UK salary belongs in the general category on Form 1116 (opens the official IRS page in a new tab), and UK interest, dividends and rent are generally passive category income. Each category has its own credit limit, its own form and its own carryover. Passive income taxed by the UK above the highest US rate moves to the general category, and UK tax charged on income from both categories is split between them.
This post is for US citizens and green card holders in Britain who have more than a salary to report, such as a let flat, savings or investments. It goes deeper than the Form 1116 section of our guide to avoiding US-UK double taxation. It covers why the categories matter, what goes in each, the high-taxed income rule, the less common categories, how one UK tax bill is divided, and a worked example for a US citizen in Glasgow with a salary and a let flat.
Why do Form 1116 income categories matter for UK income?
Because the credit is limited separately in each category. UK tax on income in one category can only offset US tax on foreign-source income in that same category. High UK tax on a salary cannot cover US tax on lightly taxed savings, and unused tax carries over only within the category where it arose.
Publication 514 (opens the official IRS page in a new tab) requires the limit to be figured on a separate Form 1116 for each category of income. Within each one, the credit cannot exceed the US tax on that category's foreign-source taxable income, after deductions are allocated to it. The IRS overview of the foreign tax credit (opens the official IRS page in a new tab) describes the same structure. A filer with a UK salary and UK investment income therefore usually attaches at least two forms to Form 1040, and the numbers on each are worked out independently.
The category also decides where any excess goes. Unused foreign tax is carried back one year and forward ten years, but only within the same category, as our post on carrying excess UK tax credits explains. A wrong category on one year's form can leave a carryover in a category where it can never be used, or create one where it does not belong.
Which UK income goes in the general category?
Pay from employment in the UK is general category income. Publication 514 says the category in most cases includes wages, salaries and overseas allowances of an individual as an employee, along with active business income. Bonuses and other taxable pay on a UK payslip follow the salary into the same category.
General is also the default. The Form 1116 instructions define it as income that does not fall into any of the other categories, so anything that is not passive, foreign branch, re-sourced by treaty or another special category lands here. Our guide also places most pension income in the general category.
For most Americans on a UK payroll, the general category is where UK tax is highest relative to US tax. UK income tax on a salary usually exceeds the US tax on it, so the general category limit is often full and a carryover builds. Publication 514 also says general category income includes high-taxed income that would otherwise be passive, which is explained below.
- UK salary, bonuses and overseas allowances as an employee
- Other taxable pay reported through UK payroll
- Profit from an active trade or business, unless it falls in the foreign branch category
- Passive income reclassified as high-taxed income
When is UK income passive category income?
When it is investment income. Publication 514 lists dividends, interest, royalties, rents and annuities among passive income, along with net gain on property that produces passive income. UK bank interest, dividends from UK shares and rent from a let flat therefore usually belong in the passive category.
There are exclusions. The instructions say passive income does not include export financing interest, rents and royalties from an active business, or high-taxed income. A private landlord letting one flat is not usually running an active rental business, so ordinary UK rent stays passive unless the high-tax rule moves it. The rental figures come from Schedule E (opens the official IRS page in a new tab), and interest and dividends from the usual income schedules.
Passive income in the UK is often taxed lightly or not at all. Interest and dividends inside an ISA (opens the official GOV.UK page in a new tab) bear no UK tax, yet are taxable on the US return with nothing to credit. That is why the passive category often shows US tax remaining while the general category shows UK tax to spare. The separate categories stop one being used to cover the other.
How can high-taxed passive income move to the general category?
Through the high-taxed income rule. Where the foreign tax on passive income, after expenses are allocated to it, exceeds the highest US tax that can be imposed on that income, Publication 514 treats it as high-taxed income. It then leaves the passive category and joins the general category along with its UK tax.
The test compares UK tax with the top US rate applied to the income, not with the filer's own US rate, and the income is measured for US purposes. Rent is a common candidate, because US depreciation and full mortgage interest can make the US rental profit much smaller than the UK one while the UK tax stays the same. The instructions point to the regulations under section 904 for how items are grouped for the test, and call for a separate column in Part I of the form for high-taxed passive income.
Reclassification follows from the figures and is not elected. It moves the UK tax on that income into the general category, where it may add to an existing carryover rather than absorb US tax. Lightly taxed passive income left behind, such as ISA interest, then has less UK tax set against it in the passive category.
Which other Form 1116 categories can apply to someone in the UK?
Three can arise. US-source income re-sourced under the treaty has its own category. Business profits of a qualified business unit abroad fall in the foreign branch category. A foreign-source lump-sum pension distribution taxed under special averaging has a category of its own. Most employees will meet only the first of these.
For a US citizen resident in the UK, Article 24 of the treaty, published by HMRC under USA: tax treaties (opens the official GOV.UK page in a new tab), treats some US-source income as foreign-source so that UK tax on it can be credited. Publication 514 requires a separate Form 1116 for each amount of re-sourced income. Our post on re-sourcing US dividends under Article 24 sets out how UK and US tax on American dividends interact.
The foreign branch category holds the business profits of US persons attributable to qualified business units in foreign countries, and the instructions say someone who owns and operates a business, or is self-employed, abroad may have one. Whether a UK sole trade belongs there depends on how the business is organised and its books kept, so we look at each case. The lump-sum category applies only where someone is able to elect, and does elect, special averaging on Form 4972.
- Re-sourced by treaty. US dividends and gains of a UK resident US citizen relieved under Article 24
- Foreign branch. Business profits of a qualified business unit abroad, never an employee's salary
- Lump-sum distributions. Only with a Form 4972 special averaging election
How is one UK tax bill split between categories?
By apportionment. UK income tax is worked out on total income, so where it falls on income in more than one category and does not relate specifically to one, it has to be divided. Publication 514 multiplies the tax by a fraction: the net income taxed in each category over the total net income taxed.
Net income here is measured under UK law. Publication 514 says expenses definitely related to a category are deducted under the foreign law, those that are not are apportioned under the principles of the foreign law, and the US regulations apply only where that law gives no apportionment. The UK figures, including the property profit computed under HMRC's rules for working out rental income (opens the official HMRC page in a new tab), therefore drive the split. A tax that relates specifically to one category is allocated to that category alone.
The UK and US years differ, so UK tax for a year ending 5 April has to be matched to the right US calendar year before it is split, a point covered in our post on paid or accrued UK tax. Our treaty relief service keeps the apportionment working with each Form 1116, because the same split feeds both the credit and any later carryover.
How does this work for an American in Glasgow with a let flat?
Take a US citizen employed in Glasgow who also lets a flat she owns in Edinburgh. Her salary is general category income and her rent is passive. GOV.UK says Scottish income tax applies to the wages and most other taxable income of someone living in Scotland, and both items are reported on her UK Self Assessment return.
Her UK tax for the year is one figure on the SA100. To claim the credit, it is split between salary and rent in proportion to the UK net income from each, with the UK property profit worked out under UK rules and with no US depreciation. The salary share goes on her general category Form 1116 and the rent share on her passive one. The income tax rates (opens the official GOV.UK page in a new tab) and bands decide the total, while the fraction decides the split.
On the US side her rental profit is lower than the UK profit, because the US deducts depreciation and the full mortgage interest. If the UK tax apportioned to the rent exceeds the highest US tax on that smaller US profit, the rent becomes high-taxed income and moves to the general category with its UK tax. Our individual tax returns service runs that test each year, and the guide to avoiding US-UK double taxation shows where the categories sit among the other reliefs.
General information, not advice. The right answer depends on your circumstances and the tax year concerned.
