No tax on overtime and tips: do Americans in the UK qualify?

Do Americans working in the UK qualify for no tax on overtime

Usually not on pay earned in the UK. The overtime deduction is limited to overtime compensation that the Fair Labor Standards Act requires an employer to pay. UK working time and pay rules are a different regime, and the Act generally does not cover employees whose work is done at a workplace in a foreign country, so a British payslip rarely contains qualifying overtime.

The label no tax on overtime misleads on two counts. The measure is a deduction from income, not an exemption, and it covers only the premium part of overtime pay. It also sits in the US return, so it can only reduce US tax. An American in Britain who already pays UK tax on the same pay is mostly concerned with the foreign tax credit, which we return to below.

Pay can still qualify in mixed years. A US citizen who worked in a US state for a US employer before moving to Britain may have FLSA-covered overtime from the months spent in the United States. Whether it qualifies turns on where the work was done and on whether the job was covered by the Act, so each period needs checking separately.

What does the overtime deduction actually cover

It covers the extra half in time and a half, and only where the Fair Labor Standards Act demands it. The IRS describes the deductible amount as the pay above the regular rate that the Act requires for hours over 40 in a workweek. If an employer pays more, such as double time, only the amount the Act minimally requires qualifies.

Overtime that exists only because of a union agreement, state law or company policy does not qualify, and nor does overtime paid to employees the Act exempts from its overtime rules. The deduction runs for tax years 2025 through 2028, can be claimed whether or not you itemise, and is worked out on Schedule 1-A attached to Form 1040 (opens the official IRS page in a new tab). It is capped, and it phases down once modified adjusted gross income passes a threshold, with higher limits on a joint return.

You also need a Social Security number that is valid for employment. If you are married you must file jointly to claim it, and a married person filing separately cannot. For 2025, employers are not required to show qualified overtime separately on Forms W-2 or 1099, so the amount has to be worked out from pay records using the method in IRS Notice 2025-69 and the Schedule 1-A instructions.

• Only the premium half of FLSA-required overtime counts, not the whole payment
• Overtime under a contract, state law or policy alone does not qualify
• A valid Social Security number is required, and married filers must file jointly
• The deduction is limited in amount and phases down at higher incomes
• It applies to tax years 2025 through 2028 only

Why does UK overtime usually fall outside the rule

Because the Act's overtime provisions do not apply to an employee whose workweek services are performed at a workplace in a foreign country. The Department of Labor says the Act covers employment in the states, the District of Columbia and US territories, and that a worker based abroad is not covered even where the employer has its head office in the United States.

That test looks at where the work is done, not at who pays or at your citizenship. A US citizen employed by a London firm, or by the UK arm of a US company, and working in London falls outside it. So does an American working remotely from Britain for a US employer, on the plain reading of the workplace test, although the IRS has not published an example of that arrangement and we would not rely on a claim without reviewing the facts.

Overtime that your UK contract or UK law provides is a separate matter. It may be perfectly good overtime for UK purposes and still not be qualified overtime compensation for the US deduction. The two systems do not share a definition, and the IRS asks whether the Act required the payment, not whether your employer chose to make it.

How do tips fit in for Americans living in Britain

The tips deduction has its own rules and no FLSA test. Qualified tips are voluntary tips received in an occupation that customarily and regularly received tips on 31 December 2024, and the IRS publishes the list of occupations. Tips must be reported on a Form W-2, 1099-NEC, 1099-MISC or 1099-K, or by the worker on Form 4137.

Several limits apply. Married people must file jointly and a valid Social Security number is required. The deduction is capped per return, phases out at higher incomes and runs for tax years 2025 through 2028. Tips earned in a specified service trade or business do not qualify, and for a self-employed person the deduction cannot exceed the net income of the business that earned the tips. Service charges count only where the customer can choose to change or ignore them.

The guidance we reviewed does not say whether tips earned in the UK qualify, and the reporting route is the practical hurdle. A UK employer will not issue a Form W-2, and tips often come as cash or through a pooled payment system. We therefore treat the position as open for a US citizen working hospitality in Britain, and any claim would need records that show the occupation, the amount and the voluntary nature of each payment.

• The occupation must be on the IRS list of tipped occupations
• Tips must be voluntary and properly reported or documented
• Specified service trades or businesses are excluded
• Self-employed workers are limited to the net income of the business

Does a deduction help if I use the foreign tax credit or the exclusion

Only where there is US tax left to reduce. A deduction lowers US taxable income, so it can save nothing if your US liability is already nil. Most Americans in the UK reach that point through the foreign tax credit, because UK tax rates are generally higher than US rates and the credit on Form 1116 often wipes out US tax on UK pay.

The exclusion works differently. Income you exclude on Form 2555 (opens the official IRS page in a new tab) is not taxed at all, so there is little for a deduction to reduce, and the foreign earned income exclusion (opens the official IRS page in a new tab) carries consequences for credits and for future elections. Our post on choosing between the foreign tax credit and the exclusion sets out why we rarely treat the exclusion as the default. A new deduction is not a reason to change that choice.

The foreign tax credit (opens the official IRS page in a new tab) rules and the deduction interact in ways the IRS has not fully spelled out for expatriates, and we do not assume an answer. If you have a mixed year with US overtime or tips and UK income in the same return, the order in which the pieces are computed matters, and it is worth having our cross-border tax team model both outcomes before filing.

What if my spouse is British and we file separately

A married person filing separately cannot claim either deduction, because both require a joint return. That bites for the many Americans married to a non-US spouse, for whom married filing separately is the usual status. Claiming the deduction would mean filing jointly, which brings its own consequences for the whole return.

A joint return with a spouse who is a nonresident alien is possible only if you both choose to treat the spouse as a US resident. Publication 54 (opens the official IRS page in a new tab) explains the election, which is made on the joint return with a signed statement and a taxpayer identification number for each spouse, and it carries over to later years until it ends. The spouse can apply for an ITIN if they cannot get a Social Security number. The election puts the spouse's worldwide income into the US return.

Consider a US citizen employed in Manchester whose British husband earns a salary there. The citizen has no FLSA overtime, so a joint return to reach the deduction would gain nothing and would bring the spouse's UK income into the US return. Our post on filing status for Americans married to a non-US spouse walks through the choice, and our individual tax returns team can model it. The wider annual cycle is in the guide for Americans in the UK, and the Form 1040 page covers the return itself.