The US-UK tax treaty explained for US taxpayers
The US–UK tax treaty exists to cut through cross-border tax confusion and help prevent the same income from being taxed twice. If you’re a US citizen or green card holder living in the UK, understanding how the US–UK tax treaty works can make a real difference in what you owe – and what you can claim back.
While the treaty offers relief through credits and special rules for income like wages, pensions, and investments, it does not replace US filing requirements such as FBAR and FATCA, and because of the treaty’s saving clause, you may still owe US tax in certain situations, even when UK tax has already been paid. In this article, we break down the treaty rules in clear terms and show how they work in real life.
This article is brought to you by Taxes for Expats (TFX), a top-rated tax firm serving US expats. Need help with your US tax return? Contact us, and we’ll 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 the 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 US–UK tax treaty can help lower double tax, but it does not work automatically.
Treaty benefits are not claimed just by using the Foreign Tax Credit (FTC) or the Foreign Earned Income Exclusion (FEIE). Those are tools built into US tax law, and they are still very useful. Treaty claims themselves usually require Form 8833 only in specific situations, not in every return.
1) File a US tax return
This rule always comes first: “US citizens/GC holders file Form 1040 on worldwide income; treaty can reduce double tax, but doesn’t remove filing.”
Living in the UK does not change your filing duty; you are still required to file a US tax return each year. Even when credits or exclusions reduce US tax to zero, Form 1040 is still required for many people.
Also read. Form 1040 – Guide 2025
2) Claim the foreign tax credit (FTC)
When UK tax is paid on income that is also taxed by the US, Form 1116 is used to claim a foreign tax credit. This credit reduces US tax on the same income.
For many people in the UK, this is the most practical option because UK income tax rates are often higher than US rates. In simple terms, this is where the double taxation agreement US–UK effect shows up for everyday income like wages.
3) Use the foreign earned income exclusion (FEIE) when it fits
The FEIE is claimed on Form 2555 and applies only to foreign earned income, such as salary or self-employment income. The maximum exclusion is $130,000 for the 2025 tax year (filed in 2026) if you meet the bona fide residence test or the physical presence test. This limit comes from IRS inflation adjustment guidance for that filing season.
NOTE! The FEIE does not apply to unearned income like dividends or interest. Because of that, FTC is often a better fit for UK residents, even when the FEIE looks attractive at first glance. This balance between FTC and FEIE sits alongside the tax treaty between the US and UK, rather than replacing it.
4) Claim reduced withholding tax rates correctly
Withholding rates matter mainly when the recipient is treated as a foreign person by the payer. If you are a UK resident who is not a US citizen/green card holder, you may claim US treaty withholding rates at the payer level using Form W-8BEN/W-8BEN-E (as applicable).
US citizens and green card holders generally certify to US payers on Form W-9 and report the income on Form 1040; relief is usually handled through Form 1116 (FTC) or other return positions, not treaty withholding forms.
5) File Form 8833 only for treaty-based return positions
Form 8833 is used to disclose a treaty-based position taken on a US return. It is not used to reduce UK tax, and it is not the form that lowers US withholding at the payer level.
Examples:
- Claiming a treaty position for a tax-exempt portion of a pension under Article 17(1)(b), where applicable
- Applying a treaty residency tie-breaker in a dual-resident situation
- Taking another treaty-based return position that modifies how US domestic tax law would otherwise apply
When handled this way, the process stays simple and clear, and the UK and US tax agreement works as intended, supporting the double taxation agreement USUK without adding confusion.
Other provisions of the US-UK tax treaty
The US-UK tax treaty has several rules that matter a lot in real life. These rules affect pensions, investment income, short-term work, and capital gains. The treaty is meant to reduce double tax, but it does not remove US filing duties or replace US tax law. It works alongside US rules, not instead of them, and the details decide the outcome.
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.
NOTE! Treaty can’t override US tax on citizens except where the treaty explicitly preserves benefits.
Article 17 – US taxation of UK pensions (with the 25% rule explained)
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: In the UK, pension withdrawals often include a tax-free portion, but this is frequently misunderstood for US tax purposes.
- In the UK, the tax-free pension lump sum is usually up to 25%, capped at £268,275 under the UK Lump Sum Allowance.
- This UK tax treatment does not automatically mean the same income is tax-free in the US.
NOTE! The US saving clause applies to Article 17(2). The US Treasury and IRS have explicitly stated that US citizens can still be taxed by the US on UK pension lump sums, even if the UK treats part (or all) of the lump sum as tax-free.
As a result, the UK’s 25% tax-free lump sum may still be fully taxable in the US.
Citizen vs. non-citizen/resident status
Article 17 separates pension income into distinct categories, each treated differently:
(a) Periodic pension payments – Article 17(1)(a)
- Regular pension payments are generally taxable only in the country of residence.
- For a UK resident receiving a UK pension, this typically means UK taxation.
- US citizens must still report the income on their US return and usually rely on foreign tax credits.
(b) Tax-free portion concept – Article 17(1)(b)
- If part of a pension would be tax-exempt in the country where the pension is established, that same portion is treated as exempt in the other country under the treaty.
- This provision is often cited in connection with the UK’s tax-free pension element – but it does not override the US saving clause for citizens.
(c) Lump sums – Article 17(2)
Pension lump sums are assigned for treaty purposes to the country where the pension scheme is established (the UK, for UK pensions).
Withholding tax reductions under the treaty
These treaty withholding caps generally apply when the recipient is a resident of one country and treated as a foreign person by the payer in the other country (for example, a UK resident who is not a US person receiving US-source dividends).
Exact rates depend on ownership percentage and treaty eligibility conditions (including limitation-on-benefits rules).
Dividends (tiered rates based on ownership)
0% withholding tax: Applies to certain direct investment dividends where the beneficial owner:
- Is a company resident in the other treaty country, and
- Owns at least 80% of the paying company, and
- Meets the treaty’s qualifying conditions (e.g., ownership period and limitation-on-benefits rules).
5% withholding tax: Applies to direct investment dividends where the beneficial owner owns at least 10% but less than 80% of the paying company.
15% withholding tax: Applies to portfolio dividends, where the ownership interest is below 10%.
Interest is generally taxable only in the recipient’s country of residence under the treaty. As a result, source-country withholding tax is typically eliminated, subject to specific exceptions outlined in the treaty.
Royalties are also generally taxable only in the recipient’s country of residence. This means no withholding tax in the source country in most cases, assuming treaty requirements are met.
Taxation of employment income
Under the US-UK tax treaty, employment income is generally taxed in the country where the work is physically performed, not in the country of residence. However, a treaty exception can apply for short-term assignments.
183-day rule (treaty exception)
Employment income may remain taxable only in your home country if all three of the following conditions are met:
- Days test: presence does not exceed 183 days in the relevant measuring period specified by the treaty (often tied to a 12-month period and/or the fiscal/tax year context).
- Employer test: Your compensation is paid by (or on behalf of) an employer that is not resident in the work country, and
- Permanent establishment (PE) test: Your compensation is not borne by or charged to a permanent establishment of the employer in the work country.
If any one of these conditions is not met, the country where the work is performed generally has the right to tax the income.
NOTE! 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.
Example of short-term secondment
A US employee is seconded to the UK for four months. The employee:
- spends fewer than 183 days in the UK,
- continues to be paid by a US employer, and
- has salary costs that are not charged to a UK permanent establishment.
In this case, the treaty exception can apply, and the employment income may remain taxable only in the United States, despite the work being performed in the UK.
Capital gains (treaty rules with a US reminder)
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.
NOTE! US citizens generally still owe US tax on capital gains. The treaty mainly affects taxing rights and sourcing, not the duty to file or report.
The treaty does not eliminate your reporting obligations under FBAR or FATCA. You must report any foreign bank accounts with balances exceeding $10,000 on FBAR. Similarly, if you have foreign financial assets, you may need to report them under FATCA.
What the treaty covers (and doesn’t)
The US-UK tax treaty is an income tax treaty. Its role is simple. It explains which country has the first right to tax certain income and how relief works when the same income is taxed in both countries. It does not replace US tax law, and it does not remove filing or reporting duties.
| Covered | Not Covered |
|---|---|
|
Treaty: The US–UK income tax treaty applies only to income taxes. It covers US federal income taxes under the Internal Revenue Code (but not US Social Security taxes) and UK Income Tax and Capital Gains Tax; in business contexts, it also references UK Corporation Tax and Petroleum Revenue Tax in its official scope language. |
FBAR / FATCA: Treaty relief does not remove US reporting obligations. FBAR (FinCEN Form 114) is still required when foreign accounts exceed $10,000 at any time during the year, and FATCA (Form 8938) is still required once IRS asset thresholds are met. |
|
Totalization: Not part of the income tax treaty. |
Totalization Agreement: A separate agreement that coordinates Social Security coverage and benefits only; handled under Social Security rules, not income tax rules. |
|
FBAR / FATCA: Not covered by the treaty. |
Income tax treaty limits: The double taxation agreement works only for income taxes and does not replace reporting or payroll tax rules. |
Key takeaway: The US–UK tax treaty reduces or allocates income taxes only; FBAR/FATCA reporting and Social Security (totalization) operate under separate legal frameworks and usually still apply.
Residency & tie-breaker
“Resident” for treaty purposes means more than where someone sleeps or has a mailing address. Under the US–UK tax treaty, it is possible to be treated as a resident by both countries at the same time. When that happens, the treaty uses tie-breaker rules to decide which country counts as the treaty residence.
The tie-breakers usually are:
- Permanent home – where a home is available and kept for use.
- Center of vital interests – where personal and economic ties are stronger, such as family life, work, and main financial activity.
- Habitual abode – where day-to-day life is spent more often over time.
- Nationality – used when earlier steps do not settle the question.
- Competent authority – the US and UK tax authorities decide together when none of the earlier tests give a clear answer.
These affect how relief works under the double taxation agreement US–UK, especially for income that could otherwise be taxed in both places.
Dual resident? Here’s what changes (and when 8833 becomes relevant).
- Dual resident status means both countries treat someone as a resident under their own laws, but the treaty tie-breaker points to one country for treaty purposes.
- Claiming a treaty-based return position as a dual-resident taxpayer can require extra disclosure. The IRS says Form 8833 is used to disclose treaty-based return positions, including those involving dual residency.
- Form 8833 is not filed automatically, and it is not used for withholding. It is attached to the US return only when a treaty position changes how US tax rules would normally apply.
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.
FAQs on the US–UK double taxation agreement
The saving clause allows the US to tax its citizens and green card holders as if the treaty did not exist, unless a specific treaty benefit is clearly preserved.
US-source dividends are generally capped at 15%, reduced to 5% when a company owns at least 10% of voting power, and to 0% in limited cases where ownership reaches 80%, and limitation-on-benefits rules are met.
Form W-8BEN/W-8BEN-E is generally for non-US persons to claim treaty withholding rates at the payer level. Form 8833 is for disclosing a treaty-based return position on a US return. US citizens/green card holders typically use Form W-9 with US payers and claim relief on the return (often via FTC/FEIE), not via W-8 forms.
Although lump sums are assigned to the scheme country, this rule is subject to the saving clause, so the US can still tax some UK pension lump sums paid to US citizens.
The treaty does not remove FIRPTA withholding, but a reduced amount can be requested by applying for a withholding certificate using Form 8288-B.
