FEIE vs Foreign Tax Credit in the UK: Which Should Americans Use?

FEIE vs foreign tax credit in the UK comes down to this: the foreign earned income exclusion removes up to $132,900 of 2026 UK earnings from US income, while the foreign tax credit offsets US tax with the UK tax you already paid. For most UK employees the credit is the stronger choice. UK income tax on a salary is usually at least as high as US tax on the same pay, so the credit alone tends to clear the US bill on wages without the side effects the exclusion brings.

Both methods are legal, both are common, and both can produce a US tax bill of zero on a UK salary. The difference shows up elsewhere on the return: in the refundable child tax credit, in how much you can put into an IRA, in the rate charged on income the exclusion does not cover, and in the pool of excess UK tax you can carry forward. This guide sets out how each works, where each one costs you, and a worked comparison using the 2026 US brackets and the 2026/27 UK rates.

What is the difference between the FEIE and the foreign tax credit?

The foreign earned income exclusion (FEIE) takes qualifying foreign earnings out of US taxable income altogether, while the foreign tax credit (FTC) leaves the income in and then subtracts the foreign tax paid on it from the US tax. One works on income; the other works on tax.

The foreign earned income exclusion (Form 2555)

The IRS says the maximum exclusion for tax year 2026 is $132,900 per person, up from $130,000 for 2025. To qualify you need foreign earned income, a tax home in a foreign country, and either the bona fide residence test (residence abroad for an uninterrupted period that includes an entire tax year) or the physical presence test (at least 330 full days in a foreign country during any period of 12 consecutive months), as set out on the IRS foreign earned income exclusion page.

The exclusion covers earned income only: wages, salary, bonuses and self-employment profit. UK pensions, dividends, interest, rent and capital gains are never excluded, so anyone with those still needs the foreign tax credit or the treaty for them.

The foreign tax credit (Form 1116)

The foreign tax credit reduces US tax by the foreign income tax imposed on you. The Instructions for Form 1116 say the credit is generally limited to the US tax on the foreign income, and income is split into separate categories, each with its own Form 1116. Wages and salary fall in the general category; most investment income falls in the passive category. Excess credit in one category cannot be used against US tax in another.

The credit works on all foreign income, earned or not, which is why most Americans in the UK with any investment income or pension end up filing Form 1116 even if they also use the exclusion.

FEIE vs foreign tax credit in the UK: why the credit usually wins

The foreign tax credit usually wins for UK employees because UK income tax rates on pay are generally at least as high as US federal rates, so the credit is big enough to cover the whole US tax on the wages. Once both methods give a zero US bill, the deciding factors are the side effects, and those mostly favor the credit.

Compare the published rates. For 2026/27 (6 April 2026 to 5 April 2027), GOV.UK lists a Personal Allowance of £12,570, a 20% basic rate up to £50,270, a 40% higher rate up to £125,140 and 45% above that, with the Personal Allowance reduced by £1 for every £2 of adjusted net income over £100,000. For 2026, the IRS inflation adjustments set a $16,100 standard deduction for single filers and brackets of 10% and 12% up to $50,400, then 22% up to $105,700 and 24% up to $201,775. A UK earner hits 40% at a much lower income than a US earner hits 24%.

What the exclusion costs you elsewhere on the return

IRS Publication 54 sets out the knock-on effects of choosing the foreign earned income exclusion:

• No additional child tax credit. If you claim the exclusion, you cannot take the additional child tax credit, the refundable part of the child tax credit, in the same year.
• Less IRA room. Excluded pay does not count as compensation when working out how much you can contribute to an IRA.
• Higher rates on what is left. Tax on income that is not excluded is figured at the rates that would have applied had the exclusion not been claimed, using the Foreign Earned Income Tax Worksheet. The excluded pay still pushes the rest of your income up the brackets.
• No credit for UK tax on excluded pay. You cannot take a credit or deduction for the foreign tax allocable to the excluded income, so that UK tax never becomes a carryover.
• No self-employment tax relief. All self-employment income still counts for self-employment tax, even the part excluded from income tax.

What the credit gives you that the exclusion does not

Under the foreign tax credit, UK tax that exceeds the US tax on the same income is not wasted. The Form 1116 instructions allow unused foreign tax to be carried back 1 year and then forward 10 years within the same category, recorded on Schedule B (Form 1116). For an American earning in the UK, that pool of excess general category credit can later shelter US tax on a UK bonus, on UK self-employment profit, or on foreign earnings in a later year.

A worked comparison at two salary levels

Illustrative example: a single US citizen lives and works in London for the whole of 2026 and has no other income. The figures use the 2026/27 UK rates and the 2026 US brackets and standard deduction quoted above, an assumed exchange rate of $1.30 to £1, and treat the whole salary as earned in one tax year in both countries. They ignore National Insurance, the different UK and US tax years, and any other credits. They show the shape of the choice, not anyone's actual tax.

Step	Salary £90,000 ($117,000)	Salary £140,000 ($182,000)
UK income tax for 2026/27	£23,432 ($30,462)	£49,203 ($63,964)
Foreign tax credit only: US tax before credit	$16,910	$32,414
Credit allowed (capped at US tax)	$16,910	$32,414
US tax due	$0	$0
Excess UK tax carried forward	$13,552	$31,550
Exclusion route: pay excluded	$117,000	$132,900
US tax on remaining pay (stacked rates)	$0	$7,920
Credit on UK tax allocable to unexcluded pay	Not needed	$7,920 used of $17,256
US tax due	$0	$0
Excess UK tax carried forward	$0	$9,336

How the numbers are built. At £90,000, UK tax is 20% of £37,700 plus 40% of £39,730 after the £12,570 allowance. US taxable income is $100,900 after the standard deduction, and the 2026 brackets give $16,910 of tax, which the larger UK tax wipes out. At £140,000, the Personal Allowance is fully withdrawn, so UK tax is 20% of £37,700, 40% of £87,440 and 45% of £14,860.

On the exclusion route at £140,000, $49,100 of pay is left after the $132,900 exclusion. The stacking rule taxes it as if the excluded pay were still there: the tax on $165,900 ($32,414) less the tax on $132,900 ($24,494) gives $7,920. Only the UK tax allocable to the unexcluded share, about 27% of the total, can be credited against it.

Both routes give a zero US bill at both salaries. The credit route builds a far larger carryover, keeps every dollar of pay available as IRA compensation, and would have kept the refundable child tax credit had this person had children. That is the usual pattern for UK employees.

When does the foreign earned income exclusion make sense?

The foreign earned income exclusion makes sense when the foreign tax on your earnings is low compared with the US tax on them, or when a simple return outweighs the benefits the credit keeps. It is the tool for low-tax situations, not for a standard UK salary.

• Low UK tax on the earnings. If UK reliefs or a part-year arrival leave little UK tax on pay that the US would tax in full, the credit may not cover the US tax and the exclusion can do better.
• Earnings from a lower-tax country. Someone who works part of the year somewhere with little or no income tax may get more from excluding that pay than from crediting a small foreign tax.
• No children, no IRA plans, no other foreign income. When the side effects cost nothing, the exclusion's simplicity can win, especially for pay under the limit.

Even then, model several years rather than one. The IRS says the choice stays in effect for every later year until you revoke it, and Publication 54 says that if you revoke it and want to choose the same exclusion again within 5 years, you must apply for IRS approval.

How do you claim each one on your US return?

The foreign earned income exclusion is claimed by attaching Form 2555 to Form 1040, and the foreign tax credit by attaching Form 1116 for each category of income. Many Americans in the UK file both: Form 2555 for wages and Form 1116 for UK investment income or for pay above the exclusion limit.

1. Decide the method for wages before you file. Run the return both ways, including the child tax credit and IRA effects, and look at the carryover position for later years.
2. If you choose the exclusion, file on time. The IRS says the first choice must generally be made on a timely filed return (including extensions), an amended return for a timely filed return, or a late return filed within 1 year of the original due date.
3. If you claim the credit, sort income into categories. UK wages go on a general category Form 1116; UK interest and dividends usually go on a passive category Form 1116.
4. Choose paid or accrued. The Form 1116 instructions let a cash-basis filer elect to credit foreign taxes when they accrue by checking the "Accrued" box on a timely filed original return, and the choice then applies to all future returns. That matters because the UK tax year runs from 6 April to 5 April, not on the calendar year.
5. Keep the carryover schedule. Record unused credit on Schedule B (Form 1116) each year so it is available when you need it.

Small amounts of foreign tax on investment income can sometimes be claimed without Form 1116. The Form 1116 instructions allow this only where all foreign source income is passive category income and total creditable foreign taxes are not more than $300 ($600 on a joint return), among other conditions. UK wages rule this out.

What people get wrong about the FEIE and the foreign tax credit

• Assuming the exclusion is the default. The exclusion is the better-known relief, but for a UK salary, the credit is usually the better default and the exclusion the exception.
• Revoking for a one-year saving. Switching off the exclusion to use the credit can lock you out of the exclusion for 5 years unless the IRS approves, so a short-term gain can cost more later.
• Expecting the exclusion to cover everything. It does not touch UK pensions, dividends, interest, rent or capital gains, and it does not remove self-employment tax.
• Crediting UK tax on excluded pay. The UK tax allocable to excluded wages cannot be credited. Claiming it overstates the credit.
• Forgetting that untaxed UK income has nothing to credit. Where the UK charges no tax, as on income inside an ISA, there is no UK tax to credit, so any US tax on that income is payable unless another relief applies.
• Losing the carryover. Excess credit that is never recorded on Schedule B, or that sits unused for more than 10 years, is gone.

Self-employed Americans have one extra layer: which country's social security applies. That is decided by the US/UK social security agreement, which our guide to National Insurance for Americans in the UK covers. Neither the exclusion nor the credit changes it.

How this fits with the UK side of your tax

The FEIE and the foreign tax credit are US reliefs only. HMRC taxes a UK resident's UK salary in full, whichever method you use on the US return. Where US tax is paid on US-source income, such as US dividends, the UK side gives relief instead, and our guide to foreign tax credit relief in the UK explains how that claim works on the Self Assessment return. For how the treaty decides which country taxes first, see double taxation relief between the US and UK, and for the full list of US forms an American in Britain may owe, see US tax filing requirements for Americans in the UK.

US/UK Cross Border Tax — US CPAs and UK tax advisers working as one team, in London, Manchester, New York and San Francisco — prepares US expat tax returns for Americans in the UK and runs the FEIE vs foreign tax credit comparison as part of each one, with the UK return prepared alongside. If you are an American living in the UK, or part of a cross-border family weighing the child tax credit, contact us before you file.