US citizens living in the UK: tax issues

An American living in the UK is taxed by both countries: by the UK because they are resident here, and by the US because of citizenship. The UK and US double taxation convention lets the US go on taxing its citizens almost as if the treaty did not exist, so relief comes mainly through foreign tax credits and a short list of protected articles. Most of the trouble sits in four places: how credits are calculated, ISAs, pensions and the mismatch between the two tax years.

Why does an American in the UK have to deal with two tax systems?

HMRC’s Double Taxation Relief Manual (DT19853) states the starting point plainly: the United States taxes its citizens on their worldwide income wherever they live. The UK, for its part, taxes its residents on their worldwide income. Residence is decided by the statutory residence test, and once someone is UK resident GOV.UK says they will normally pay UK tax on foreign income and usually report it on a Self Assessment return. The UK tax year runs from 6 April to 5 April.

The convention, signed on 24 July 2001 and in force from 31 March 2003 (SI 2002 No. 2848), does not remove either liability. Article 1(4), usually called the saving clause, says a state may tax its residents, and by reason of citizenship its citizens, as if the convention had not come into effect. In practice the UK applies the treaty as the country of residence, while the US keeps its citizenship based charge.

Article 4(2) adds a residence twist. A US citizen or green card holder counts as a US resident for treaty purposes only if they have a substantial presence, permanent home or habitual abode in the US. An American settled in London with no US home will usually be a UK resident only for treaty purposes, which is the position the rest of this page assumes.

The banks know about citizenship too. Under the UK and US agreement signed on 12 September 2012 to implement FATCA, UK financial institutions must identify and report accounts held by US citizens to HMRC, which passes the data to the Internal Revenue Service (International Exchange of Information Manual, IEIM400040).

Which treaty protections survive the saving clause?

Article 1(5)(a) lists the provisions that still apply to a state’s own citizens despite Article 1(4). They are Article 9(2), Article 17(1)(b), 17(3) and 17(5), Article 18(1) and 18(5), and Articles 24 (relief from double taxation), 25 (non discrimination) and 26 (mutual agreement procedure). Anything not on that list, such as a rule that a type of income is “taxable only in” the UK, generally does not stop the US taxing its own citizen.

Giving up citizenship is not an instant exit either. Under Article 1(6), a former citizen whose loss of citizenship had tax avoidance as one of its principal purposes is still treated as a citizen for ten years, but only for income from US sources.

How do foreign tax credits work in each direction?

Article 24(1) requires the US to allow its citizens a credit for UK income tax, subject to US law. Article 24(4) requires the UK to give credit for US tax on US source income, subject to UK law on credit relief (see foreign tax credit relief).

Article 24(6) then sets special rules for a US citizen resident in the UK:

• the UK is not bound to give credit for US tax on income or gains from sources outside the US;
• on US source income, the UK credit is capped at the tax the US could charge under the convention on a UK resident who is not a US citizen;
• the US must then credit the UK tax left after that capped UK credit;
• for that purpose only, the income is treated as arising in the UK so that the US credit works.

Illustration only. An American resident in the UK receives a £1,000 dividend from a US company. HMRC’s treaty summary (DT19852) gives a 15% treaty rate for portfolio dividends. The UK credit is therefore limited to £150, whatever the US actually charges the citizen. The UK tax remaining after that £150 credit is what the US is then required to credit against its own tax. How the US computes its side is a matter of US law.

Timing adds friction. The convention itself distinguishes US “taxable periods” beginning on 1 January from the UK “year of assessment” beginning on 6 April (Article 29), so the same income often sits in different returns. If double taxation is not relieved, Article 26 allows a case to be presented to the competent authority within three years of first notification of the action, or six years from the end of the relevant taxable year if later.

Can an American use an ISA?

On the UK side there is no bar. GOV.UK says you can open an ISA if you are UK resident, the 2026 to 2027 allowance is £20,000, and ISA interest, income and gains do not go on a UK tax return. See our guide to ISA tax rules.

The problem is that the ISA exemption is a UK relief. The convention contains no article on ISAs, and the saving clause lets the US tax its citizens as if the convention did not apply. Nothing in the treaty therefore makes the US follow the UK exemption. An American should take US advice before choosing an ISA or the investments held in it.

How does the treaty treat pensions?

This is where the treaty does most for Americans, because several pension rules are on the Article 1(5) protected list.

• Contributions to a UK workplace scheme. Article 18(5) lets a US citizen employed in the UK by a UK employer deduct or exclude contributions to a UK scheme, and employer contributions and accruals, when computing US taxable income. The relief is limited to contributions that qualify for UK relief, cannot exceed what the US allows for a corresponding US scheme, and applies only if the US competent authority has agreed that the scheme generally corresponds.
• Contributions to a US scheme while working here. Article 18(2) and (3) can give UK relief, but only if contributions were made before the work in the UK began and HMRC as competent authority has agreed the scheme generally corresponds to a UK one. The relief cannot exceed what a UK scheme would get.
• Growth inside a scheme. Article 18(1) says income earned by a scheme in the other state is taxed as the member’s income only when paid out.
• Pension income. Article 17(1)(a) makes pensions taxable only in the state of residence, but Article 17(1)(b) exempts an amount that would be exempt in the source state if the owner lived there. US social security paid to a UK resident is taxable only in the UK under Article 17(3), and both of those rules are protected for citizens.
• Lump sums. Article 17(2) says a lump sum from a scheme is taxable only in the state where the scheme is established. That paragraph is not on the protected list, so the treaty does not stop the US taxing a citizen on a UK lump sum.

Our page on foreign pensions received by UK residents covers the UK reporting side.

What changed for Americans who arrive from April 2025?

From 6 April 2025 the remittance basis ended and all UK residents are taxed on the arising basis (RFIG41000). Someone arriving after at least ten consecutive tax years of non residence can claim relief on foreign income and gains for their first four years of UK residence, and nationality is irrelevant. The claim must be made year by year; see the four year FIG regime. Where income is relieved in the UK, there is no UK tax on it for the US side to credit, so the overall effect needs working through on both returns.

What mistakes come up most often?

• Treating “taxable only in the UK” as binding on the US. For citizens it usually is not, unless the provision is listed in Article 1(5).
• Claiming UK credit for the full US tax on US income. Article 24(6)(b) caps it at the non citizen treaty rate.
• Forgetting the UK return. Paying US tax on foreign income does not remove the UK duty to report it. Missing Self Assessment deadlines brings penalties of its own.
• Opening ISAs or UK funds without checking the US position.
• Assuming a UK pension lump sum is tax free everywhere.
• Overlooking that UK banks report US citizens’ accounts to HMRC for onward exchange.

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Related Accountapedia entries

• How double tax treaties work
• Certificates of UK residence for treaty claims
• Tax on director fees from an overseas company
• Keeping ISAs and UK accounts after moving abroad
• Leaving the UK: tax steps and form P85

Sources

• GOV.UK: Manual page DT19853
• GOV.UK: Tax foreign income
• GOV.UK: Manual page DT19850
• GOV.UK: 2001 uk usa double taxation convention as amended by the 2002 protocol
• GOV.UK: Manual page DT19852
• GOV.UK: Manual page IEIM400040
• GOV.UK: Individual savings accounts
• GOV.UK: Manual page RFIG41000

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.