Why Do Americans in the UK Pay US Taxes? Citizenship-Based Taxation Explained

Americans living in the UK must file US tax returns because the United States taxes its citizens on their worldwide income wherever they live, a system known as citizenship-based taxation. An American who has lived in London for decades therefore remains within the US tax system, alongside the UK’s. Economics helps explain how this system works, why it creates unusual costs, and why it remains controversial.

What Is Citizenship-Based Taxation?

Income tax is one of the main direct taxes, levied on the incomes of individuals and firms. Almost every country taxes individuals according to residence: people pay income tax where they live. The United States is one of only two countries, alongside Eritrea, that taxes according to citizenship instead.

The practical result is that an American resident in the UK falls under two tax systems at once. HMRC taxes them as a UK resident, while the Internal Revenue Service (IRS) expects an annual US return reporting their worldwide income, even if all of it is earned in Britain.

How Double Taxation Relief Works for Americans in the UK

Being taxed twice on the same income would sharply reduce the incentive to work and save abroad, so the US offers relief. The foreign earned income exclusion allows qualifying citizens to exclude a set amount of foreign earnings from US tax. The IRS sets this limit each year, adjusting it for inflation, and for the 2025 tax year it was $130,000 per qualifying person. Alternatively, a foreign tax credit lets taxpayers offset UK tax already paid against their US liability. A US–UK tax treaty adds further rules on which country may tax particular types of income.

The United Kingdom (UK) and the United States (US) are each subject to their respective income tax systems. Since the two systems have many similarities in their rates of taxation, many Americans living in the UK do not have to pay any additional US income taxes, or very few do due to this similarity in rates. However, these similarities do not provide complete double taxation relief because the UK and US define "income" differently. For example, under UK law, the tax-free treatment of ISAs is not treated as such under US law. These mismatches can leave tax owing even where the overall burden seems balanced.

Why Filing US Taxes Is Costly for Americans in the UK

Adam Smith argued in The Wealth of Nations that a good tax should be convenient to pay and cheap to collect. Citizenship-based taxation tests both principles. Even when no US tax is due, Americans abroad must file returns, report foreign bank accounts and track exchange rates. The cost of compliance can exceed the tax actually collected.

This complexity has created a specialist market. Advice on US taxes for Americans in the UK exists largely because understanding two interacting tax systems requires expertise that most individuals lack. 

In economic terms, taxpayers are paying for specialisation: advisers who focus on cross-border tax develop expertise that reduces the cost of errors and penalties. That spending, however, is itself a compliance cost the tax system creates. 

How FATCA Shifts the Tax Burden onto Americans in the UK

The US Foreign Account Tax Compliance Act (FATCA) was introduced to tackle offshore tax avoidance and evasion. It requires foreign banks, including UK banks, to report accounts held by US citizens to the IRS.

Economists distinguish between who is legally responsible for a tax and who bears its burden, a concept known as the incidence of tax. FATCA’s reporting duties fall formally on banks, but some banks have responded by limiting services to US citizens, so much of the burden shifts onto account holders. “Accidental Americans”, people who hold US citizenship through birth but have few ties to the country, can face the same restrictions.

Is Citizenship-Based Taxation Fair? The Economic Debate

Citizenship has many permanent advantages, such as diplomatic protection and the right of return to one's home country; therefore, it is reasonable that citizens living abroad should pay taxes. Furthermore, it would also serve as a disincentive for wealthy people to relocate outside of their home country simply to escape paying taxes.

Critics argue the system breaches the principle that taxes should be cheap and convenient to collect, raising relatively little revenue at a high cost to ordinary taxpayers. Because renouncing citizenship is the only way to leave the system fully, it also creates an incentive for some Americans abroad to give up their nationality. Whether the benefits of citizenship justify these costs remains a question of values as much as economics.