Foreign Tax Credit: Paid or Accrued? The Form 1116 Election

The foreign tax credit paid or accrued choice decides which US tax year a foreign tax belongs to. By default, an individual claims the credit in the year the foreign tax is actually paid. Under Internal Revenue Code section 905(a), you can elect to claim it in the year the tax accrues instead. You make the election by ticking the "Accrued" box in Part II of Form 1116. Once made, it applies to every later year.

For Americans in the UK, timing is the hardest part of the foreign tax credit. The UK tax year runs from 6 April to 5 April, the US year is the calendar year, and UK tax can be paid months after the income arose. The foreign tax credit paid or accrued election is the main tool for lining the two up. This guide explains both methods, how each works with UK PAYE and Self Assessment, and the obligations that come with accruing.

Foreign tax credit paid or accrued: the two methods

Most individuals are cash-method taxpayers. Without an election, foreign income tax is creditable in the US tax year in which you pay it. The IRS explains both methods in Publication 514, Foreign Tax Credit for Individuals.

The paid method

Under the paid method, the date of payment controls. Tax withheld from wages counts as paid when it is withheld. A balancing payment made in January counts in the calendar year of that January, whichever income it relates to. You translate the tax into dollars at the exchange rate on the day of payment.

The accrued method

Under the accrued method, foreign tax is creditable in the US year in which it accrues. A foreign income tax generally accrues on the last day of the foreign tax year, when all the events fixing the liability have occurred. For the UK, that is 5 April. Therefore, UK tax for the year ended 5 April 2026 accrues in US tax year 2026, even if part of it is paid in January 2027. You translate accrued tax at the average exchange rate for the year to which the tax relates.

How each method works with UK tax

The right answer depends on how you pay UK tax.

PAYE employees

An employee's UK Income Tax is withheld each payday. Under the paid method, tax withheld from January to December is credited in that same US calendar year, alongside the salary it relates to. That is a close match. Under the accrued method, the credit for a US year is the UK tax for the UK tax year ending on 5 April within it. The two differ in timing, but for a steady salary the amounts are similar and the excess credits usually cover any gap.

Self Assessment taxpayers

The self-employed, landlords and investors pay through Self Assessment: payments on account on 31 January and 31 July, and a balancing payment on the following 31 January. Under the paid method, the credit can lag the income by a year or more. Consequently, the US may tax income before any UK tax has been paid on it. The accrued method brings the whole UK liability into the US year in which the UK tax year ends, which is usually closer to when the income arose.

One-off events

The gap matters most for a large one-off item, such as a property sale or a business disposal. If the US taxes a gain in 2026 and the UK tax is not paid until January 2028, a paid-method taxpayer has no credit in 2026. They would rely on the one-year carryback under section 904(c), which may not reach far enough. Our guide to the foreign tax credit carryover and Schedule B explains those limits.

Making the election

You elect by ticking the "Accrued" box in Part II of Form 1116 on a timely filed return. The election covers all your foreign taxes, in every category, for that year and all later years.

The first-year overlap

In the year you elect, you can claim both the taxes that accrue in that year and taxes paid in that year that relate to earlier years. This prevents an earlier year's tax falling between the two methods. As a result, the election year often shows an unusually large credit, which may create carryovers.

The obligations that come with accruing

Accrual is an estimate, so the law requires you to correct it.

The two-year payment rule

Under section 905(c), if accrued foreign tax is not paid within 24 months after the end of the US tax year to which it relates, the credit must be reduced. You notify the IRS by filing an amended return on Form 1040-X with a revised Form 1116. If the tax is paid later, the credit is restored then.

Changes and refunds

If the final UK liability differs from the amount accrued, or HMRC later refunds tax, that is a "foreign tax redetermination". You must report it, whichever method you use. The IRS sets out the procedure in the Instructions for Form 1116. Failing to report a redetermination can lead to a penalty under section 6689.

Foreign tax credit paid or accrued: which should you choose?

In our experience, a UK employee with only PAYE income is usually well served by the default paid method. An American with significant Self Assessment income, or an expected one-off gain, is often better on the accrued method. Because the election cannot be reversed, model several years before making it. Our guide to Form 1116 passive versus general category covers the sorting that applies under either method, and our US expat tax returns page sets out the wider filing picture.

An illustrative case

Consider an illustrative US citizen in Leeds who becomes self-employed in May 2025. The figures are illustrative. Her first UK tax year ends on 5 April 2026, and her first UK payment is due on 31 January 2027. Under the paid method, her 2025 and 2026 US returns show UK profits with little or no UK tax paid, so US tax is due. Under the accrued method, the UK tax for 2025/26 is creditable on her 2026 US return. She elects to accrue in 2026 and keeps a note to check that the tax is paid within 24 months.

If you are unsure which method fits your income, book a consultation with our foreign tax credit team. We model the foreign tax credit paid or accrued choice over several years before you commit.

Frequently Asked Questions

Should I claim the foreign tax credit when paid or when accrued?

By default, individuals claim the foreign tax credit in the year the foreign tax is paid. You can elect under Internal Revenue Code section 905(a) to claim it in the year it accrues. The accrued method often suits people who pay UK tax through Self Assessment, because it brings the credit closer to the income.

How do I elect the accrued method for the foreign tax credit?

Tick the "Accrued" box in Part II of Form 1116 on a timely filed return. The election applies to all your foreign taxes for that year and every later year.

Can I switch back from accrued to paid?

No. Once you elect to claim the foreign tax credit on the accrued basis, you must use it for all later years. You cannot return to the paid method.

When does UK income tax accrue for US purposes?

UK Income Tax generally accrues on 5 April, the last day of the UK tax year. UK tax for the year ended 5 April 2026 therefore accrues in US tax year 2026, even if part of it is paid later.

What happens if I accrue UK tax and do not pay it within two years?

Under section 905(c), accrued foreign tax not paid within 24 months after the end of the US tax year to which it relates is no longer creditable until paid. You must file an amended return on Form 1040-X to reduce the credit.

Which exchange rate applies to accrued foreign taxes?

Accrued foreign taxes are generally translated into US dollars at the average exchange rate for the tax year to which the taxes relate. Taxes claimed on the paid method are translated at the rate on the date of payment.