Moving to the UK does not bring an end to US tax responsibilities. Unlike many countries, the United States generally taxes its citizens and certain other individuals based on citizenship rather than residence. As a result, many Americans living in Britain must continue filing annual US tax returns, even if they already pay UK tax.
Understanding the main reporting requirements can help avoid unnecessary penalties and reduce the risk of filing errors. Here are some of the most important rules that US expats in the UK should be aware of.
The US Tax Return Requirement
Many Americans are surprised to learn that living overseas does not automatically remove the obligation to file a US federal tax return. If your income exceeds the relevant filing threshold, you will usually need to submit a return to the Internal Revenue Service (IRS), regardless of where the income was earned.
In addition to filing with HM Revenue & Customs (HMRC), many expats therefore have reporting obligations in both countries. The UK-US tax treaty and various tax relief provisions are designed to help reduce the likelihood of the same income being taxed twice, but they do not remove the filing requirement.
Understanding the Foreign Earned Income Exclusion
One of the best-known tax provisions for Americans abroad is the Foreign Earned Income Exclusion (FEIE). This allows qualifying individuals to exclude a portion of their foreign earned income from US taxation, provided they meet specific eligibility tests, such as the Physical Presence Test or the Bona Fide Residence Test.
The FEIE applies only to earned income, such as salaries or self-employment income. It does not generally apply to investment income, pensions, or rental income, making it important to understand which types of income qualify.
The Foreign Tax Credit
For many Americans living in the UK, the Foreign Tax Credit (FTC) is often more beneficial than the Foreign Earned Income Exclusion. The FTC allows taxpayers to claim a credit for certain income taxes paid to the UK, helping prevent double taxation on the same income.
Depending on individual circumstances, some taxpayers use only the Foreign Tax Credit, while others may combine it with the Foreign Earned Income Exclusion where permitted. Choosing the most suitable approach depends on income sources, tax residency, and long-term financial plans.
FBAR Reporting
US taxpayers with financial accounts outside the United States may also have separate reporting obligations.
The Foreign Bank Account Report (FBAR) must generally be filed if the combined value of foreign financial accounts exceeds the applicable reporting threshold at any point during the calendar year. This includes many common UK accounts, such as current accounts, savings accounts, and certain investment accounts.
Importantly, filing an FBAR is separate from filing a tax return. Even if no US tax is owed, the reporting requirement may still apply.
FATCA Requirements
Another important reporting rule is the Foreign Account Tax Compliance Act (FATCA). Depending on the total value of overseas financial assets, some taxpayers must also report specified foreign assets on IRS Form 8938.
Although FBAR and FATCA reporting can overlap, they are different requirements with different filing thresholds and reporting rules. Confusing the two is a common mistake among expats.
For those with more complex financial arrangements, seeking guidance from professionals experienced in cross-border taxation can be helpful. Firms offering US expat tax services, such as Universal Tax Professionals, assist Americans living abroad with understanding these reporting obligations and meeting US filing requirements.
Common Mistakes to Avoid
Many filing issues arise because taxpayers assume that paying UK tax means they no longer need to file in the United States. Other common mistakes include:
- Forgetting to file the FBAR alongside the annual tax return.
- Assuming the Foreign Earned Income Exclusion applies to every type of income.
- Missing FATCA reporting requirements.
- Failing to report foreign investment or pension income correctly.
- Waiting until the filing deadline without gathering overseas financial records.
Keeping organised records throughout the year can make the filing process much easier.
Staying Compliant
US tax rules for expatriates can seem complicated, particularly when balancing obligations in both the UK and the United States. Fortunately, several provisions exist to reduce double taxation, including the Foreign Earned Income Exclusion, the Foreign Tax Credit, and the UK-US tax treaty.
Understanding how these rules interact—and recognising additional reporting requirements such as FBAR and FATCA—can help Americans living in the UK remain compliant while avoiding common filing mistakes. Reviewing your circumstances regularly and keeping accurate financial records are practical steps towards meeting your ongoing US tax obligations with confidence.
