Is dollar salary from a US payroll US-source income if I live and work in London?

Not automatically. The IRS says where or how you are paid has no effect on the source of the income. Compensation is sourced where the work is performed, so pay for days worked in London is foreign-source even if a US payroll paid it in dollars on a Form W-2. Only the share attributable to days actually worked in the United States, generally measured by a workday fraction under Treasury Regulation 1.861-4, is US-source.

Which exchange rate do I use for sterling salary on my US return?

The IRS says that in general you translate foreign currency at the spot rate prevailing when you receive the income, and it also publishes yearly average exchange rates. For regular monthly salary many preparers use either payslip-date spot rates or the published yearly average, applied consistently and documented. Large one-off sterling payments such as bonuses are usually converted at the rate on the payment date. The dollar element on your W-2 needs no conversion.

Does the UK tax the part of my salary paid in dollars?

Yes, if you are UK resident. GOV.UK says residents normally pay UK tax on all their income, whether from the UK or abroad, so dollar pay from a US payroll is UK employment income in full. PAYE is often operated on it through a UK shadow payroll or a special arrangement, and your Self Assessment return reconciles everything and claims credit for US tax on the pay for days you worked in the United States.

Can I pay both US social security and UK National Insurance on a split payroll?

It can happen in practice, but it should not. The US-UK totalization agreement assigns coverage to one country for the same work. A worker temporarily sent from a US employer to the UK for an expected period of five years or less can generally stay in US social security with a certificate of coverage. Coverage applies to the employment as a whole, so both payroll elements should follow the same system.

Should a London banker use the foreign earned income exclusion or the foreign tax credit?

At banking pay levels the foreign tax credit usually works better. The exclusion is capped at $130,000 for 2025 and $132,900 for 2026, and the IRS does not allow a credit for foreign tax on income you exclude. UK tax on high earnings often exceeds the US tax on the same foreign-source pay, so the credit can eliminate US tax on that slice, with unused credit carried back one year or forward ten years.

Do I owe US tax on currency gains when I convert my sterling salary to dollars?

Possibly. Under Internal Revenue Code section 988, sterling that rises against the dollar between receipt and conversion can produce a currency gain. The personal transaction exception in section 988(e) exempts gains that do not exceed $200 on each transaction, but if a single conversion produces a larger gain, the whole gain is taxable. Holding dollar salary in a UK dollar account does not itself create a US currency gain.

US UK Tax Returns Preparation: Split Dollar & Sterling Pay

US UK tax returns preparation for a salary paid in two currencies comes down to one principle: the currency and the payroll that pays you do not decide who taxes the income, the place where you physically did the work does. A US citizen executive or senior banker living in London who is paid partly in US dollars through a US payroll, often with a Form W-2, and partly in sterling through UK PAYE must report the entire salary on a US Form 1040 in dollars and the entire salary on a UK Self Assessment return in sterling. Workday counts then split the pay into US-source and foreign-source slices, and those slices drive the foreign tax credit, the foreign earned income exclusion and the UK relief for US tax.

In the returns we prepare for split-payroll executives, the numbers on the W-2 and the P60 are rarely the numbers that end up on the returns. The W-2 shows only the dollar element, the P60 shows only the sterling element (or, where the UK payroll has grossed in the dollar pay, a total that uses a different exchange rate and a different tax year), and neither document tells you how many days were worked in New York versus London. This guide walks through each step on both sides of the Atlantic, with an illustrative worked scenario and a document checklist at the end.

What is a split payroll and why does it complicate US UK tax returns preparation?

A split payroll is an arrangement in which one employee is paid by two payrolls in two countries for a single job or for linked employments. Typically the US parent or a US affiliate pays a dollar amount through its US payroll, reported on Form W-2, while the UK entity pays a sterling amount through PAYE, reported on the P60 and payslips. Banks and multinational groups use it to keep a US executive in US benefit and social security arrangements while meeting UK payroll obligations, or simply because the executive's reporting line runs to both offices.

The complication is that each payroll only sees its own slice, while each tax authority wants to see the whole. The US taxes a citizen on worldwide income regardless of where the citizen lives. The UK taxes a UK resident on worldwide income. So both countries tax the full salary, and the returns must reconcile two partial payroll records into one complete picture in two currencies and across two different tax years: the US calendar year and the UK tax year running from 6 April to 5 April.

US return: all wages, dollar and sterling, reported in US dollars on Form 1040 for the calendar year.
UK return: all employment income, sterling and dollar, reported in sterling on the Self Assessment return for the tax year ending 5 April.
Source split: each country's relief for the other's tax depends on how many working days were spent in the US versus the UK and elsewhere.
Social security: US FICA and UK National Insurance can both be triggered unless the US-UK totalization agreement assigns coverage to one country.

How do you convert a sterling salary to dollars on the US return?

The dollar element of the salary needs no conversion at all: the W-2 figures are already in dollars and go onto the return as reported, subject to the workday analysis below. The sterling element must be translated. The IRS page on exchange rates at https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates states that you must translate foreign currency into US dollars when you receive income in a foreign currency, and that in general you use the exchange rate prevailing, meaning the spot rate, when you receive, pay or accrue the item. The same page publishes yearly average exchange rates.

For a monthly sterling salary, the practical choice is between converting each payslip at the spot rate on its pay date, or using the published yearly average where the pay is received evenly through the year. In the returns we prepare, we document which method was used, apply it consistently to every sterling item of the same type, and keep the calculation on file. A large sterling bonus paid on a single date is a different animal from twelve equal salary payments, and we usually convert that at the rate on the payment date rather than letting an annual average distort it.

One more timing point catches people out. The US return runs January to December, but the P60 runs 6 April to 5 April. A P60 cannot simply be converted and dropped onto a Form 1040. The sterling payslips have to be rebuilt month by month into calendar-year totals, which is why the payslips themselves, not just the P60, are on our checklist.

What does the W-2 tell you, and what does it leave out?

The W-2 from the US payroll reports the dollar wages, any US federal income tax withheld, and, where the executive remains in the US system, social security and Medicare wages and tax. It does not tell you how much of the dollar pay relates to days worked in London. Many executives assume that because the dollar pay arrives from a US payroll it is US income. It is not. The IRS explains at https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-what-is-foreign-earned-income that where or how you are paid has no effect on the source of the income; foreign earned income is income for personal services performed in a foreign country.

US federal withholding on the dollar payroll is a credit against the final US liability in the normal way. Where the withholding is heavy but most of the work was done in London, the executive may be substantially overwithheld once the foreign tax credit is applied, and the refund arrives only when the return is filed. The reverse also happens: a US payroll that withholds little, combined with a large US-workday slice that the UK tax does not fully cover, can leave a balance due. Reviewing withholding mid-year with the payroll team is part of good compliance, not an afterthought.

How are workdays used to source a split salary?

The US sourcing rule for employee compensation is in Treasury Regulation 1.861-4, available at https://www.law.cornell.edu/cfr/text/26/1.861-4. For services performed partly inside and partly outside the United States, the part of compensation attributable to US services is generally determined on a time basis: it bears the same relation to total compensation as the number of days of performance within the US bears to the total number of days of performance. The default period is the calendar year. Certain fringe benefits, such as housing and education, are sourced on a geographical basis by reference to the principal place of work instead.

In plain terms, the workday fraction is applied to the whole salary, both the dollar and the sterling elements together. It is not the case that the dollar payroll is US-source and the sterling payroll is UK-source. If an executive spent 15 percent of working days in New York, roughly 15 percent of the combined pay is US-source, whichever payroll happened to pay it. The foreign-source remainder is what feeds the Form 1116 foreign tax credit limitation and, if claimed, the Form 2555 foreign earned income exclusion.

Count working days only: weekends and holidays not worked are generally left out of both the numerator and the denominator.
A day spent travelling on business is a working day; allocate it consistently and note the rule you applied.
Days worked in third countries are foreign-source for US purposes but may raise their own local issues.
Keep contemporaneous evidence: calendars, travel bookings, expense reports and badge-in records.
Separate bonuses and deferred awards may relate to earlier years and need their own earning-period analysis.

Should a split-payroll executive use the foreign tax credit or the exclusion?

For a senior banker or executive earning well above the exclusion limit, the foreign tax credit usually does most of the work. The IRS states at https://www.irs.gov/individuals/international-taxpayers/figuring-the-foreign-earned-income-exclusion that for 2025 the maximum exclusion is the lesser of foreign earned income or $130,000 per qualifying person, and for 2026 it is $132,900. That is a small fraction of a typical London banking package, and UK income tax rates on high earners generally exceed US rates on the same income, so UK tax on the foreign-source slice will often cover the US tax on it through the credit.

Mixing the two has a cost. The IRS explains at https://www.irs.gov/taxtopics/tc856 that you cannot take a credit or deduction for foreign taxes paid on income you exclude under the foreign earned income exclusion, and that the credit is the smaller of the foreign tax paid or the US tax attributable to foreign-source income, computed by category. Unused credits can generally be carried back one year and forward ten years. Excess UK tax on the foreign-source general category slice can therefore be carried forward rather than lost, which matters for executives whose US-workday share varies from year to year.

The failure mode we see most often is a return that applies the credit to the whole salary, including the US-workday slice. UK tax paid on pay for days worked in New York is not tax on foreign-source income for US purposes, so it does not increase the limitation. That error inflates the credit and understates US tax, and it tends to surface only when the workday records are finally requested.

Who taxes what under the US-UK treaty?

The US-UK income tax treaty documents are published at https://www.irs.gov/businesses/international-businesses/united-kingdom-tax-treaty-documents. Broadly, employment income is taxable where the employment is exercised, and the treaty's saving clause preserves the US right to tax its own citizens as if the treaty had not come into effect, subject to the relief article. The practical result for a UK-resident US citizen works in two directions.

Pay for UK workdays: the UK has the primary taxing right as the country of residence and the country where the work was done. The US taxes it as well because of citizenship, and gives a foreign tax credit for the UK tax, limited to the US tax on that foreign-source slice.
Pay for US workdays: the US has the primary taxing right as the source country. The UK taxes it too because the executive is UK resident, and the UK gives credit for the US tax on that US-source slice against the UK tax on the same income.
Third-country workdays: both countries treat these as foreign-source; the country where the work was done may also claim tax, and relief follows the relevant local rules and treaties.

Because each country credits the other's tax only on the slice where the other country has the primary right, both returns must use the same workday split. A US return that says 85 percent foreign-source and a UK return that claims relief as if 30 percent were US-source are inconsistent, and inconsistency is exactly what an enquiry or examination looks for. We prepare both returns from one master workday schedule for that reason. The exact treaty mechanics, including how the relief article interacts with the saving clause on particular income, are applied to the facts of each file rather than summarised with a single rule.

How is the dollar element taxed in the UK?

GOV.UK states at https://www.gov.uk/tax-foreign-income/residence that residents normally pay UK tax on all their income, whether it is from the UK or abroad. For a UK-resident executive, that means the dollar pay from the US payroll is UK employment income in full, including the part that relates to US workdays; the UK then relieves US tax on that slice as described above. The dollar amounts are converted into sterling for the UK return, and the UK tax year runs 6 April to 5 April, so the US payslips must be regrouped into UK tax years.

PAYE on pay from an overseas payroll is where the arrangements vary. Where there is a UK employing entity or a UK host employer, that entity is usually responsible for operating PAYE on the dollar element too, and the pay is often run through the UK payroll as a notional or shadow payment so that UK tax is withheld even though no sterling changes hands. Where no UK entity has the obligation, HMRC operates special arrangements under which PAYE can be accounted for in other ways; HMRC's PAYE Manual sets out a series of international employment arrangements at https://www.gov.uk/hmrc-internal-manuals/paye-manual/paye81950 and neighbouring pages. Which arrangement, if any, applies depends on the employer structure, and we confirm it from the payroll records rather than assuming it.

Whatever PAYE was operated, the executive's Self Assessment return is where everything is reconciled: all employment income, UK tax already deducted under PAYE, and the claim for credit relief for US tax on the US-workday slice. Following the end of the remittance basis in April 2025, the UK's rules targeting artificial dual employment contracts are a separate subject that we cover in a dedicated article.

What about US social security and UK National Insurance?

Social security is not covered by the income tax treaty or by the foreign tax credit. The IRS explains at https://www.irs.gov/individuals/international-taxpayers/social-security-tax-consequences-of-working-abroad that US social security and Medicare taxes generally continue to apply to wages earned abroad by a US citizen working for an American employer, and that totalization agreements are designed so that you pay social security taxes to only one country for the same work.

The US-UK totalization agreement, summarised by the Social Security Administration at https://www.ssa.gov/international/Agreement_Pamphlets/uk.html, contains a detached worker rule: an employee temporarily sent by a US employer to work in the UK for a period expected to be five years or less generally stays covered only by US social security, provided a certificate of coverage is obtained. The certificate is what proves to HMRC and the UK payroll that National Insurance should not be deducted. A US citizen who is locally hired in London, or whose assignment is expected to run beyond the detached worker period, generally falls into UK National Insurance instead.

On a split payroll, the social security position must be the same for both elements of pay, because coverage attaches to the employment, not to the payroll. We regularly see W-2s showing FICA on the dollar element while the UK payslips show National Insurance on the sterling element, with no certificate of coverage in place. That is double contribution on one job, and the fix is a coverage determination under the agreement, not a tax return entry. Neither FICA nor National Insurance is creditable income tax, so the foreign tax credit does not rescue the position.

Is there a US tax on currency gains from a dollar and sterling salary?

For a US taxpayer, the dollar is the functional currency, so holding dollar salary in a UK dollar account does not create a US currency gain or loss. The exposure arises on the sterling side. When sterling received as salary is later converted back to dollars, or spent, at a rate different from the rate at which it was received, the difference is a foreign currency gain or loss under Internal Revenue Code section 988, the text of which is at https://www.law.cornell.edu/uscode/text/26/988.

Section 988(e) contains a personal transaction exception for individuals: gain on the disposition of foreign currency in a personal transaction is not recognised unless the gain on that transaction exceeds $200. The test applies transaction by transaction, and once the gain on a transaction exceeds $200 the whole gain is taxable, not just the excess. For an executive who periodically moves large sterling balances into dollars, several individual conversions can each exceed the threshold, so we ask for the conversion history on any account where substantial sterling was accumulated and later moved.

Worked scenario: apportioning a split salary by workdays

The following figures are an illustration only, not a real client, and use an assumed exchange rate of 1 pound = 1.30 US dollars for the whole year purely to keep the arithmetic simple. A US citizen banker resident in London for the whole of the calendar year is paid $300,000 through a US payroll on Form W-2 and 200,000 pounds through UK PAYE. At the assumed rate, the sterling element is $260,000, so total salary for US purposes is $560,000.

Working days in the year: 240 in total, of which 204 were worked in London and 36 in New York.
US-source share: 36 divided by 240 = 15 percent. US-source compensation = 15 percent of $560,000 = $84,000.
Foreign-source share: 204 divided by 240 = 85 percent. Foreign-source compensation = 85 percent of $560,000 = $476,000.
Note that the split ignores which payroll paid what: 85 percent of the W-2 dollar pay is foreign-source even though it came from a US payroll.
Form 1116: general category foreign-source income starts at $476,000, reduced by allocable deductions. The credit is capped at the US tax attributable to that slice.
UK side: the whole package is UK employment income. The UK gives credit for the US tax attributable to the $84,000 of US-workday pay, converted into sterling and matched to the UK tax years concerned.

In this illustration, the UK tax on the 85 percent foreign-source slice would typically be large enough to cover the US tax on it, so the US liability on that slice is largely eliminated and any surplus UK tax becomes a carryforward. The US-source $84,000 is taxed by the US first; the US tax on it, net of any withholding already applied through the W-2, is what the UK relieves. If the banker had instead claimed the foreign earned income exclusion on part of the foreign-source pay, the UK tax on the excluded portion would be lost for credit purposes, which is why the exclusion rarely suits pay at this level. Social security is handled entirely separately, according to whether a certificate of coverage is in place.

What documents are needed for split-payroll US UK tax returns preparation?

Because the workday split and the currency conversion drive every other number, the document request for a split-payroll executive is longer than for a single-payroll employee. This is the checklist we work from.

Form W-2 for the dollar payroll, plus any corrected W-2c.
UK P60 for each UK tax year overlapping the US calendar year, and any P45 on a change of employer.
Every monthly payslip from both payrolls, so pay can be regrouped into calendar-year and UK tax-year totals.
P11D or payrolled benefits details, and any US statement of taxable benefits.
A travel and working-day calendar showing where each working day was spent, with supporting diary, travel and expense records.
Bonus and deferred award statements showing grant, vesting and the period the award relates to.
Any certificate of coverage under the US-UK totalization agreement, or correspondence showing none was obtained.
Details of any shadow payroll or PAYE special arrangement the employer operates for the dollar element.
Records of large sterling-to-dollar conversions for the section 988 review.
Prior-year US and UK returns, including any foreign tax credit carryforward schedule.

Filing, deadlines and the reporting that sits alongside the returns

A US citizen living abroad whose tax home and abode are outside the US generally has an automatic extension to file and pay to 15 June, though interest runs on tax paid after the regular April due date, and a further extension to October can be requested. UK Self Assessment for an executive with a split payroll is normally required because the PAYE system alone cannot deliver double tax relief or reconcile the overseas element. The two returns are best prepared together, from one set of workpapers, so that the workday split, exchange rates and credit claims agree.

A London-based executive will almost always also have UK bank and investment accounts reportable on the FBAR and, above the relevant thresholds, on Form 8938. Where FBARs have been missed, late reports are filed through FinCEN's BSA E-Filing System with an explanation of the reason for late filing, or the executive regularises the position through the Streamlined Filing Compliance Procedures if eligible; the IRS page on streamlined procedures is at https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures.

Common errors we correct on split-payroll returns

Treating the W-2 dollar pay as wholly US-source and the sterling pay as wholly foreign-source.
Converting the P60 total at one rate and entering it as calendar-year income.
Claiming a foreign tax credit for UK tax on US-workday pay.
Using different workday counts on the US and UK returns.
Paying both FICA and National Insurance on the same employment without checking for a certificate of coverage.
Claiming the exclusion on high pay and then losing credit for the UK tax on the excluded amount.
Ignoring sterling-to-dollar conversions where the gain on a single transaction exceeded $200.

Split payrolls are routine for senior US staff in London, but the returns are not. The work is in reconstructing the year: where each working day was spent, what each payroll paid and when, which exchange rate applies, and which country has the first right to tax each slice. Get the workday schedule right and the rest of the US UK tax returns preparation follows from it; get it wrong and both returns are wrong in ways that compound over the years a foreign tax credit carryforward or an enquiry window stays open.