US vs UK Tax: How the Two Systems Compare
If you are a US person living, working, or investing in the United Kingdom -- or just trying to understand how the two systems differ -- the headline you cannot ignore is this: the United States taxes its citizens on worldwide income no matter where they live, while the UK taxes on residence. That single difference means an American in London does not swap the IRS for HMRC; they answer to both. This comparison sets the two systems side by side and then walks the differences that actually cost US persons money: the citizenship-based filing obligation, choosing the Foreign Tax Credit over the Foreign Earned Income Exclusion in a high-tax country, the mismatched tax years, and the UK tax-free wrappers (like the ISA) that the US simply does not recognize. Figures are for the 2026 US tax year and the 2025/26 UK tax year. This is general guidance, not advice for your specific situation.
The short answer
The US taxes citizens and green-card holders on worldwide income regardless of residence; the UK taxes on residence (with the new Foreign Income and Gains regime replacing non-dom status from April 2025). The UK's top income tax rate is 45% (vs 37% US federal), its capital-gains rates are 18%/24% (vs 0/15/20% plus 3.8% NIIT in the US), and it funds the NHS partly through 8% employee National Insurance and a 20% VAT. The UK tax year runs April 6 to April 5, not the calendar year. Americans in the UK keep filing US returns and typically use the Foreign Tax Credit, because the UK is a higher-tax country than the US at most income levels.
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United States vs United Kingdom at a glance
| Dimension | United States | United Kingdom |
|---|---|---|
| Tax authority | IRS (federal) + 50 state revenue departments | HMRC (single national authority) |
| Basis of taxation | Citizenship AND residence -- US citizens/green-card holders taxed on worldwide income wherever they live | Residence (and, until April 2025, domicile). Non-dom status replaced by the residence-based Foreign Income and Gains (FIG) regime |
| Tax year | Calendar year (Jan 1 - Dec 31) | April 6 - April 5 |
| Top income tax rate | 37% federal (plus state income tax in most states) | 45% additional rate (no separate state/regional layer in England; Scotland sets its own bands up to 48%) |
| Tax-free base | Standard deduction $16,100 single / $32,200 MFJ (2026) | Personal allowance £12,570, fully tapered away above £125,140 of income |
| Capital gains | Long-term 0/15/20% + 3.8% NIIT; short-term at ordinary rates | 18% (basic-rate band) / 24% (higher) for most assets, after a £3,000 annual exempt amount |
| Dividends | Qualified dividends 0/15/20%; ordinary at marginal rates | 8.75% / 33.75% / 39.35% by band, after a £500 dividend allowance |
| Social/payroll tax | FICA 7.65% employee (15.3% self-employed) up to the $184,500 SS wage base + Medicare | National Insurance: 8% employee main rate; class 4 for the self-employed |
| Consumption tax | No federal VAT; state + local sales tax (0% to ~10%) | VAT at a standard 20% (5% and 0% reduced rates) |
| How most people file | Nearly everyone files a Form 1040 each year | PAYE withholds at source; most employees never file. Self Assessment for the self-employed and higher earners |
The difference that defines everything: citizenship-based taxation
The US is one of only two countries (with Eritrea) that taxes its citizens on worldwide income regardless of where they live. Moving to the UK does not end your US tax filing -- a US citizen in Manchester still files a Form 1040 every year reporting worldwide income, plus FBAR and FATCA forms for UK bank and investment accounts. The UK, by contrast, taxes you because you are resident there, and stops taxing your foreign income once you cease to be UK-resident. So an American in the UK is in BOTH systems at once and must use treaty mechanisms to avoid being taxed twice on the same income. A Briton who moves to the US simply becomes a US tax resident and (once non-resident) drops out of the core UK income tax net.
FEIE vs Foreign Tax Credit: in the UK, the credit usually wins
US persons abroad have two main tools to avoid double tax: the Foreign Earned Income Exclusion (FEIE, Form 2555), which excludes up to about $132,900 of earned income for 2026, and the Foreign Tax Credit (FTC, Form 1116), which credits foreign income tax dollar-for-dollar against US tax. The decision rule is rate-driven: in a country whose tax rate is HIGHER than the US (which the UK generally is at middle and upper incomes), the FTC is usually better because the UK tax you pay more than wipes out the US tax, and excess credits carry forward. The FEIE tends to win only in low-tax situations. The FTC also preserves earned income for the refundable Child Tax Credit, which the FEIE can reduce -- a meaningful difference for American parents in the UK.
The totalization agreement stops double social-security tax
Without coordination, an American working in the UK could owe both US Social Security/Medicare tax and UK National Insurance on the same earnings. The US-UK Totalization Agreement prevents that: it assigns you to one country's system based on the nature and expected length of your assignment (generally the country where you work, with a detached-worker exception for temporary postings). It also lets you combine US and UK coverage credits to qualify for benefits. This is separate from the income-tax treaty -- social taxes and income taxes are coordinated under different agreements, and you need to get both right.
The tax-year mismatch creates real apportionment work
The US tax year is the calendar year. The UK tax year runs from April 6 to April 5. For an American in the UK claiming the Foreign Tax Credit, this mismatch is not cosmetic -- UK tax is assessed over a period that straddles two US tax years, so you must apportion UK income and UK tax paid to the correct US calendar year to compute the credit correctly. Most cross-border filers handle this by tracking income monthly and allocating, or by using the 'paid' vs 'accrued' FTC election carefully. It is one of the most common sources of error on US returns filed from the UK.
UK tax-free wrappers are not tax-free to the IRS
The UK's Individual Savings Account (ISA) is completely tax-free under UK law -- no UK tax on the interest, dividends, or gains inside it. But the US does not recognize the ISA wrapper. To the IRS, an American's ISA is just a taxable account: the income and gains inside it are reportable and taxable on the US return every year, and ISA holdings in non-US funds can trigger the punitive Passive Foreign Investment Company (PFIC) rules and Form 8621. UK pensions fare better -- the income-tax treaty gives them broad recognition -- but even there the US treatment of the 25% tax-free lump sum differs from the UK's. The lesson for US persons in the UK: a UK 'tax-free' product is frequently a US tax problem.
Different shapes: rate stacks and what tax buys
Beyond the mechanics, the systems have different shapes. UK headline rates are higher (45% top vs 37% US federal), but the UK has no general state/local income-tax layer the way most US states do, and UK National Insurance (8% employee) is lower than the combined US FICA/SE burden for the self-employed. The UK funds the NHS partly through general taxation and NI, so UK residents do not buy private health insurance the way most Americans do -- an out-of-pocket cost that is invisible on a tax return but real in a household budget. Comparing 'who pays more' therefore requires looking past headline rates to the full stack: income tax, social tax, consumption tax (the 20% VAT is a large tax), and what public services the tax actually funds.
Key facts
Frequently asked questions
If I move to the UK, do I stop filing US tax returns?
No. The US taxes its citizens and green-card holders on worldwide income regardless of where they live, so you keep filing a US Form 1040 every year you remain a citizen or green-card holder, plus FBAR (FinCEN 114) and often FATCA (Form 8938) for your UK accounts. You use the Foreign Tax Credit or the Foreign Earned Income Exclusion to avoid being taxed twice, but the filing obligation itself never ends just because you left the US. Only formally expatriating ends it -- see the Expatriation guide.
Is my UK ISA tax-free in the US?
No. The ISA is tax-free under UK law, but the US does not recognize the wrapper. To the IRS your ISA is an ordinary taxable account: the interest, dividends, and gains inside it are reportable and taxable on your US return each year. Worse, ISAs holding UK or other non-US funds can fall under the Passive Foreign Investment Company (PFIC) rules, which carry punitive tax and a separate Form 8621 filing for each fund. Many US persons in the UK hold cash ISAs or US-domiciled holdings to avoid the PFIC trap.
Who pays more tax overall, the US or the UK?
At most middle and upper incomes the UK is the higher-tax country on earned income once you combine its 40%/45% rates with the 20% VAT, which is why Americans in the UK usually rely on the Foreign Tax Credit rather than the exclusion. But the comparison depends on the full stack: US filers also pay state income tax in most states and far higher out-of-pocket healthcare costs, while the UK funds the NHS through taxation. Headline rates alone are misleading -- you have to count income tax, social tax, consumption tax, and what the tax buys.
Does the UK have anything like the US capital gains rate?
The structures differ. The US taxes long-term capital gains at preferential 0/15/20% rates (plus the 3.8% NIIT for higher earners) and short-term gains at ordinary rates. The UK taxes most capital gains at 18% (within the basic-rate band) or 24% (higher band) after a £3,000 annual exempt amount, with no long-vs-short-term distinction. For a US person with UK gains, both systems apply and the Foreign Tax Credit coordinates them -- but the timing and character differences require care.
Primary sources
- GOV.UK -- Income Tax rates and Personal Allowances
- GOV.UK -- Capital Gains Tax rates
- GOV.UK -- National Insurance: how much you pay
- GOV.UK -- VAT rates
- IRS -- Foreign Tax Credit
- IRS -- Foreign Earned Income Exclusion
- IRS -- US income tax treaties A to Z
- IRS -- Totalization Agreements
- IRS -- US citizens and resident aliens abroad
- IRC §911 Foreign earned income (Cornell)
- IRC §901 Foreign tax credit (Cornell)