How US and UK Income Taxes Differ
IRS & HMRC, Guide
The structural differences between the US and UK income tax systems that cause most cross-border problems, from tax years to ISAs.
How US and UK Income Taxes Differ: the short answer
The US and UK tax income in ways that look alike on the surface and diverge underneath. The differences explain most of the problems Americans in Britain and Britons with US ties run into. This guide sets out the structural ones rather than the rates.
Two systems that rarely line up
The US taxes its citizens and green card holders on worldwide income wherever they live.
The UK taxes on residence, decided by the Statutory Residence Test. A US citizen in London is therefore within both systems. The UK tax year runs from 6 April to 5 April, while the US year is the calendar year, so every UK figure has to be re-cut into two US years before the returns can agree.
The UK taxes each spouse separately, with no joint return. The US allows married filing jointly, but a citizen married to a non-US spouse usually files as married filing separately unless an election is made. Most UK employees settle their tax through PAYE and never file, whereas the US expects an annual return from almost everyone with income above the thresholds. An American on PAYE usually has a US filing obligation even with nothing further to pay in the UK.
UK tax shelters do not carry across. ISA income and gains are exempt in the UK but fully reportable in the US, and funds inside ISAs are commonly PFICs. UK pension growth is generally protected under the treaty, while relief for contributions is narrower. UK private residence relief has no US mirror, as section 121 has its own tests. And because UK tax is often settled after the US return, foreign tax credit timing needs managing.
At a glance
- Citizenship and residence, on worldwide income
- US basis
- Residence under the Statutory Residence Test
- UK basis
- Calendar year versus 6 April to 5 April
- Tax years
- Joint filing possible in the US, never in the UK
- Spouses
Figures are for the tax year stated in the official instructions linked below.
How we handle it
- Cross-Border Tax
US and UK returns prepared together from one set of workpapers, so credits, tax years and exchange rates line up across both.
- Individual Tax Returns
US federal returns for Americans living in the UK and British nationals with US income, prepared with the UK figures in view.
- UK Self Assessment
Self Assessment returns for UK residents with US income, residence questions or treaty claims, prepared with the US return in view.
- Treaty Relief
Claims under the US/UK income tax treaty, with Form 8833 disclosure, residence tie-breaker analysis and reduced withholding on US income.
Where people go wrong
The misreadings we correct most often.
Who this affects
- US citizens and green card holders living in the UK
- British nationals moving to the US for work
- Dual citizens filing in both countries every year
- Couples where one spouse is American and the other is not
01
Assuming UK-exempt income such as ISA returns is exempt in the US
02
Treating PAYE as the end of the filing process for an American
03
Selling a UK home without checking the US section 121 rules
04
Claiming foreign tax credits before the UK liability is known
Why US UK Tax Returns
Every form is prepared against the official instructions, and every position on it is one we can point to in the Code, the treaty or HMRC's guidance.
One File
US and UK returns prepared in the same engagement and reconciled line by line.
Primary Sources
Every position traced to the Code, the treaty, IRS instructions or HMRC guidance.
Scope First
Returns, forms, years and fee agreed in writing before work begins.
The Same People
The team that files this year carries the elections and credits into the next.
Questions we are asked
Why does my US return treat my ISA as taxable when the UK does not?
The US does not recognise UK tax-advantaged wrappers except where the treaty specifically says so, and the treaty does not cover ISAs. Interest, dividends and gains inside an ISA are reported on the US return as if held in an ordinary account. Funds held in an ISA are commonly PFICs, which brings Form 8621 and a harsher tax regime unless an election is made.
How do I handle the tax years not matching?
Each US return covers January to December, which spans parts of two UK tax years. UK income and tax are apportioned to the calendar year, and the foreign tax credit is matched to the income it relates to. Because UK tax is often finalised after the US return is due, some filers use the accrual method for credits, which is binding once chosen, so it deserves thought first.
If I sell my London flat, will the US tax the gain the UK exempts?
Possibly. UK private residence relief often removes the UK gain on a main home, but the US applies its own section 121 exclusion, which has an ownership and use test and a limit on the amount excluded. Any gain above that is taxable in the US. Currency movement can also create a US gain, or a taxable gain on paying off a sterling mortgage, even when the sterling price barely changed.
Primary sources
What this page says is drawn from the official material below. Read it yourself; we would rather be checked than trusted.
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