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Connect on LinkedInLiving in the United Kingdom as an American can come with many perks—from easy travel across other European countries to access to the UK’s public healthcare system and a completely different pace of life. But one thing doesn’t stay behind when you move overseas: tax obligations.
For U.S. citizens, taxes don’t stop at the border. Americans must continue filing U.S. tax returns and reporting worldwide income to the IRS. But living in the UK can also trigger local tax obligations. Many Americans in Britain become UK residents for tax purposes, meaning they have to pay UK income tax, National Insurance Contributions, and potentially capital gains tax.
Seeing how the UK and U.S. tax systems differ can make it much easier to plan ahead, meet your filing requirements, avoid common mistakes, and manage your overall tax bill.
📋 Key Updates for 2026
- The FEIE rises to $132,900, increasing the amount of foreign salary eligible for exclusion from U.S. taxation.
- The UK personal allowance remains at £12,570, meaning many taxpayers continue paying no UK income tax on the first portion of personal income.
- The UK tax year runs from April 6 to April 5, differing from the U.S. calendar-based tax year.
How the UK and U.S. tax systems work
One of the biggest differences between the UK tax system and the U.S. tax system is who has to file.
U.S. taxes are based on citizenship, which means that U.S. citizens have to file a U.S. tax return regardless of where they live as opposed to the UK who taxes primarily based on tax residence. For Americans living in Britain this means dealing with two tax authorities: The IRS for U.S. tax filing and HMRC (His Majesty’s Revenue & Customs) for UK taxes.
Because the UK is considered a high-tax country, many Americans end up paying most of their income taxes to the UK first. However, tools like the Foreign Tax Credit and the U.S.-UK tax treaty help avoid double taxation.
💡 Pro Tip:
Keep copies of your UK tax returns and PAYE income statements each year—these documents are essential when claiming the Foreign Tax Credit (FTC) on your U.S. tax return.
How income tax compares in the UK v.s. the U.S.
The two countries calculate income tax in different ways, especially when it comes to tax bands, allowances, and deductions.
UK income tax structure
The UK income tax system uses a series of tax bands, with different income tax rates applied to portions of taxable income.
For most UK taxpayers, the system includes:
- Personal allowance: The first ￡12,570 is generally tax-free
- Basic rate: Income above the allowance is taxed at 20%
- Higher rate: Income above ￡50,270 is taxed at 40%
- Additional rate: Very high earners pay 45%
These rules apply across most of the UK, though Scotland has slightly different tax bands.
Many employees pay UK taxes automatically through PAYE (Pay As You Earn), where the employer withholds UK income tax and National Insurance Contributions from each paycheck. However, self-employed individuals or people with certain types of income may need to file through the Self-Assessment system.
The U.S. tax system also uses progressive federal tax brackets, but it includes additional layers such as:
- State taxes
- Local tax obligations
- A wide range of tax deductions and exemptions
Unlike the UK system, Americans generally calculate their tax liability by filing an annual U.S. tax return with the IRS, reporting worldwide income.
For Americans living abroad, provisions such as the Foreign Earned Income Exclusion and Foreign Tax Credit help reduce the overall tax burden.
💡 Pro Tip:
If you live in the UK long term, the FTC is often more valuable than the FEIE because UK income tax rates are higher, allowing you to offset more U.S. tax liability.
Other taxes Americans encounter in the UK
Income taxes aren’t the only difference between the two systems, Americans living in the UK also encounter different rules for payroll taxes, consumption taxes, and property-related taxes.
Payroll taxes: Social Security v.s. National Insurance
In the U.S., employees pay Social Security and Medicare taxes that fund federal retirement and healthcare programs.
In the UK, workers, instead, pay National Insurance Contributions (NICs). These contributions help fund:
- State pensions
- Certain unemployment benefits
- Parts of the National Health Service (NHS)
To prevent workers from paying into both systems at the same time, the U.S. and UK maintain a Totalization Agreement. This agreement ensures most workers contribute to only one system at a time (usually the country where you work).
For example, an American working for a UK employer usually pays UK National Insurance Contributions. Whereas a U.S. employee temporarily assigned to the UK by a U.S. company may remain in the U.S. Social Security system.
Consumption taxes: VAT vs. sales tax
Another noticeable difference is how consumption taxes are applied.
In the U.S., purchases often include sales tax, which is added at checkout and varies by state or local government.
In the UK, most goods and services include Value Added Tax (VAT). Instead of being added at checkout like sales tax, VAT is built into the advertised price. As a result, everyday purchases in the UK often appear more expensive upfront, but the tax is already included in the final cost.
Investment and capital gains taxes
Investment income can also be treated differently between the two countries.
In the UK, capital gains tax applies when you sell certain assets for a profit such as shares or property. The applicable capital gains tax rate depends on the type of asset and the taxpayer’s income level.
In the U.S., capital gains are also taxed when assets are sold. However, U.S. tax rules require Americans to report capital gains on their U.S. tax return even if the assets are located abroad and the gains were already taxed in another country. The IRS also distinguishes between short-term and long-term capital gains, which may be taxed at different rates.
The UK also applies inheritance tax on estates above certain thresholds, which differs from the U.S. estate tax system.
💡 Pro Tip:
Before investing in UK mutual funds or ETFs, check whether they may be classified as Passive Foreign Investment Companies (PFICs) under U.S. tax rules. These investments can trigger complex IRS reporting and potentially higher taxes.
Property taxes and local taxes
Property taxation also works differently between the two countries.
In the U.S., homeowners pay annual property taxes based on the assessed value of their property.
The UK does not use the same system. Instead, local governments collect Council Tax, which helps fund municipal services such as schools, waste collection, and local infrastructure. Council Tax varies by property and location, with some differences across Scotland, England, Wales, and Northern Ireland. Owners of very high-value homes in England may also face the High Value Council Tax Surcharge, a separate charge on residential properties worth £2 million or more from April 2028.
Filing requirements for Americans in the UK
Even if most of your taxes are paid to HMRC, Americans living abroad still have several U.S. tax filing obligations.
Common requirements include:
- Annual U.S. tax return: Americans abroad remain U.S. tax filers, even if most of their income is taxed in the UK. (Americans overseas receive an automatic two-month extension to file, which is usually until June 15).
- Foreign Bank Account Reporting (FBAR): If the combined value of your foreign financial accounts exceeds $10,000 at any point during the year, you have to file an FBAR with the U.S. Treasury.
- FATCA reporting: Some taxpayers also have to report foreign assets on Form 8938 when balances exceed certain thresholds.
These forms often do not create additional taxes, but failing to file them can lead to significant penalties.
Managing U.S. taxes while living in the UK
Managing taxes across the UK and U.S. tax systems can become complicated with a snap of a finger. Even if most of your income is taxed through the UK system, the IRS still wants its share through annual filings and reporting of foreign financial accounts.
Bright!Tax specializes in U.S. expat taxes and helps Americans living abroad stay compliant with IRS rules while minimizing their tax burden. Our team works with expats in the United Kingdom and around the world, handling filings accurately so you can spend more time on building your life abroad, not on taxes.
Get in touch today for help navigating U.S. tax obligations while living in the UK so you can process and file with confidence.
Frequently Asked Questions
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What is the main difference between taxes in the UK vs US?
The biggest difference in taxes in the UK vs US is that the UK generally taxes based on residence, while the U.S. taxes based on citizenship. That means U.S. citizens living in the UK usually still need to file a U.S. tax return, even if they already pay UK tax.
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Do U.S. citizens living in the UK have to file taxes in both countries?
Yes, many do. Americans living in the UK often need to file with both HMRC and the IRS. Even when you do not owe tax in both places, you may still have filing obligations under both U.S. tax systems and UK tax rules.
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Do Americans in the UK pay tax twice on the same income?
Usually not. Although Americans in the UK may have to file in both countries, tools like the Foreign Tax Credit, the Foreign Earned Income Exclusion, and the U.S.-UK tax treaty can help reduce or eliminate double taxation.
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How do the UK and U.S. tax systems compare?
The UK and U.S. tax systems both use progressive tax rates, but they differ in important ways. The UK uses tax bands and usually collects tax through PAYE, while the U.S. requires annual tax filing and may also involve state and local taxes.
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Is income tax higher in the UK or the U.S.?
That depends on your income, filing status, and where you live. In many cases, UK income tax rates are higher than U.S. federal rates, which is why some Americans in Britain can use UK taxes paid to offset their U.S. tax liability.
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What is the difference between PAYE and the U.S. tax filing system?
PAYE is the UK system where employers deduct income tax and National Insurance from wages automatically. In the U.S., taxpayers usually file an annual return and calculate what they owe directly with the IRS. That is one of the practical day-to-day differences in taxes in the UK vs US.
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Do Americans in the UK pay Social Security or National Insurance?
Most Americans working for a UK employer pay UK National Insurance Contributions rather than U.S. Social Security. Thanks to the U.S.-UK Totalization Agreement, workers usually do not have to contribute to both systems on the same income.
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What is the difference between VAT and sales tax?
In the UK, VAT is usually included in the advertised price. In the U.S., sales tax is generally added at checkout and varies by state or locality. It is a small but very visible example of how taxes in the UK vs US work differently in everyday life.
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Do Americans in the UK need to report foreign bank accounts?
Yes, potentially. If the total value of your foreign financial accounts exceeds $10,000 at any point during the year, you may need to file an FBAR. Some expats may also need to file Form 8938 under FATCA.
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How are investments taxed in the UK vs the U.S.?
Both countries tax capital gains, but the rules are not identical. Americans in the UK must still report investment income and gains on their U.S. tax return, even if those investments are held abroad. Certain UK investments, such as some mutual funds and ETFs, may also trigger special U.S. reporting rules.
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Is the UK corporate tax rate the same as the U.S. corporate tax rate?
No. The corporate tax rate in the UK is different from the U.S. federal corporate tax rate, and each country has its own rules for business profits, deductions, and reporting. This matters for Americans in the UK who own companies or run businesses across borders.
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Do I need a UK tax return if I already file a U.S. one?
Not always, but sometimes. Many UK employees do not need to file a Self Assessment return if their taxes are fully handled through PAYE. But self-employed individuals and people with other sources of income often do, even while also filing in the U.S.
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What is the best way to manage taxes in the UK vs US as an expat?
The best approach is to keep clear records, understand which country taxes your income first, and make sure you do not miss U.S. reporting forms. Because the UK and U.S. tax systems overlap in complicated ways, many expats benefit from professional help.
