Foreign Tax Credit (Form 1116): the main relief for Americans in the UK

The Foreign Tax Credit lets you reduce your US income tax, dollar for dollar, by income tax you have paid to another country. For Americans working in the UK it is usually the relief that matters most, because UK income tax is generally as high as or higher than the US tax on the same income.

How it works

The credit is claimed on Form 1116. It is a credit against tax, not a deduction from income. If you earn £100,000 in London and pay roughly £28,000 of UK income tax, that is around US$35,000 of creditable tax at typical exchange rates, which comfortably exceeds the US federal tax on the same income. The US tax falls to nil and the unused credit carries forward.

The limitation

You cannot credit more foreign tax than the US tax attributable to your foreign-source income. Form 1116 calculates:

Credit limit = (foreign-source taxable income ÷ total taxable income) × US tax before credits

For someone whose income is entirely UK-source, the limit is simply the US tax on that income. Credit above the limit is not lost: it carries back one year and forward ten years, within the same income basket.

Income baskets

The limit is calculated separately for each category of income:

• General: wages, salary, self-employment and business income.
• Passive: dividends, interest, capital gains, rent and royalties.
• Section 951A (GILTI) and foreign branch income, for owners of foreign companies and branches.

Baskets do not mix. Spare credit from UK PAYE cannot offset US tax on UK dividends, which sit in the passive basket.

Which UK taxes qualify

Creditable: UK income tax (PAYE and Self Assessment) and UK capital gains tax. Corporation tax is creditable only in specific situations for shareholders.

Not creditable: National Insurance contributions (a social security charge, dealt with by the Totalization Agreement instead), VAT and council tax.

Foreign Tax Credit or FEIE?

In the UK the credit usually wins, for the reasons set out in our FEIE guide: it covers all income types, avoids the stacking rule, preserves IRA eligibility and the refundable Child Tax Credit, and produces carry-forward credit. The exclusion can still make sense for lower earners whose UK tax is relatively low, for example because of the personal allowance. We model both before choosing.

The UK dividend problem

UK dividend tax rates for 2026/27 are 10.75%, 35.75% and 39.35% above the £500 allowance (2025/26: 8.75%, 33.75% and 39.35%), and the tax falls in the passive basket. Qualified dividends are taxed in the US at 0%, 15% or 20%, so the passive-basket limit is often lower than the UK tax paid, leaving unused passive credit and sometimes residual US tax where UK rates are lower. ISA income makes this worse: no UK tax is paid, so there is nothing to credit and the income is fully US-taxable.

Paid or accrued

Most individuals credit foreign tax in the year it is paid. You may instead elect the accrual method, crediting tax in the year the liability becomes fixed, which can better match UK Self Assessment liabilities paid the following January to the US year in which the income arose. The election is binding for future years, so it should be made deliberately.

Frequently asked questions

Can I credit UK tax on my ISA?

There is no UK tax on ISA income, so there is nothing to credit. The income is taxable in the US in full.

Can I credit UK tax withheld from my pension?

Yes, within the limitation, and the treaty's pension article determines which country taxes which part. Lump sums need separate analysis.

What if I paid UK tax but my UK tax year and US tax year do not line up?

UK tax is apportioned to the US calendar year using a consistent, documented method. We record the method so it is applied the same way every year.