The foreign tax credit for UK taxes covers UK income tax and capital gains tax — the tax on your salary, dividends, interest, rental profit and gains. It does not cover National Insurance, Council Tax, VAT, Stamp Duty Land Tax or inheritance tax. Putting those on Form 1116 overstates the credit, and it is one of the commonest errors on expat returns.
The rule behind the list is short even if the list is not. The United States credits foreign income taxes under section 901 of the Internal Revenue Code, and Article 24 of the US–UK treaty requires it to give credit for UK income tax and capital gains tax. Anything that is not an income tax, or is a social security contribution covered by an agreement, falls outside.
Which UK taxes count for the foreign tax credit
| UK tax or charge | Creditable on Form 1116? | Why |
|---|---|---|
| Income tax on salary, including Scottish rates | Yes | An income tax; general category |
| Income tax on dividends and savings interest | Yes | An income tax; passive category |
| Income tax on UK rental profit | Yes | An income tax; usually passive category |
| Capital gains tax | Yes | Covered by the treaty; usually passive category |
| Corporation tax paid by your company | Not directly | Only as a deemed-paid credit through a CFC inclusion |
| National Insurance (Class 1, 2 or 4) | No | Social security covered by the US–UK agreement |
| Council Tax | No | A local property charge, not an income tax |
| VAT | No | A tax on consumption |
| Stamp Duty Land Tax | No | A transaction tax on acquiring property |
| Inheritance tax | No | Relieved at estate level, never on Form 1116 |
| Student loan repayments | No | A loan repayment, not a tax |
| HMRC penalties and late-payment interest | No | Not a tax on income |
The IRS sets out the general tests in its guide to foreign taxes that qualify for the foreign tax credit.
Why National Insurance never counts
The United States and the United Kingdom have had a social security agreement in force since 1 January 1985. IRS Publication 514 is explicit that no deduction or credit is allowed for social security taxes paid to a country with which the United States has such an agreement. Class 1 employee contributions and Class 2 and Class 4 self-employed contributions all fall on the wrong side of that line.
Class 4 is the one that catches people. HMRC collects it through Self Assessment on the same calculation as income tax, so it looks like income tax on the SA302. It is still National Insurance. Strip it out before the Form 1116 figure is taken from the calculation.
The agreement exists to stop you paying into both systems at once rather than to give you a credit — our guide to the US–UK totalization agreement explains how coverage is assigned.
Property and transaction taxes
Council Tax is a local charge on residential property. It is not levied on income, so it cannot be credited, however large the bill on a London home.
Stamp Duty Land Tax is a transaction tax on buying property, and VAT is a tax on consumption. Neither is creditable. SDLT is not wasted for US purposes, though: as a cost of acquisition it generally forms part of the property's US cost basis, which reduces the US gain when you eventually sell.
Inheritance tax is relieved somewhere else
UK inheritance tax is not an income tax and has no place on Form 1116. Where both countries tax the same estate, relief comes through the 1978 US–UK estate and gift tax treaty and the section 2014 credit for foreign death taxes on the US estate tax return — an entirely separate mechanism with its own forms and its own residence rules.
Only tax you actually owe can be credited
The credit is for your final UK liability, not for whatever happened to be deducted. PAYE overpaid in the year and refundable by HMRC is not creditable; the credit follows the tax you genuinely owed once the Self Assessment is settled.
Reliefs shrink the credit in the same way. Income inside an ISA carries no UK tax, so there is nothing to credit against the US tax on it — see ISA tax for US citizens. Salary sacrifice and Gift Aid reduce UK tax and therefore reduce the credit too.
Tax on income you exclude from US tax is also off the table. If you claim the foreign earned income exclusion, UK tax attributable to the excluded salary cannot be credited as well — the trade-off is set out in the FEIE versus the foreign tax credit.
Corporation tax and your UK company
An individual cannot credit corporation tax paid by their own limited company, because the company is the taxpayer. The route to that tax is indirect: where the company is a controlled foreign corporation and income is included on your return, a section 962 election can bring in a deemed-paid credit for 90% of the underlying UK corporation tax under the NCTI rules. That sits with US owners of UK companies.
Getting the number right on Form 1116
- Take UK income tax and capital gains tax from the SA302 calculation, excluding Class 4 National Insurance.
- Split the tax by category: salary tax to general, tax on dividends, interest, rent and most gains to passive.
- Allocate UK tax-year figures to the US calendar year, or elect to claim on the accrual basis so the two line up.
- Translate consistently: taxes claimed on the accrual basis generally use the average exchange rate for the year, taxes claimed when paid use the rate on the payment date.
- Carry any excess onto Schedule B, by category — see Form 1116 explained.
Tranzesta prepares the UK and US returns together, so the credit is built from the actual SA302 rather than from a PAYE figure that includes the wrong things. Book a consultation if your last Form 1116 was taken from a P60.
Frequently Asked Questions
Can I claim UK National Insurance as a foreign tax credit?
No. The United States and the United Kingdom have a social security agreement, and IRS Publication 514 states that no credit or deduction is allowed for social security taxes paid to a country with such an agreement. That covers Class 1, Class 2 and Class 4 National Insurance, including Class 4 collected through Self Assessment alongside income tax.
Does UK capital gains tax count for the US foreign tax credit?
Yes. UK capital gains tax is an income tax for US credit purposes and is covered by Article 24 of the US–UK treaty. It usually falls in the passive category on Form 1116, so it can only offset US tax on passive income, and because UK rates often exceed US rates on the same gain the excess commonly becomes a carryover.
Is UK Council Tax creditable on a US tax return?
No. Council Tax is a local charge on residential property rather than a tax on income, so it does not qualify for the foreign tax credit under section 901 of the Internal Revenue Code, regardless of the amount paid or where in the United Kingdom the property is.
Can I claim a credit for UK tax on ISA income?
No, because there is none. Income and gains inside an ISA are free of UK tax, so no UK tax exists to credit, while the United States taxes that income in full on Form 1040. That combination is why ISAs are usually unattractive for US citizens, particularly stocks and shares ISAs holding UK funds.
Is UK inheritance tax claimed on Form 1116?
No. Inheritance tax is not an income tax. Where an estate is taxed by both countries, relief comes through the 1978 US–UK estate and gift tax treaty and the section 2014 credit for foreign death taxes on the US estate tax return, which is a separate mechanism from the individual foreign tax credit.
Do UAE taxes qualify for the US foreign tax credit?
Rarely, for an individual. The UAE levies no personal income tax, so there is usually no foreign income tax to credit, and UAE VAT is a consumption tax. UAE corporate tax paid by a company can only reach an American owner indirectly, as a deemed-paid credit through a controlled foreign corporation inclusion with a section 962 election.
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