After more than four decades helping American expatriates navigate the intersection of US and UK tax law, we have seen the same costly mistakes appear again and again. Most are entirely avoidable. None of them involves deliberate wrongdoing; they are simply the result of two complex tax systems colliding without proper guidance. As UK international tax advisors who are ourselves US citizens and taxpayers, we understand these pitfalls from the inside. This guide covers the seven most expensive mistakes and what to do instead.
Mistake 1: Assuming UK Tax Compliance Covers Your US Obligations
This is the most common and most costly misunderstanding we encounter as an expat tax accountant in the UK. Paying UK income tax through PAYE or filing a UK Self Assessment return does not in any way satisfy your US filing obligations.
The United States taxes its citizens on worldwide income, regardless of where they live. If you are an American living in the UK, you must file a US Form 1040 every year, reporting your global income to the IRS. This obligation exists even when you owe zero US tax and even if you have lived in the UK for decades. Missing years of US returns create accumulated exposure that becomes increasingly difficult and expensive to unwind.
Mistake 2: Treating the 25% UK Pension Lump Sum as Tax-Free
Under UK rules, you can withdraw 25% of your pension pot completely free of UK income tax. It is a legitimate, widely used benefit of the British pension system. The IRS does not recognise it.
That 25% lump sum is fully taxable on your US return in most cases at ordinary income tax rates. Without planning from a qualified international tax advisor in London, this single withdrawal can trigger a substantial and entirely unexpected US tax bill on money you genuinely believed was tax-free. We raise this point with every client approaching retirement, and it remains one of the most important conversations any adviser should be having proactively.
Mistake 3: Ignoring ISA Income on Your US Return
The UK's Individual Savings Account is one of the most misunderstood financial products in the American expat community. In the UK, ISA income is entirely tax-free. The IRS does not recognise this exemption.
Every pound of interest, dividends, and capital gains earned inside your ISA must be reported on your US return as ordinary taxable income. Furthermore, if your ISA holds UK unit trusts, OEICs, or certain ETFs, you may also face Passive Foreign Investment Company (PFIC) rules, which carry punitive tax treatment and additional Form 8621 reporting requirements. Many of our clients discover this years after opening their first ISA, creating a backlog of unreported income that requires careful remediation.
Mistake 4: Missing FBAR and FATCA Filing Requirements
If the aggregate maximum value of your non-US financial accounts exceeded $10,000 at any point during the calendar year, FBAR filing is generally required, and this is filed separately from your Form 1040. Most Americans in the UK cross this threshold easily with a current account, savings account, and ISA combined. Taxes for Expats
Separately, if your total foreign financial assets exceed $200,000 at year-end as a single filer, Form 8938 under FATCA applies as well. These are two entirely distinct obligations. As experienced US tax specialists in London, we consistently find clients who have filed one, believing they have satisfied both. They have not. Penalties for missing either start at $10,000 per violation for non-wilful failures, rising dramatically from there.
Mistake 5: Choosing the Wrong Strategy — FEIE vs Foreign Tax Credit
Americans in the UK have two primary tools for reducing US tax liability on foreign income: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). Choosing incorrectly between them or combining them improperly is one of the most expensive planning errors in income tax preparation services for US expats.
For most Americans in the UK, a high-tax jurisdiction, the Foreign Tax Credit is the stronger strategy. It provides a dollar-for-dollar offset of UK taxes already paid to HMRC, typically eliminating US liability. The FEIE, by contrast, excludes income from US tax but does not provide carryforward credits and can create complications when pension income, self-employment earnings, or investment returns are also in play. The right choice depends entirely on your individual income profile, and getting it wrong can cost thousands.
Mistake 6: Not Reporting UK Workplace Pension Contributions
Many Americans assume that because employer pension contributions never pass through their bank account, they fall outside the scope of US reporting. This is incorrect.
Employer contributions are generally treated as taxable compensation on your US return in the year they are made unless a specific treaty-based position is correctly taken and disclosed via Form 8833. Missing this disclosure across multiple tax years creates accumulated unreported income that compounds significantly over time. This is one of the areas where working with qualified UK international tax advisors from the outset saves far more than it costs.
Mistake 7: Waiting Too Long to Address Missed Filings
Perhaps the most expensive mistake of all is inaction. Americans who discover they have missed years of US returns or FBAR filings often delay seeking help, either from anxiety, uncertainty about the process, or a hope that the problem will resolve itself. It does not.
The IRS offers structured remediation pathways, most notably the Streamlined Foreign Offshore Procedure, that allow qualifying non-wilful filers to come into full compliance with significantly reduced or eliminated penalties. This programme requires filing three years of returns, six years of FBARs, and a certification of non-wilful conduct. Crucially, it is only available before the IRS initiates contact. Once an examination begins, the window closes, and the cost of resolution increases dramatically.
If you have unfiled years, the right time to act is now, not later.
How Jaffe & Co Can Help
At Jaffe & Co, we have been providing specialist income tax preparation services and advice to American expatriates in London and worldwide since 1981. We are attorney-qualified advisers with more than 100 years of combined experience in US and UK expatriate tax, and we are ourselves US citizens, navigating the same obligations we advise on every day.
Whether you need a comprehensive review of your current position, help with missed filings, or ongoing annual compliance across both systems, our team provides clear, practical guidance tailored to your specific circumstances with no hidden costs and no unnecessary complexity.
Concerned about your US or UK tax position? Talk to our team at Jaffe & Co, trusted expatriate tax advisors helping Americans in London and worldwide since 1981.
