If you live in the United Kingdom and hold US citizenship or a green card, yes, you still have to pay US taxes, or at least file a US tax return every year on your worldwide income. The United States is one of only two countries that taxes based on citizenship rather than residence, so a move to London, Edinburgh, or anywhere else in the UK does not end your obligation to the IRS. In practice, though, most Americans in the UK end up owing little or nothing to the US once they use the foreign earned income exclusion, the foreign tax credit, and the US-UK tax treaty. The filing is unavoidable. The double tax usually is not.
Why Citizenship Triggers US Tax
Federal law imposes income tax on every US citizen and resident regardless of where the income is earned.1Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed Your salary in Manchester, your rental income in Liverpool, and gains in a London brokerage account all get reported to the IRS. The rule holds even if you have not been to the United States in decades. Failure to file carries penalties whether or not you owe any tax, because the reporting requirement stands separate from the payment obligation.
The Foreign Earned Income Exclusion
The most valuable relief for Americans abroad is the foreign earned income exclusion under 26 U.S.C. § 911, which lets you subtract a large slice of your earnings from your US taxable income.2Office of the Law Revision Counsel. 26 USC 911 – Citizens or Residents of the United States Living Abroad For 2026 the maximum exclusion is $132,900.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 If your salary is below that figure, you may owe nothing to the IRS on your earned income.
To claim it you must pass one of two tests. The physical presence test requires 330 full days in a foreign country during any 12-consecutive-month period; days in transit over international waters or spent in the US do not count. The bona fide residence test asks whether you have been a genuine UK resident for an uninterrupted period covering an entire tax year from January 1 through December 31, with real ties such as a home, a job, and a settled life.2Office of the Law Revision Counsel. 26 USC 911 – Citizens or Residents of the United States Living Abroad
The exclusion only covers earned income: salaries, wages, and self-employment fees. Dividends, capital gains, rental income, and pension distributions are outside its scope. You claim it on IRS Form 2555, documenting your days abroad and your total foreign earnings. Your tax home must also be in the UK.
The Foreign Tax Credit
When the exclusion is not enough, or when you have investment income it does not cover, the foreign tax credit under 26 U.S.C. § 901 fills the gap.4Office of the Law Revision Counsel. 26 USC 901 – Taxes of Foreign Countries and of Possessions of United States The credit is dollar for dollar against your US tax bill for income tax you already paid to HM Revenue and Customs. Pay £8,000 to HMRC, and the dollar equivalent comes straight off what you owe the IRS.
UK income tax rates are generally higher than US rates for middle and higher earners, so many Americans in the UK finish the year with excess foreign tax credits and no US liability. Unused credits carry forward for up to ten years and back one year.
You claim the credit on Form 1116, which separates income into categories such as general earnings and passive income. Report the foreign tax paid in pounds and convert to dollars at the applicable exchange rate, and keep your HMRC statements in case of audit.
You can use the exclusion and the credit in the same year, but not on the same dollars of income. A common approach is to apply the exclusion to your first $132,900 of salary, then use the credit to cover US tax on anything above that plus investment income. Getting the split wrong can cost real money.
Self-Employment Tax and the Totalization Agreement
A common surprise: the foreign earned income exclusion does not reduce self-employment tax. Even if all your earnings are excluded from income tax, you still owe the 15.3% combined Social Security and Medicare tax on net self-employment income.5Internal Revenue Service. Instructions for Schedule SE (Form 1040)
The US-UK Social Security Totalization Agreement often removes that bill. Under its general rule, work performed in the UK is covered by the UK system (National Insurance) rather than the US system.6Social Security Administration. US-UK Social Security Agreement Self-employed people living in the UK are generally assigned to UK coverage.7Social Security Administration. Totalization Agreement with United Kingdom To claim the exemption, you need a certificate of coverage from HMRC and attach it to your US return each year.
Employees sent temporarily by a US employer can stay in the US system for up to five years, paying Social Security tax to the US instead of National Insurance to the UK.6Social Security Administration. US-UK Social Security Agreement If you are locally hired by a UK company, you pay National Insurance from day one and owe nothing for US self-employment tax or FICA.
UK ISAs, Mutual Funds, and the PFIC Trap
Individual Savings Accounts are tax-free for UK purposes. The IRS does not recognize that shelter. Every pound of interest, dividends, and capital gains earned inside your ISA is reportable and potentially taxable on your US return.
The bigger problem is what usually sits inside an ISA. Most UK-domiciled mutual funds and investment trusts qualify as Passive Foreign Investment Companies (PFICs). A foreign corporation meets the PFIC definition if at least 75% of its income is passive or at least 50% of its assets produce passive income.8Internal Revenue Service. Instructions for Form 8621 Nearly every UK-domiciled fund clears one of those tests.
PFIC taxation is punitive. When you take a distribution or sell shares, the gain is allocated across every year you held the investment and taxed at the highest marginal rate for each of those years, with an interest charge added.9Office of the Law Revision Counsel. 26 USC 1291 – Interest on Tax Deferral Long-term capital gains rates do not apply. On top of that, you must file a separate Form 8621 for every PFIC, every year.8Internal Revenue Service. Instructions for Form 8621
The practical result: for many US citizens in the UK, holding UK mutual funds inside an ISA creates a paperwork and tax burden that outweighs the UK tax saving. Some invest through a US brokerage in US-domiciled funds instead, though finding a US brokerage that will maintain an account for someone with a UK address can be a challenge.
Pensions and Social Security Under the Treaty
The US-UK Income Tax Convention, signed in 2001, sets out how retirement income is split between the two systems. Under Article 17, pensions are generally taxable only in the country where the recipient lives, so a US pension paid to a UK resident is taxed in the UK. UK Social Security paid to someone living in the UK is taxable only there, not in the US.10Treasury Department. Convention Between the Government of the United States of America and the Government of the United Kingdom
Article 18 covers contributions to and growth inside pension schemes. If you contribute to a UK workplace pension or a Self-Invested Personal Pension (SIPP), the treaty generally provides that income earned inside the pension is not taxed by the US until you actually receive a distribution. The accompanying exchange of notes lists the qualifying schemes: 401(k) plans, IRAs, and similar arrangements on the US side; approved employment-related and personal pension schemes on the UK side.11U.S. Department of the Treasury. Exchange of Notes – US-UK Double Taxation Convention
Whenever you rely on a treaty provision to reduce your US tax, file Form 8833 disclosing the specific article you are using. Skipping that form when taking a treaty position carries a $1,000 penalty per occurrence for individuals.
Reporting Your UK Accounts: FBAR and FATCA
Two disclosures sit alongside your tax return. They apply whether or not you owe any tax, and the penalties are severe.
FBAR (FinCEN Form 114)
If the combined balances of all your foreign financial accounts exceed $10,000 at any point during the year, you must file a Report of Foreign Bank and Financial Accounts.12Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR) The threshold catches almost any American with a UK current account. It covers current, savings, and investment accounts, and accounts where you have signature authority without ownership.
The FBAR is filed electronically through the FinCEN BSA E-Filing System, not with your tax return. The deadline is April 15, with an automatic extension to October 15 that requires no paperwork.12Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR) Non-willful violations can cost up to $10,000 per account per year. Willful violations jump to the greater of $100,000 or 50% of the account balance, plus potential criminal prosecution.
FATCA (Form 8938)
The Foreign Account Tax Compliance Act adds a second layer through IRS Form 8938, filed with your tax return.13Office of the Law Revision Counsel. 26 USC 6038D – Information With Respect to Foreign Financial Assets Filing thresholds for Americans abroad are higher than for those in the US. If you are single or married filing separately, you file when your foreign financial assets exceed $200,000 on the last day of the tax year, or $300,000 at any point during the year. Married filing jointly, the numbers are $400,000 and $600,000.14Internal Revenue Service. Summary of FATCA Reporting for US Taxpayers
Form 8938 covers a broader range of assets than the FBAR, including foreign pension plans, interests in foreign entities, and foreign-issued securities held outside a financial account. Failing to file starts at a $10,000 penalty and rises by $10,000 for each 30-day period the failure continues after IRS notification, capped at $50,000.13Office of the Law Revision Counsel. 26 USC 6038D – Information With Respect to Foreign Financial Assets The FBAR and Form 8938 overlap heavily, but they go to different agencies under different rules, so filing one does not excuse the other.
State Taxes Do Not Automatically Stop
The federal return is not the only one to worry about. Your last US state of residence may still expect a return. Factors that keep you tied to a state include holding a driver’s license there, remaining registered to vote, owning property, or maintaining financial accounts. California, New York, Virginia, South Carolina, and New Mexico are commonly cited as difficult states to break tax residency from. Even after residency is clearly severed, some states require nonresident returns for in-state source income such as rental property or work done for a state-based employer. Document when you surrendered your license, changed your voter registration, and closed local accounts.
Filing Deadlines From Abroad
Americans living abroad get an automatic two-month extension to June 15. You do not request it; it applies if your tax home is outside the US.15Internal Revenue Service. US Citizens and Resident Aliens Abroad Interest on unpaid tax still runs from April 15, so pay any expected balance by mid-April even if you file in June. A further extension to October 15 is available on Form 4868.
Electronic filing is faster than posting a paper return from the UK and gives you immediate confirmation.16Internal Revenue Service. International – Where to File Form 1040 Addresses for Taxpayers and Tax Professionals The failure-to-file penalty is 5% of unpaid tax per month, up to 25%. More than 60 days late, the minimum penalty is $525 or 100% of the tax owed, whichever is less, and it applies even if the balance is tiny.17Internal Revenue Service. Failure to File Penalty The failure-to-pay penalty is a separate 0.5% per month on any unpaid balance.
Catching Up If You Never Filed
If you have lived in the UK for years without filing, the Streamlined Foreign Offshore Procedures let you file three years of delinquent returns and six years of delinquent FBARs without the standard penalties. You must certify that the failure was non-willful, meaning negligence or honest mistake rather than deliberate avoidance, and you cannot already be under IRS examination or criminal investigation.18Internal Revenue Service. Streamlined Filing Compliance Procedures
The IRS has offered the program since 2014 with no announced closing date, but the terms could change. Acting before the IRS contacts you matters: an open examination disqualifies you from the program.
Renouncing US Citizenship and the Exit Tax
Renunciation ends US tax obligations going forward, but it can trigger a tax bill on the way out. The expatriation rules treat you as if you sold all your assets at fair market value on the day before you renounce. The exit tax applies to “covered expatriates,” meaning anyone with a net worth of $2 million or more, average annual net income tax over the prior five years above an inflation-adjusted threshold (roughly $211,000 for 2026), or who cannot certify five years of tax compliance before expatriation.19Internal Revenue Service. Expatriation Tax
Covered expatriates reduce the deemed-sale gain by an inflation-adjusted exclusion of $890,000 for 2025. Anything above that is taxed as a capital gain. Renunciation also carries a $2,350 State Department fee and requires a final tax return on Form 8854 for the year of expatriation. For someone with modest assets who has stayed current on filings, the exit tax often produces no actual liability. For someone with significant wealth or years of unfiled returns, the cost can be high enough that staying in the system is cheaper.