For thousands of Americans living in the United Kingdom, the UK–US tax treaty was meant to be a shield — a promise that income would not be taxed twice and that the complex web of transatlantic finance could be managed with clarity. Yet, in reality, the treaty has become a maze of exceptions, mismatched definitions, and bureaucratic misunderstandings that have left many paying far more tax than they legally owe.
In some cases, expats have overpaid HMRC by as much as 40%, often without realising it until years later. The reasons range from treaty misinterpretations and unclaimed credits to timing mismatches between the two tax systems. What should have been a protection mechanism has, for many, become an expensive trap.
A Treaty Designed to Prevent Double Taxation — In Theory
The UK–US Double Taxation Convention, first signed in 2001 and updated several times since, was designed to ensure that income is not taxed twice. It allocates taxing rights between the two nations and provides mechanisms such as foreign tax credits, residency tie-breaker rules, and exemptions for certain income categories.
In principle, a taxpayer should be able to offset UK tax paid against US tax owed on the same income. The idea is simple: a fair balance between two major economies that share many citizens, investors, and professionals moving back and forth each year.
In practice, however, the treaty’s complexity and the differences in accounting methods between HMRC and the IRS have created fertile ground for error. As both authorities tighten compliance rules and digital reporting expands, even the most financially literate expats are finding themselves caught off guard.
Trap 1: Residency Confusion — Where “Home” Means Two Different Things
The first major pitfall lies in residency classification. The UK uses the Statutory Residence Test (SRT), which considers physical presence, ties, and work patterns. The US, however, taxes its citizens on worldwide income, regardless of where they live.
This means that even if an American meets the UK’s definition of tax resident and pays UK taxes accordingly, they must still file a US return and potentially pay US tax — unless protected by treaty provisions or eligible for exclusions such as the Foreign Earned Income Exclusion (FEIE).
Many expats fail to apply the treaty’s tie-breaker rules correctly, leading both HMRC and the IRS to treat them as residents simultaneously. The result is double taxation — and a paper trail nightmare trying to reclaim the excess.
Trap 2: Misaligned Tax Years and Payment Dates
Another subtle but costly problem arises from timing mismatches.
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The UK tax year runs from 6 April to 5 April of the following year.
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The US tax year is the calendar year, from 1 January to 31 December.
This misalignment often leads to credit mismatches, where tax paid in one jurisdiction doesn’t line up with when the other recognises the income. For example, a bonus paid in March may fall into different years for the UK and the US, making it temporarily impossible to claim matching credits.
Without expert intervention, those mismatches accumulate — creating what accountants call a “foreign tax credit orphan”, income taxed twice because the timing windows don’t overlap neatly.
Trap 3: Pension and Retirement Accounts — The Silent Drainers
Retirement savings are another grey area. British ISAs (Individual Savings Accounts) are tax-free in the UK, but the IRS does not recognise them as tax-exempt. The same confusion extends to UK employer pension schemes, which may receive relief under the treaty, but only if properly disclosed and structured.
Likewise, American expats contributing to 401(k)s or IRAs often assume those savings are protected from HMRC taxation, when in fact, the UK treats them differently. Without a clear declaration and correct treaty referencing, income growth within these accounts can be taxed by HMRC — negating years of savings effort.
It’s a trap that silently drains returns. Many dual-nationals discover years later that their “tax-free” growth wasn’t free at all.
Trap 4: Misreported Capital Gains — The 28% Surprise
When it comes to capital gains, the two systems clash dramatically.
The US calculates gains based on dollar-denominated cost and sale prices, while the UK uses sterling values. Exchange-rate fluctuations can therefore create artificial gains or losses depending on which currency moved — even if the real-world profit was minimal.
Moreover, the UK does not distinguish between short- and long-term gains, while the US does. A gain taxed at 20% in the US may be subject to 28% under HMRC rules if classified differently.
Expats who fail to file properly aligned foreign tax credit claims can end up paying the difference twice — an overpayment of up to 40% on the same sale.
Trap 5: Mismatched Allowances and Deductions
Each country offers its own set of personal allowances and deductions. The UK allows a Personal Allowance(currently £12,570), while the US provides a Standard Deduction (around $14,600 for single filers in 2025). But these cannot be combined or duplicated.
Too often, expats mistakenly claim both, unaware that HMRC and the IRS may adjust returns later. When the correction arrives, it brings a hefty penalty, plus interest for under- or over-payment.
Additionally, certain UK tax-advantaged investments — like Enterprise Investment Schemes (EIS) — don’t qualify for similar relief in the US. The same investment that saves you thousands under HMRC can trigger a tax liability across the Atlantic.
Trap 6: HMRC’s Limited Recognition of US State Taxes
Perhaps one of the most overlooked areas is the treatment of US state taxes.
The UK–US treaty covers federal income tax, not state taxes. This means that if a taxpayer pays 5–10% in state tax (e.g. California, New York, or New Jersey), HMRC will not recognise that payment for foreign tax credit purposes.
In effect, that money vanishes from the credit calculation. The expat ends up paying HMRC the full UK rate plus their non-creditable state tax — a double hit that can easily push their total liability 30–40% higher than necessary.
Trap 7: Social Security and National Insurance Overlaps
The UK and US have a Totalisation Agreement designed to prevent double payment of social security taxes. However, misunderstandings are common, especially among freelancers and self-employed expats.
If the proper Certificate of Coverage (Form CA3822 for UK residents) isn’t obtained, both HMRC and the US Social Security Administration can demand contributions. For high earners, this can amount to thousands in unnecessary payments each year.
The Real-World Cost: Case Studies of Costly Oversights
Consider “David”, a 42-year-old software consultant from California working in London. He filed both UK and US returns on his own, using online tax software. Everything looked fine — until he realised three years later that his UK pension contributions were not properly excluded under the treaty. After an HMRC review, he discovered he had overpaid nearly £18,000 in combined taxes.
Or “Sarah”, a dual citizen who sold a rental property in Bath. Her US accountant calculated the gain in dollars, while HMRC taxed it in pounds. The fluctuating exchange rate meant she effectively paid tax on a phantom gain that never existed in real terms. It took a professional tax advisor months to reconcile the records and recover part of the overpayment.
These stories are not rare. According to UK tax advisors specialising in expat cases, as many as 60% of US citizens living in Britain either misfile or overpay due to treaty confusion.
What HMRC Doesn’t Tell You
While HMRC’s website outlines the treaty framework, it stops short of explaining how to navigate dual filing situations in practice. Many taxpayers assume that once their self-assessment is complete, the job is done. In fact, the treaty requires proactive elections — for example, to claim certain reliefs, or to exclude specific income types — that must be formally stated on the US side as well.
Without those elections, the IRS may not honour HMRC’s calculations, even if they are technically correct.
It’s a subtle but critical point: the treaty protects you only if you invoke it properly.
How to Legally Reduce the Overpayment
Avoiding these pitfalls starts with documentation and professional oversight.
Experts recommend the following steps:
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Confirm residency status under both systems each year, especially if work patterns or travel days change.
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Align tax-year data through careful record-keeping or professional software that converts dates and exchange rates accurately.
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Disclose all pensions and savings accounts, even if they appear tax-free locally.
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Elect treaty benefits explicitly in US filings using the correct forms (e.g., Form 8833).
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Seek dual-qualified tax advice rather than separate local accountants — coordination is key.
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Check for foreign tax credit carryovers from prior years, which may offset future liabilities.
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Revisit filings periodically, as both HMRC and IRS regulations evolve yearly.
For those already caught in the trap, a retroactive claim for overpaid UK tax may still be possible, provided documentation and timing rules are met.
Expert Guidance: When Professional Help Pays for Itself
Most double-taxation problems stem not from negligence but from structural confusion. The UK–US treaty was drafted for clarity but implemented across two of the world’s most complex tax codes. Without cross-border expertise, even seasoned professionals can make mistakes that cost tens of thousands.
Specialist firms such as My Tax Accountant offer dedicated personal tax services for US citizens living in the UK, ensuring both HMRC and IRS filings align precisely. Their advisors typically handle everything from treaty-based relief elections to reclaiming past overpayments — work that often recovers more than the fee itself.
The 2025–2026 Outlook: Tougher Enforcement Ahead
The coming tax years may be the toughest yet for transatlantic taxpayers. HMRC is expanding its digital data exchange with the IRS under the Common Reporting Standard (CRS), meaning that undeclared income or mismatched filings will be flagged automatically.
Meanwhile, the US has intensified scrutiny on foreign accounts through the Foreign Account Tax Compliance Act (FATCA). Dual residents can expect more correspondence, more form filings, and — if unprepared — more penalties.
Those who act now, align their records, and confirm their treaty positions will weather the storm with minimal friction. Those who delay risk paying twice for the same income.
Conclusion: From Treaty Protection to Treaty Awareness
The UK–US tax treaty was never meant to be an obstacle, but without precise execution, it becomes one. Most American expats don’t knowingly overpay HMRC — they simply assume the system “balances out.” Unfortunately, in cross-border taxation, assumptions are expensive.
By understanding the traps — from residency to pensions, capital gains to state taxes — and seeking coordinated professional advice, US citizens in Britain can reclaim control of their finances.
In the end, the difference between compliance and overpayment isn’t intelligence or intent — it’s awareness.
And awareness, in the world of international tax, is the most valuable deduction of all.
