Can I claim the foreign earned income exclusion while on a UK secondment?

Often not. Form 2555 requires foreign earned income, a tax home in a foreign country, and either the bona fide residence test or the physical presence test. IRS guidance says that going to a foreign country to work for a specified period of time ordinarily does not make you a bona fide resident even if you are there for a full tax year, which describes a dated assignment letter. The physical presence test needs 330 full days abroad in any 12 months in a row, which frequent US travel erodes. Even if the day count is met, you are not treated as having a foreign tax home for any period during which your abode is in the United States, and a secondee who keeps a US house, a US-based family and a guaranteed role on return usually fails on abode.

Is hypothetical tax withheld under a tax equalisation policy deductible on my US return?

No. Hypothetical tax is a contractual reduction of your pay that the employer retains to fund the actual taxes it will pay. It is never remitted to the IRS or HMRC, so it is not withholding, not a payment on Form 1040, and not a deduction. The employer's payment of your actual US and UK tax is additional taxable compensation, which is why assignment programmes gross it up. The annual equalisation settlement is a separate contractual true-up computed from your filed return, and repaying an employer in a later year for amounts already taxed raises claim of right issues rather than a straightforward deduction.

Do I still pay US Social Security and Medicare while working in London?

Usually yes, for a limited period. The US and the UK have a totalization agreement designed to stop the same earnings being charged to both social security systems. The IRS states that a person claiming exemption must obtain a certificate of coverage from the social security agency of the home country and present it to the employer. For an American seconded to the UK on US payroll, that certificate evidences continued US coverage and relief from UK National Insurance. Certificates have a finite life, so a long or extended assignment can move you into UK National Insurance part way through. National Insurance is not an income tax and is not creditable on Form 1116.

Are employer-paid school fees and a London flat taxable on my US return?

Generally yes. IRS guidance treats allowances or reimbursements for cost of living, overseas differential, family, education, home leave, quarters and moving expenses as earned income, and treats the fair market value of employer-provided lodging, meals or use of a car as earned income too. There are two narrow routes out and they are mutually exclusive: accountable plan reimbursement of living and travel costs while genuinely away from home on an assignment expected to last one year or less, or the foreign housing exclusion on Form 2555 if you qualify under section 911. The first depends on your tax home staying in the US, the second on it having moved to the UK.

How do foreign tax credits work when the UK tax year does not match the US calendar year?

The UK year runs 6 April to 5 April and the US year is the calendar year, so every P60 spans two US returns. On the cash basis you credit UK tax in the US year you actually pay it, and because UK balancing payments fall on the 31 January after the UK year end, tax on early assignment income can land two US years later. That produces residual US tax in year one and excess credits later. IRS guidance lets a cash basis taxpayer elect to accrue foreign taxes by checking the box in Part II of Form 1116, matching UK tax to the year the income arose. The election binds all later years, so decide it in the first assignment year.

What changes if my one year secondment is extended to three?

The assignment becomes indefinite from the date the expectation changed, not from month thirteen. IRS Publication 463 confirms that an initially temporary assignment can become indefinite due to changed circumstances, and that on an indefinite assignment you must include employer amounts received for living expenses in income even if they are called travel allowances. Living and travel reimbursements reported as excludable must be re-characterised from that date, which can mean corrected payroll reporting and an amended Form 1040-X. Form 2555 may become available prospectively if the abode test is also met. On the UK side, HMRC guidance at EIM32080 makes a workplace permanent once the period is likely to exceed 24 months, ending detached duty relief.

US Tax Return Preparation for Expats: UK Secondment

US tax return preparation for expats on a UK secondment is built differently from the return of someone who has emigrated, and the difference comes down to one word: temporary. On a secondment the employment contract normally stays with the US entity or is split between the US and UK employers, the assignment letter has an end date, and both sides expect you to come home. That fact pattern frequently defeats the foreign earned income exclusion on Form 2555, because the IRS tax home and abode rules follow where your domestic ties sit rather than where your desk sits. The return is therefore usually built around foreign tax credits on Form 1116, with a tax equalisation settlement running alongside it. Your US citizenship keeps you taxable on worldwide income for every year of the assignment, whatever HMRC concludes about your UK residence.

What follows is the preparation and compliance side of a US to UK assignment for a senior professional, banker or fund executive posted to London on a one, two or three year letter: residence on each side, the Form 2555 tests and why secondees fail them, Form 1116 mechanics, tax equalisation reporting, housing and school fees, certificates of coverage, equity vesting, the state you left, and what breaks when the assignment is extended.

Why is a secondment different from a permanent transfer?

A secondment keeps the employee employed by, or contractually tied to, the home entity while assigned for a defined period to a host entity. A permanent transfer, or localisation, moves the contract itself to the UK company. US tax law does not use the word secondment, but it draws a line that maps onto it almost exactly: temporary versus indefinite.

IRS Publication 463 states that a temporary assignment in a single location is one that is realistically expected to last, and does in fact last, for one year or less, and that an assignment is indefinite if it is realistically expected to last more than one year, whether or not it actually does. IRS guidance on the foreign earned income exclusion says the same thing from the other direction.

That distinction does two things at once, and they pull in opposite directions. On a temporary assignment your tax home does not move, so employer reimbursements of travel and living costs can be paid under an accountable plan without becoming taxable wages. But a tax home that has not moved is fatal to Form 2555, which requires a tax home in a foreign country. On an indefinite assignment the tax home can move to London, opening the door to Form 2555, but Publication 463 then says you must include in income any amounts you receive from your employer for living expenses, even if they are called travel allowances. Almost no guidance written for Americans abroad states that either-or plainly, and it is the structural point in a secondment return.

Where are you resident on each side?

The US answer does not depend on residence at all. US citizens and green card holders are taxed on worldwide income wherever they live, so Form 1040 is due for every year of the assignment, including the year you leave and the year you return.

The UK answer is decided by the statutory residence test. GOV.UK sets out the headline automatic UK tests: you are UK resident if you spent 183 or more days in the UK in the tax year; or your only home was in the UK for 91 days or more in a row and you visited or stayed in it for at least 30 days of the tax year; or you worked full-time in the UK for any period of 365 days and at least one day of that period was in the tax year you are checking. Where none is decisive, the sufficient ties test combines day counts with family, accommodation, work, 90 day and country ties.

Arrival part way through a UK tax year is handled by split year treatment. GOV.UK puts it plainly: when you move in or out of the UK the tax year is usually split into two, a non-resident part and a resident part, so you only pay UK tax on foreign income based on the time you were living here. For an inbound secondee the usual routes are Case 4, starting to have a home in the UK only, and Case 5, starting full-time work in the UK. HMRC guidance at RFIG21170 requires for Case 5 that the individual is UK resident in the tax year, was non-UK resident for the previous tax year, and does not meet the sufficient ties test for the part of the year before the third automatic UK test is first met. Split year treatment changes the UK charge. It changes nothing on the US side.

Two UK payroll mechanics matter. A section 690 notification, now made under sections 690A and 690D of ITEPA 2003, lets an employer operate PAYE on only the proportion of a globally mobile employee's income earned within the UK; GOV.UK confirms that from April 2026 employers must submit a reasonable estimate of the proportion not likely to be PAYE income, capped at 30 per cent for qualifying new residents. Separately, Overseas Workday Relief was reformed from 6 April 2025, tied to the four year foreign income and gains regime and limited to the lower of GBP 300,000 or 30 per cent of total employment income.

US tax return preparation for expats: exclusion or credit?

Form 2555 has three requirements and all three must be met: foreign earned income, a tax home in a foreign country, and either the bona fide residence test or the physical presence test.

The bona fide residence test requires an uninterrupted period that includes an entire tax year. IRS guidance then adds the sentence that decides most secondment cases: if you go to a foreign country to work for a specified period of time, you ordinarily will not be regarded as a bona fide resident of that country even though you work there for one tax year or longer. A signed assignment letter with an end date is close to a definition of a specified period. The IRS also states that you are not a bona fide resident if you tell the foreign authorities you are not resident and they accept that you are not subject to their income tax as a resident.

The physical presence test is arithmetic rather than intention: 330 full days in a foreign country or countries during any period of 12 months in a row, with a full day defined as the 24 hour period that starts at midnight. That leaves only 35 spare days. A managing director who flies to New York monthly, attends a US offsite, takes home leave and transits US airports on the way to holidays burns through them quickly, and time over international waters is not time in a foreign country.

The amounts are capped in any event. The maximum exclusion was $130,000 for 2025 and is $132,900 for 2026 under Rev. Proc. 2025-32. For 2025 the standard foreign housing limitation was $39,000, being 30 per cent of the exclusion, before deducting the base housing amount, with higher IRS limits for specified high cost locations. For a banker earning several multiples of that in a country whose rates exceed US rates, the exclusion shelters a modest slice of the package, and no credit or deduction is available for foreign taxes paid on excluded income. Excluding income can cost more credit than it saves tax.

The tax home and abode trap that catches secondees

This is where prepared returns go wrong. The IRS defines your tax home as the general area of your main place of business, employment or post of duty, regardless of where you maintain your family home. Read alone that sounds like good news: the desk is in London, so the tax home is in London. But the same guidance carries an override. You are not considered to have a tax home in a foreign country for any period during which your abode is in the United States, subject only to a combat zone exception.

Abode is a different concept. The IRS describes it as one's home, habitation, residence, domicile or place of dwelling, says it has a domestic rather than a vocational meaning, and states that its location is based on where you maintain your family, economic and personal ties. A secondment is designed to preserve exactly those ties. The facts to test in month one, not at filing, include the following.

A US home retained and left empty, used by family, or let short term with an intention to reoccupy
A spouse and school age children who stay in the US, or who join months later and return earlier
A UK flat held on a corporate lease in the employer's name rather than a tenancy in your own name
Employer paid home leave flights in the assignment letter, and a guaranteed role on repatriation
US bank accounts, credit cards, driving licence, vehicle registration and voter registration all maintained
Continued US payroll delivery and hypothetical tax withheld under an equalisation policy

No single fact is decisive and the test is one of facts and circumstances. But a file containing most of them is a file in which the abode remains in the United States, and Form 2555 fails on the tax home requirement even where the 330 day count is comfortably met. The day count is the test people run; the abode rule is the test that decides. Add the Publication 463 rule that a genuinely temporary assignment of one year or less does not move the tax home at all, and a one year secondment is doubly outside section 911.

The consequence is a strategy set on day one rather than a surprise in April. If the analysis points to a credit-based return, Form 673 should not be filed with the employer, because reducing US withholding on the strength of an exclusion you will not claim creates an underpayment and interest exposure. US withholding and UK PAYE should be coordinated at the outset so the same earnings are not fully withheld twice, which is what a section 690 notification or a shadow payroll is for. A contemporaneous workday calendar should start immediately, because it drives the Form 1116 numerator. And the accrual election on Form 1116 should be considered in the first assignment year, since it binds every later year. None of that is retrievable the following March.

Why Form 1116 is usually the answer

The foreign tax credit is claimed on Form 1116, and for a secondee almost all of the action is in the general category, where wages sit; passive income from UK interest and dividends needs its own Form 1116. Only income, war profits and excess profits taxes generally qualify, so UK income tax collected through PAYE and on a self assessment balancing payment is creditable, while UK National Insurance is not an income tax and belongs to the social security analysis.

The credit is capped. IRS guidance describes the limitation as your US tax multiplied by a fraction: taxable income from sources outside the United States over total taxable income from US and foreign sources. Unused foreign taxes may be carried back one year and forward ten. For most London based US executives the UK effective rate exceeds the US rate, so the year produces excess credits rather than residual US tax, and the real question is whether those carryforwards will ever be usable.

The numerator is a sourcing question, and the IRS rule is blunt: the source of earned income is the place where you perform the services, and where or how you are paid has no effect on the source of the income. Where duties are performed in more than one country, foreign source income is computed on a time basis, being days worked in the foreign country divided by total workdays, multiplied by total compensation. A US citizen based in London who spends thirty workdays a year in New York has US source compensation for those days: outside the Form 1116 numerator, with no credit available, and possibly outside the UK charge as well. A workday schedule is not tidiness here, it is the evidence for a number on the return.

How do the UK and US tax years interact?

The UK tax year runs 6 April to 5 April and the US year is the calendar year, so every P60 straddles two US returns and PAYE deducted in one UK year is credited across two US years unless something is done about it.

The timing problem is sharper than apportionment. A cash basis taxpayer claims the credit in the year the tax is paid, and UK balancing payments fall due on 31 January following the end of the UK tax year, with payments on account on 31 January and 31 July. UK tax on income earned in the spring of one calendar year can therefore be paid in the January that falls in the calendar year after next. Year one then shows UK source income with comparatively little UK tax paid, producing residual US tax, while a later year shows UK tax paid with too little foreign source income to absorb it.

IRS guidance offers the fix: a cash basis taxpayer may claim the credit in the year the tax is paid or in the year it accrues, and may elect to accrue foreign taxes by checking the box in Part II of Form 1116. That matches UK tax to the year the income arose and normally smooths a secondment. It is not free. Once made you must follow it in all later years, and you cannot later deduct any part of the previously accrued taxes. Where the UK liability is finalised at a different figure, the US position must be revisited, and individuals generally have ten years to claim a refund where more creditable foreign tax was paid than originally claimed.

How is tax equalisation reported on the US return?

Tax equalisation, or tax equalization in US spelling, is a contractual arrangement under which the employer keeps the assignee in broadly the tax position they would have been in had they stayed at home: a hypothetical tax is withheld from pay and the employer pays the actual US and UK liabilities the assignment generates. Tax protection is the softer version, where the employee pays and files normally and is reimbursed only if the combined actual tax exceeds notional home country tax. Four points govern the reporting.

Hypothetical tax is not tax. It is a contractual reduction in pay retained by the employer, never remitted to the IRS or HMRC, and it never appears on Form 1040 as a payment or credit. Treating it as withholding is a common and expensive error.
Employer payments of your actual US and UK tax are additional compensation, because the employer is discharging your personal liability. That compensation is itself taxable, which is why programmes apply a gross-up, and the gross-up is compensation too.
The UK tax the employer pays on your behalf is still your UK liability, and remains creditable on Form 1116 provided the corresponding income is not excluded under section 911.
The equalisation settlement is a separate calculation from the return, a true-up between hypothetical tax withheld and the final equalised position that can leave either side owing. Repaying an employer in a later year for amounts already taxed raises claim of right issues rather than a simple deduction.

The discipline is that the Form 1040 and the settlement are two different numbers produced in sequence. The settlement is computed from the filed return, so a return that is wrong on sourcing or on the credit propagates into a cash settlement with your employer. Reconcile before signing.

How are housing, school fees, home leave and relocation taxed?

On the US side assignment benefits are compensation. IRS guidance on foreign earned income states that allowances or reimbursements for cost of living, overseas differential, family, education, home leave, quarters and moving expenses count as earned income, and that the fair market value of property or facilities provided by your employer in the form of lodging, meals or use of a car is earned income. The London flat, the international school fees, the goods and services differential, the home leave flights and the shipment of household effects all enter US gross income unless a specific rule removes them.

There are two realistic routes out and they are mutually exclusive. The first is the accountable plan route on a genuinely temporary assignment: if it is realistically expected to last one year or less you are travelling away from your tax home and reimbursed living and travel costs can be paid untaxed. The second is the foreign housing exclusion on Form 2555, available only if you qualify under section 911 at all, and capped as above. The first depends on the tax home staying in the US; the second depends on it having moved to the UK. A preparer who treats them as complementary produces a return that contradicts itself.

On the UK side, qualifying relocation expenses and benefits are exempt up to GBP 8,000 per move under section 273 ITEPA 2003, per EIM03104, and travel and subsistence at a temporary workplace can be relieved under the detached duty rules. None of that carries across, which is why a benefit can be tax free in the UK and taxable in the US, generating no UK tax to credit against it.

Do you keep paying US social security in the UK?

Social security follows a separate agreement from income tax. The US and the UK have a totalization agreement, and the IRS states that individuals claiming exemption from US Social Security and Medicare taxes must secure a certificate of coverage from the social security agency of their home country and present it to their employer. For an American seconded to London on US payroll the certificate is obtained on the US side and evidences continued US coverage and relief from UK National Insurance.

The detached worker principle keeps a temporarily transferred employee in the home system for a limited period rather than indefinitely, and the certificate is applied for before the assignment begins. Two consequences follow: a certificate has a finite life, so an assignment that runs long can tip the employee into UK National Insurance part way through and change net pay; and National Insurance is not creditable on Form 1116, so where it becomes payable it is a real cost, not a timing item.

What happens to equity that vests during the assignment?

Equity is sourced by the same principle as salary, applied over the period the award was earned: for restricted stock units usually grant to vest, and for options to the point the award is no longer forfeitable. Income at vest is allocated between countries by workdays in that period, on the same time basis the IRS applies to wages. Three problems recur.

First, a US payroll that was never told about the assignment reports the whole vest as US wages on Form W-2, understating the foreign source numerator on Form 1116 and requiring a supportable workday schedule to correct. Second, double withholding: US federal supplemental withholding on the full vest while UK PAYE is applied to the UK portion, trapping cash on one side until a return is filed. Third, awards granted before the move carry US workdays, so much of an early vest is US source and generates no creditable UK tax, while the UK may still bring part of it into charge depending on residence and relief.

Does your US state still want a return?

A move abroad is a federal event, not automatically a state one. States tax on residence and domicile under their own rules, and several do not conform to section 911, so income excluded federally on Form 2555 can still be taxed by the state. Domicile is generally retained until a new one is established, which normally requires both leaving and demonstrating an intention not to return.

Note the overlap with the abode analysis. The retained house, the driving licence, the voter registration, the family left behind and the guaranteed role on repatriation are the same facts that keep the abode in the United States for section 911. One fact pattern, two adverse results: no Form 2555 and a continuing state filing obligation. Some states operate safe harbours for residents working abroad and others do not, so the specific state rules have to be read rather than assumed.

What does a preparer re-examine when a one year secondment becomes three?

Extensions are the most under-documented event in assignment compliance, and the timing rule is counter-intuitive. Publication 463 confirms that an assignment initially temporary may become indefinite due to changed circumstances, and its example makes the mechanics clear: where a nine month assignment is extended after eight months by a further seven, deductible expenses stop at the eight month point. The trigger is the date the expectation changed, not month thirteen and not the date the extension letter was finally signed.

The UK runs a parallel rule with the same logic and a different clock. EIM32080 provides that a workplace is not temporary where the employee works there during a period of continuous work that lasts, or is likely to last, more than 24 months, applying a 40 per cent of working time test, and HMRC states that the effect of the rule is not altered where the expectation does not match the outcome. An extension taking the expected London period past 24 months therefore makes the London office a permanent workplace from the date of the change, ending detached duty relief. A proper re-examination covers the following.

Reimbursements and allowances previously treated as excludable accountable plan travel amounts become taxable compensation from the date the expectation changed, usually meaning corrected payroll reporting and, for a closed year, a corrected Form W-2 and an amended Form 1040-X
Form 2555 may become available prospectively once the assignment is indefinite, but only if the abode test is also satisfied, so the family, housing and repatriation facts must be re-tested rather than assumed to have improved
The physical presence test runs over any 12 months in a row, so a qualifying period can straddle two calendar years and produce a part-year exclusion in the first year it becomes available
The foreign housing exclusion becomes worth modelling for the first time, weighed against the loss of credit on the excluded slice of income
Form 1116 carryovers and any accrual election must be re-run, because a switch to partial exclusion changes both the numerator and the creditable tax
Detached duty relief ends, the section 690 estimate may need revising, and Overseas Workday Relief has a four year life and a financial limit, so a longer assignment runs past it
The social security certificate has a finite life, and an extension can move the employee into UK National Insurance mid-assignment
Equalisation policies frequently end at localisation, so hypothetical tax withholding stops part way through a year and the Form W-2 changes shape
State domicile should be re-assessed, since a longer absence strengthens an abandonment argument only if the retained ties are actually cut

A worked example of a London secondment

A US citizen managing director signs an 18 month assignment letter and starts on a London trading desk on 1 March. The family home in New Jersey is kept and not let. The spouse and children join in August and the children start at an employer-funded international school. The employer leases a flat in its own name, provides home leave flights, includes a repatriation clause and operates tax equalisation with hypothetical US tax withheld from 1 March.

For the first calendar year Form 2555 is unavailable on two independent grounds. The bona fide residence test cannot be met because the qualifying period must include an entire tax year and arrival was in March. The physical presence test cannot be met because no 12 month period ending in that calendar year contains 330 full days abroad, and monthly New York trips would have made it marginal anyway. The abode analysis adds a third ground for the months when the family was still in New Jersey. It is a Form 1116 year by necessity, not choice.

The UK side gives split year treatment, most likely under Case 5, so the UK part begins when full-time UK work starts. UK tax is largely collected through PAYE during the calendar year, but the balancing payment for the UK year ending the following 5 April is not due until the 31 January after that, which on the cash method lands in a later US year: the reason to weigh the accrual election in year one rather than year three. RSUs granted three years earlier in New York vest in June and are almost entirely US source on a grant to vest workday basis, so they sit outside the Form 1116 numerator even though the cash arrived while living in London. The school fees, the flat and the home leave flights are US taxable compensation, and because the assignment was always expected to exceed one year they cannot be sheltered as temporary travel reimbursements either. New Jersey remains a live filing question on the retained house and the intention to return.

The filing calendar and what else gets triggered

US returns are due 15 April, with an automatic two month extension to 15 June for taxpayers living outside the United States, a further extension to 15 October by filing Form 4868, and a discretionary additional two months to 15 December on request. Form 2350 exists for taxpayers who need more time to satisfy the bona fide residence or physical presence test, which matters in an arrival year. Extensions extend the time to file, not the time to pay.

The UK self assessment year ends 5 April, with online filing by the following 31 January, paper filing by 31 October, registration by 5 October and payments on account on 31 January and 31 July. Opening a UK current account for the secondment, plus any employer expense or savings account, will often push the aggregate balance over the $10,000 FBAR threshold, requiring FinCEN Form 114, with higher thresholds applying to Form 8938 filed with the return. Those obligations start in year one, not when the assignment turns long term, and they are the most commonly missed part of a secondee's compliance.