Living abroad as a US expat in the UK can be exciting, but it comes with financial challenges—especially when it comes to taxes. The US is one of the few countries that taxes citizens on worldwide income, regardless of where they live. This means US expats in the UK risk facing double taxation—paying tax to both the IRS and HM Revenue & Customs (HMRC).
The good news? With the right strategies, you can reduce or even eliminate double taxation. Here are seven smart ways to manage your tax responsibilities as a US expat in the UK.
1. Understand the US–UK Tax Treaty
The United States and the United Kingdom have a tax treaty designed to prevent double taxation. This treaty outlines which country has taxing rights over certain types of income, such as pensions, interest, and dividends.
For example:
- The treaty often gives taxing rights to the UK for UK-source employment income, but you’ll still need to report it to the IRS.
- Certain tax credits or exemptions may apply to reduce your US liability.
Tip: Familiarize yourself with treaty provisions relevant to your income sources. Consulting a tax advisor who understands both US and UK laws is essential.
2. Leverage the Foreign Earned Income Exclusion (FEIE)
The FEIE allows qualifying US expats to exclude a portion of their foreign-earned income from US taxation. For the 2025 tax year, the exclusion limit is over $120,000 per person.
To qualify, you must meet either:
- The Physical Presence Test: living abroad for at least 330 full days within a 12-month period.
- The Bona Fide Residence Test: proving you are a resident of another country (the UK, in this case).
Example: If you earn £70,000 ($90,000) from employment in the UK, the FEIE may allow you to exclude most or all of it from US taxation, depending on exchange rates and thresholds.
3. Use the Foreign Tax Credit (FTC)
When your UK income exceeds the FEIE limit—or if your income doesn’t qualify for exclusion—the Foreign Tax Credit can be a lifesaver.
The FTC allows you to offset US tax liability with taxes you have already paid to HMRC. Since UK tax rates are often higher than US rates, many expats end up owing little to nothing to the IRS after applying credits.
Key point: Unlike the FEIE, the FTC also applies to investment income, dividends, and rental income.
4. Maximize the Foreign Housing Exclusion or Deduction
Living in the UK can be expensive, especially in cities like London. The IRS recognizes this and provides a Foreign Housing Exclusion/Deduction.
You may be able to exclude certain housing costs—such as rent, utilities, and property insurance—from your taxable income. The maximum limit varies depending on your city. For London, the housing exclusion cap is significantly higher than in smaller towns.
Tip: Keep detailed records of housing expenses to maximize this benefit.
5. Watch Out for UK-Specific Tax Traps
While the US provides exclusions and credits, the UK tax system has its quirks that expats should understand:
- Capital Gains Tax (CGT): The UK taxes capital gains differently from the US. Some exemptions apply, but coordination is needed to avoid mismatches.
- ISAs (Individual Savings Accounts): These are tax-free in the UK but taxable in the US. Many US expats unknowingly trigger IRS reporting requirements with ISAs.
- Pensions: UK pension contributions may receive UK tax relief but are still taxable in the US unless covered under treaty provisions.
Strategy: Avoid investing in UK tax shelters that are not recognized by the US.
6. Stay Compliant with Reporting Requirements
Even if you don’t owe additional US taxes, you still must file annual returns and reports:
- Form 1040: Standard US individual tax return.
- FBAR (FinCEN Form 114): Required if you have over $10,000 across all foreign financial accounts at any point in the year.
- FATCA (Form 8938): Required for reporting foreign assets above certain thresholds.
Warning: Non-compliance carries steep penalties, often higher than the actual tax owed.
7. Work with a Cross-Border Tax Professional
International taxation is complex. The overlap of US and UK tax laws, treaty applications, and reporting obligations can be overwhelming. A tax advisor who specializes in US expats in the UK can:
- Ensure you claim all eligible exclusions and credits.
- Help you structure investments and pensions tax-efficiently.
- Keep you compliant with both IRS and HMRC.
While hiring an expert involves cost, the savings in avoided double taxation and penalties often outweigh the fees.
Final Thoughts
As a US expat in the UK, double taxation may seem unavoidable—but with the right strategies, it doesn’t have to be. By leveraging tools like the Foreign Earned Income Exclusion, Foreign Tax Credit, and the US–UK Tax Treaty, you can significantly reduce your tax burden.
The key is staying informed, organized, and compliant. With careful planning—and professional guidance when needed—you can enjoy life in the UK without unnecessary tax headaches.
