Surviving Uncle Sam While Living in the UK: A Guide to Double Taxation

So, You’re Moving to the UK? Watch Out for the Tax Man!

Moving to the UK is an absolute blast. You get the pubs, the history, and a much shorter flight to the rest of Europe. But there’s a little cloud that follows every American across the pond: the IRS. Because the US is one of the few countries that taxes based on citizenship rather than residency, you might find yourself in a bit of a pickle—potentially being taxed by both the UK and the US. Don’t panic just yet! Dealing with double taxation is a rite of passage for US expats, and it’s totally manageable once you know the ropes.

Wait, Why Am I Being Taxed Twice?

The US government wants a piece of your income no matter where in the world you earn it. Meanwhile, the UK’s tax office, HMRC, wants their share because you’re living and working on British soil. It sounds like a recipe for going broke, but luckily, there are some clever rules in place to make sure you aren’t actually paying double. It’s all about using the right tools to offset what you owe.

The US-UK Tax Treaty: Your New Best Friend

The good news is that the US and the UK have a tax treaty specifically designed to prevent people from being unfairly taxed. This treaty is like a secret handshake between the two governments. It helps determine which country has the primary taxing rights on different types of income, like your salary, dividends, or pension. Most of the time, the treaty ensures you aren’t paying more than the highest tax rate of either country.

1. Foreign Earned Income Exclusion (FEIE)

The FEIE is a popular choice for expats. It allows you to exclude a certain amount of your foreign earnings from US taxation—usually over $120,000 (the amount shifts slightly every year). If you earn less than this threshold, you might not owe the IRS a dime in taxes, though you still have to file the paperwork. It’s a great way to simplify things if you’re a standard employee.

2. Foreign Tax Credit (FTC)

Since the UK generally has higher income tax rates than the US, the Foreign Tax Credit is often the better route. Basically, for every dollar you pay in UK tax, you get a dollar credit toward your US tax bill. Because UK taxes are usually higher, you often end up with a US tax bill of zero, plus some extra credits you can carry forward to future years. It’s a bit more complex than the FEIE, but it’s often more beneficial in the long run.

Don’t Forget the Paperwork (FBAR & FATCA)

Taxes aren’t the only thing the IRS wants to know about. If you have more than $10,000 across all your foreign bank accounts at any point during the year, you have to file an FBAR (Report of Foreign Bank and Financial Accounts). Then there’s FATCA, which involves reporting your foreign assets if they hit a certain value. These don’t necessarily cost you money, but the penalties for forgetting them are scary, so keep them on your radar!

Pro Tips for US Expats

Living in the UK is expensive enough without making tax mistakes. First, always track your days spent in the US, as this can affect your tax status. Second, be careful with UK ISAs (Individual Savings Accounts)—while they are tax-free in the UK, the IRS doesn’t recognize them that way, and they can be a reporting nightmare. Finally, if you’re feeling overwhelmed, don’t be afraid to hire a pro. A tax advisor who specializes in US-UK dual filing is worth their weight in gold for the peace of mind alone.