The saving clause is Article 1(4) of the US-UK income tax treaty. It lets each country tax its own residents, and lets the United States tax its citizens, as if the treaty had not come into effect. Article 1(5) then lists the benefits that survive it. For a US citizen living in the UK, those listed benefits are most of what the treaty offers.
This article is for Americans in Britain who have read a treaty article saying income is taxable only in the UK and want to know why the IRS still expects tax on it. It covers what the clause says, who it catches, the exceptions, pensions and social security, disclosure on Form 8833 and the common misreadings. It expands one section of our guide to avoiding US-UK double taxation.
What does Article 1(4) of the US-UK treaty say?
Article 1(4) says that, whatever any other provision of the treaty provides, a country may tax its residents, and by reason of citizenship may tax its citizens, as if the treaty had not come into effect. The only limit is Article 1(5). The United States includes a clause of this kind in its tax treaties as a matter of course.
The reason is citizenship taxation. A treaty mainly divides taxing rights between a resident of one country and the other country. Without the clause, a US citizen who became resident abroad could use the treaty against the United States itself. The Treasury's technical explanation, published with the US-UK treaty documents (opens the official IRS page in a new tab), gives the example of a UK resident who is also a US citizen and performs services in the United States. The business profits article would by its terms prevent US tax, and the saving clause restores it.
The clause is written for both countries, so the UK may also tax its own residents as its domestic law provides, subject to the same exceptions. Residence for this purpose is decided under Article 4, including its tie-breaker. The text appears in the convention published by HMRC under USA: tax treaties (opens the official GOV.UK page in a new tab), and our page on the US-UK tax treaty summarises the main articles.
Who does the saving clause catch?
The clause catches residents of a country, as determined under Article 4, and citizens of the United States wherever they live. Article 1(6) extends it to a former citizen or long-term resident whose loss of that status had tax avoidance as one of its principal purposes, for ten years afterwards and only for income from sources in that country.
For a green card holder the route is through residence. A green card makes someone a US resident under domestic law. If that person is also UK resident, the Article 4 tie-breaker decides which country they belong to for treaty purposes, and someone assigned to the UK is not a US resident for the saving clause. Making that claim can count as giving up US residence for expatriation purposes. A US citizen has no such option, because citizenship is caught in its own right.
Article 1(6) was written by reference to the US rules on former citizens in force when the treaty was signed, and it does not apply to anyone who lost their status before 6 February 1995. The domestic expatriation tax (opens the official IRS page in a new tab) rules have since changed and work differently. Anyone considering giving up citizenship or a long-held green card should have both the treaty and current law reviewed through our expatriation service.
Which treaty benefits survive under Article 1(5)?
Article 1(5) lists two groups of benefits that the saving clause does not affect. The first group is available to everyone, including a country's own citizens and residents. The second is available only to individuals who are neither citizens of the country giving the benefit nor admitted to permanent residence there.
The list below follows the treaty text as amended by the 2002 protocol, which added Article 18(5) and the teachers article.
What is missing matters as much. Business profits, dividends, interest, royalties, gains and employment income are not on the list. Nor are the general rule for periodic pensions in Article 17(1)(a), the lump sum rule in Article 17(2) or the annuities rule in Article 17(4). For each of those, the United States may tax its citizen under domestic law whatever the article says.
- Article 9(2). The corresponding adjustment where profits of associated enterprises are reallocated.
- Article 17(1)(b), 17(3) and 17(5). Pension payments that would be exempt in the country of the scheme, social security payments, and alimony and child support.
- Article 18(1) and 18(5). Deferral of tax on income earned inside the other country's pension scheme, and relief for certain contributions by a US citizen resident in the UK to a UK scheme.
- Articles 24, 25 and 26. Relief from double taxation, non-discrimination and the mutual agreement procedure.
- Articles 18(2), 19, 20, 20A and 28. Host-country pension contribution relief, government service, students, teachers and diplomats, but only for people who are not citizens or permanent residents of the taxing country.
What does the saving clause mean for an American in the UK?
For a US citizen resident in the UK, most rules that say income is taxable only in the country of residence do not stop the United States taxing it. Relief comes from the credit instead. Article 24 guarantees a credit for UK tax and, for US-source income, re-sources the income so the credit can be used.
Interest is the plain example. Article 11 generally gives interest to the country of residence alone. A US citizen in Leeds with interest from a UK bank is taxed on it by the UK as a resident and by the US as a citizen. The US credits the UK tax on Form 1116. The outcome is roughly the higher of the two countries' tax.
US-source income needs Article 24(6). The UK credits only the US tax that could be charged to a UK resident who is not a citizen, which for a portfolio dividend is the 15% treaty rate. The US then credits the remaining UK tax and treats the income as arising in the UK to the extent needed to avoid double taxation. That calculation sits on a separate Form 1116, and our treaty relief service applies it to each item of income.
How does the saving clause treat pensions and social security?
Pensions are split. Growth inside a UK pension scheme is generally protected for a US citizen under Article 18(1). Relief for contributions is narrower and comes from Article 18(5), with conditions. Periodic payments under Article 17(1)(a) and lump sums under Article 17(2) are not protected. Social security under Article 17(3) is protected.
Article 18(1) says income earned by a scheme in one country may be taxed as income of a member resident in the other only when it is paid out. Article 18(5) covers a US citizen resident in the UK whose UK employment is paid for by a UK employer or permanent establishment. It applies only so far as the contributions qualify for UK relief, and cannot exceed what the US would allow for a corresponding US plan. Our US-UK pensions service tests each scheme against those terms.
For payments out, a US citizen is taxable in the US on a periodic UK pension, with a credit for UK tax, but Article 17(1)(b) exempts any amount that would be exempt in the UK. Article 17(2) assigns lump sums to the country of the scheme and is not on the protected list, and the technical explanation says a US citizen resident in the UK remains subject to US tax on one. Other readings are argued, so take advice first.
Article 17(3) deals with payments by one country to a resident of the other. US Social Security paid to a US citizen resident in the UK is taxable only in the UK. A UK State Pension (opens the official GOV.UK page in a new tab) paid to a US resident is taxable only in the US. The paragraph does not cover a UK State Pension paid to a US citizen living in the UK. The UK taxes that as a resident's income, and the cautious position is that the US taxes it too, with a credit.
When is Form 8833 required for a treaty position?
Form 8833 is generally required when a taxpayer takes the position that a treaty overrides or modifies US tax law and so reduces tax, unless reporting is waived. Residence decided under a treaty tie-breaker is specifically reportable. Several positions that individuals commonly take, including those on pensions and social security, are among the waivers.
The instructions to Form 8833 (opens the official IRS page in a new tab) list the positions that must be disclosed. They include a claim that residence is determined under a treaty and a claim that a treaty grants a credit for foreign tax that the Code does not allow. They waive reporting where a treaty reduces or modifies the tax on an individual's employment income, pensions, annuities or social security, and where an individual claims a reduced rate on dividends or interest. A penalty applies to each failure to disclose a reportable position.
Re-sourcing under Article 24 is less tidy. The instructions list a treaty that alters the source of income as reportable unless the taxpayer is an individual, but a claim to a credit the Code would not give is listed without that carve-out. The cautious practice is to disclose re-sourced income on Form 8833, since disclosure costs little and an undisclosed position carries a penalty.
What are the common misreadings of the saving clause?
The common misreadings run in both directions. Some people read a single article and conclude the US cannot tax them. Others hear of the saving clause and conclude the treaty gives a US citizen nothing. Both are wrong, and the answer for any item of income lies in checking it against Article 1(5).
The method is the same each time. Find the article for the income, check whether its benefit appears in Article 1(5), and if it does not, work out the credit under Article 24. The wider set of reliefs, including the foreign tax credit and the foreign earned income exclusion, is covered in our US-UK double taxation guide. To have a treaty position reviewed before it goes on a return, contact us with an outline of the income involved.
- Taxable only in the UK means no US tax. For a US citizen it means the UK taxes first and the US gives a credit, unless the benefit is listed in Article 1(5).
- The treaty removes the need to file. It does not. The filing obligation comes from domestic law and the treaty leaves it alone.
- The tie-breaker makes a citizen non-resident. Article 4 can reassign a green card holder. It cannot switch off citizenship.
- An ISA is covered. The treaty does not mention ISAs, and they have no US tax protection.
- The clause cancels every benefit. Pension growth, social security, the credit and re-sourcing all survive.
- States follow the treaty. Some states do not, and may tax income the federal return relieves.
General information, not advice. The right answer depends on your circumstances and the tax year concerned.
