10 Common Tax Mistakes Americans Living in the UK Should Avoid

Moving to the UK as an American is an exciting new city, new job, new pace of life. But there's one thing that follows you across the Atlantic whether you like it or not: your US tax obligations. Unlike almost every other country in the world, the US taxes its citizens on their worldwide income, no matter where they live. That means even if you're paying UK tax through PAYE every month, Uncle Sam still expects to hear from you every year.

The problem is, most Americans in the UK don't find this out until something goes wrong, a missed deadline, a scary letter, or a mortgage application that suddenly gets complicated by unreported foreign accounts. As experienced UK international tax advisors, we see the same mistakes come up again and again. Here are the ten most common ones, and how to avoid them.

1. Assuming You Don't Need to File Because You Pay UK Tax

This is the single biggest misconception we hear. Paying tax in the UK does not exempt you from filing a US tax return. You may not owe additional tax thanks to treaties and credits, but the filing requirement itself doesn't disappear just because you're square with HMRC.

2. Not Filing an FBAR (Foreign Bank Account Report)

If the combined balance of your foreign financial accounts, UK current accounts, savings, ISAs, pensions exceeds $10,000 at any point in the year, you're required to file an FBAR with FinCEN. This is separate from your tax return, has its own deadline, and the penalties for missing it can be steep, even if you owe no tax at all.

3. Contributing to a Stocks & Shares ISA Without Realising the US Tax Trap

ISAs are tax-free in the UK, which makes them a natural place to save. But the IRS doesn't recognise them the same way. A Stocks & Shares ISA is typically treated as a foreign trust or, worse, may hold investments classified as Passive Foreign Investment Companies (PFICs) , one of the most punitive areas of the US tax code. What feels like smart UK saving can quietly create a US tax headache.

4. Investing in UK Mutual Funds or ETFs (and Triggering PFIC Rules)

This issue extends beyond ISAs and affects many UK-based investments. Most UK-domiciled funds are considered PFICs by the IRS, resulting in complex reporting requirements and potentially unfavourable tax treatment, including higher tax rates and interest charges, even if no investments are sold. Many Americans unknowingly build PFIC exposure through workplace pensions, general investment accounts, or advice from UK financial advisers unfamiliar with US regulations. Seeking professional international tax preparation services can help identify PFIC risks, ensure accurate IRS reporting, and minimise costly tax consequences through proper cross-border tax planning. 

5. Overlooking UK Pension Reporting

UK workplace pensions and SIPPs need to be reported to the IRS, and depending on the structure, may require additional forms. Getting pension contributions, growth, and eventual withdrawals right on both sides of the Atlantic is one of the more technical areas of expat tax and getting it wrong can affect both your US filings and your long-term retirement planning.

6. Missing the Foreign Earned Income Exclusion or Foreign Tax Credit Deadline Rules

Two of the main tools that keep most Americans abroad from being double-taxed are the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). Both have specific eligibility tests and elections that need to be made correctly and consistently. Choosing the wrong one, or switching between them without understanding the consequences, can cost you money and create complications for years to come.

7. Not Understanding UK Residency and Domicile Rules

Since April 2025, the UK has moved away from the old "non-dom remittance basis" system to a new residency-based Foreign Income and Gains (FIG) regime. If you've been in the UK a while, or are new to the country, understanding how these rules interact with your US filing obligations is essential; the two systems don't always line up neatly, and getting caught in between can mean paying more tax than necessary.

8. Forgetting About State Tax Obligations

Even after moving abroad, some US states are notoriously reluctant to let go of taxpayers, particularly if you keep a driver's license, property, or voter registration there. Depending on your last state of residence, you may still owe state tax filings even while living in London.

9. Waiting Too Long to Deal With Back Filings

Life gets busy, and it's easy to let US filings slip for a year which can turn into several years. The good news is the IRS has an amnesty-style programme (Streamlined Filing Compliance Procedures) specifically for Americans abroad who've fallen behind non-wilfully. But this only works if you come forward before the IRS contacts you first. Waiting makes your options narrower and more expensive.

10. Trying to DIY Cross-Border Tax With Generic Software

Off-the-shelf tax software is built for domestic US taxpayers. It doesn't understand UK pensions, ISAs, FEIE elections, PFICs, or the interaction between the two tax systems. Using it as an American in the UK is a bit like using a UK road map to drive in Boston. The basic rules of the road are similar, but you'll miss all the local details that actually matter.

Why This Is Worth Getting Right

None of this is designed to alarm you; most of these issues are entirely manageable once you know they exist. The real risk isn't complexity; it's not knowing what you don't know. That's exactly where proper income tax advisory services earn their keep: catching the ISA that's quietly becoming a PFIC, making sure your FBAR is filed alongside your return, or confirming you've made the right FEIE vs. FTC election for your situation.

At Jaffe & Co, we've spent over 40 years focused exclusively on this niche helping Americans in London and across the UK stay compliant on both sides of the Atlantic without overpaying or losing sleep over IRS letters. If you're looking for an international tax advisor in London who actually understands the day-to-day reality of being a US citizen abroad, that's exactly the kind of international tax preparation services we provide, and we'd be glad to help you get things sorted properly.

Frequently Asked Questions

Do I still need to file US taxes if I already pay tax in the UK? Yes, paying UK tax doesn't remove your US filing obligation; the two systems are separate, though credits and exclusions can reduce or eliminate double taxation.

Are UK ISAs really a problem for US taxpayers? Often, yes ISAs can be treated as foreign trusts or hold PFIC investments, which can create unexpected US tax and reporting obligations.

What happens if I've missed several years of US tax returns? You may qualify for the IRS Streamlined Filing Compliance Procedures, which allows non-wilful late filers to catch up with reduced penalties but only before the IRS contacts you first.

Can I use US tax software like TurboTax while living in the UK? Generally not recommended. Most consumer software isn't built to handle UK pensions, PFICs, FEIE elections, or treaty positions correctly.

Do I need to report my UK pension to the IRS? Yes, UK pensions typically need to be reported, and depending on the type, may require specific additional forms and careful tax treatment.