the treaty, explain how it works, and guide you on how to take advantage of its benefits.
This article is brought to you by Taxes for Expats (TFX) a top-rated tax firm serving US citizens, residents, and anyone with US tax obligations, both at home and abroad. Are you a UK or US citizen? Need help with your US tax return? Schedule your free discovery call, and we’ll review your case and walk you through the next steps.
Importance of the treaty for US citizens living in the UK
The US–UK income tax treaty is a crucial tool for US citizens living in the UK. Without this treaty, you could end up paying taxes on the same income in both countries.
Here’s why the treaty is so important for US citizens in the UK:
- Prevents double taxation: If you pay taxes in the UK on income earned there, the treaty allows you to claim a foreign tax credit on your US tax return, which helps to reduce or even eliminate the tax you owe in the US.
- Reduces withholding taxes: If you have investments in the UK, the treaty can help you benefit from lower tax rates on the income generated from those investments.
- Clarifies tax residency: The treaty provides guidelines for determining your tax residency, a key factor in deciding which country has the right to tax your income.
How to claim United States–United Kingdom tax treaty benefits
As a US citizen, green card holder, or resident alien living in the UK, you need to make sure you meet certain requirements and file the necessary paperwork.
The treaty doesn’t apply automatically, so you’ll need to actively claim the benefits. Here's how to claim them:
1. File a US tax return.
As a US citizen, you are required to file a US tax return every year, even if you're living in the UK. The treaty doesn’t eliminate this obligation, but it can help reduce your overall tax burden
2. Claim the foreign tax credit (FTC).
If you’ve paid UK taxes on your income, you can use Form 1116 to claim a foreign tax credit on your US tax return to offset the taxes you’ve already paid to the UK.
Example: By using the treaty, you can claim a foreign tax credit on your US tax return for any UK tax paid on your IRA distributions. This offsets your US tax liability and prevents you from paying tax twice on the same distributions. Just make sure to retain proof of UK tax payments to support your credit claim.
3. Use the foreign earned income exclusion (FEIE).
The foreign earned income exclusion lets you exclude up to $130,000 (2025 limit per taxpayer, adjusted annually) of earned income from your US taxable income, if you meet either the bona fide residence test or the physical presence test.
To claim the foreign earned income exclusion, you’ll need to file Form 2555.
Even though FTC and FEIE aren’t directly referenced in the US–UK tax treaty, they’re important tools that work alongside the treaty’s benefits to make sure you don’t get taxed twice on the same income.
4. Claim reduced withholding tax rates.
If you’re receiving dividends, interest, or royalties from UK sources, you can benefit from reduced withholding tax rates as specified in the treaty.
To do this, give your income payer a completed Form W-8BEN, confirming that you’re eligible for treaty benefits.
5. File Form 8833 for treaty-based positions.
If you’re using treaty provisions that override certain Internal Revenue Service (IRS) rules, you must file Form 8833.
Example 1: If you’re a US citizen in the UK receiving UK pension income, and the treaty exempts you from certain UK taxes on the pension, you must file Form 8833 to claim that exemption on your US tax return.
Example 2: If you receive dividends from a UK company and the treaty reduces the withholding tax from 30% to 5% due to your 10% or more ownership of the company, you must file Form 8833 to claim the reduced rate.
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Other provisions of the US–UK tax treaty
The tax treaty between the US and the UK offers significant protections and benefits, but it’s essential to understand its provisions will in order to take full advantage of them.
Saving clause
The saving clause is a fundamental provision in the treaty that preserves each country's right to tax its citizens as if the treaty did not exist.
This means that the US retains the right to tax its citizens on their worldwide income regardless of where they reside. Similarly, the UK can tax its residents on their global income, regardless of where the income originates.
Article 17 – US taxation of UK pensions
Article 17 covers pension income and ensures that UK pensions are generally taxed only in the UK. However, if you’re a US citizen, you may still need to report that income on your US tax return, where it may also be subject to tax. The treaty allows you to claim a foreign tax credit for the UK taxes paid to prevent double taxation.
Special provisions for UK pension plans: The treaty ensures that UK pension withdrawals (up to 25% tax-free) are exempt from US taxation under the treaty provisions.
Withholding tax reductions
The treaty provides reduced withholding tax rates for several types of income, including dividends, interest, and royalties.
Investment income: zero withholding tax for certain direct investment dividends (if the recipient owns at least 80% of the UK company).
Tiered withholding rates:
- Direct investment dividends: 5% withholding tax if you own 10% or more of the UK company.
- Portfolio investment dividends: 15% withholding tax.
Taxation of employment income
The treaty usually taxes employment income in the country of residence, but there are exceptions:
- 183-day rule: If you’re working in the UK temporarily (for 183 days or fewer in a 12-month period), your employment income may be exempt from UK tax.
- Economic employer concept: If you work for a UK employer (even if your legal employer is in the US), the UK might tax your income. This concept makes sure that the right country taxes your income based on who bears the economic responsibility for your work.
Capital gains
In the US–UK tax treaty, Article 13 covers capital gains. Generally, your capital gains are taxed in the country where you live. So, if you're a US citizen living in the UK, you'll likely pay tax on your gains in the UK.
But, as always, there are exceptions. For example, if you're selling real property or shares in a company that derives value from real estate in the other country, the country where the property or company is based may tax you.
Get expert help navigating the US–UK tax treaty
At Taxes for Expats, we specialize in guiding US citizens, green card holders, and resident aliens through cross-border taxation. We’ll help you file the necessary forms with the IRS and ensure you get the most out of the US–UK tax treaty’s provisions.
If you’re feeling unsure about your tax situation or need help with your US tax return, contact us. We’ll review your case, walk you through the treaty’s details, and make sure you’re fully compliant with tax laws.
