The US-UK tax treaty and the saving clause

The US-UK double taxation treaty divides up taxing rights between the two countries so the same income is not fully taxed twice. For most people it works quietly in the background: you pay UK tax where the UK has first claim, and credit it against any US tax on the same income.

The saving clause

The catch is a provision called the saving clause. It lets the United States tax its citizens and green-card holders as though the treaty did not exist, overriding most of the relief the treaty otherwise gives. Because US tax is based on citizenship, an American in the UK stays inside the US net, and the saving clause is what keeps them there.

What survives the clause

The treaty carves out specific exceptions the saving clause does not override. The most valuable for an American in the UK is the treatment of pensions: the treaty generally lets a UK pension grow tax-deferred for US purposes, which is why a SIPP can work where an ISA does not. Certain other items, such as some social security and government-service pensions, also survive. The list is short and worth reading literally rather than assuming the treaty protects more than it does.

The foreign tax credit and exclusion

Outside the treaty, two mechanisms do most of the work of preventing double tax for Americans abroad: the foreign tax credit, which credits UK tax paid against US tax, and the foreign earned income exclusion. UK rates are often high enough that the credit wipes out the US bill on the same income, but the US return still has to be filed to claim it.

The treaty is the reason a SIPP is treated kindly; see how the US taxes your UK SIPP.