Can a US citizen exclude UK dividends from their own company under the Foreign Earned Income Exclusion?

No. The Foreign Earned Income Exclusion on Form 2555 covers only earned income, meaning pay for services performed abroad. Dividends from your UK limited company are unearned investment income, so they stay fully reportable on Form 1040 regardless of the salary level. UK dividend tax can instead be claimed as a foreign tax credit on Form 1116, and the dividends may qualify for the lower US qualified dividend rates because the UK treaty is on the IRS list.

What are the UK dividend tax rates for 2026-27?

GOV.UK confirms a £500 dividend allowance, then rates of 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band for 6 April 2026 to 5 April 2027. The basic and higher rates each rose by two percentage points from April 2026, while the additional rate stayed unchanged. A US calendar-year return can therefore include dividends taxed in the UK at two different rate sets.

Does UK tax on dividends reduce the US Net Investment Income Tax?

Under the IRS position, no. The IRS states that foreign income tax credits are allowed only against regular income tax and may not reduce the 3.8% Net Investment Income Tax computed on Form 8960. Some filers take a treaty-based position under the US-UK treaty that UK tax should offset it, but that position requires disclosure and is contested. Remember that excluded foreign earned income is added back when testing the NIIT threshold.

Which Form 1116 basket should UK tax on my company dividends go in?

For a US shareholder owning 10% or more of a controlled foreign corporation, the IRS applies a look-through rule: dividends are passive only to the extent attributable to the company's own passive income. A UK trading or consulting company earns mainly active income, so most of the dividend and its UK tax usually belong in the general category, alongside UK tax on salary. Putting it all in the passive basket can strand credits.

Do I pay US Social Security on salary from my UK limited company?

Generally not. A UK limited company is not an American employer, so it does not withhold US FICA, and director salary is wages rather than self-employment income, so US self-employment tax does not apply to it. UK Class 1 National Insurance is collected through PAYE instead. The US-UK totalization agreement exists to prevent both countries charging social security on the same work, using certificates of coverage where needed.

If my UK company keeps its profits, do I still owe US tax?

Possibly. A US citizen owning most of a UK company usually owns a controlled foreign corporation, and from 2026 must include net CFC tested income, the renamed GILTI regime, on Form 8992 even without a dividend. For a company paying UK corporation tax at the 25% main rate, the annual high-tax exclusion election often removes that inclusion, but it must be tested each year. Retained profits already taxed become PTEP.

US UK Tax Returns: Salary vs Dividends From a UK Company

US UK tax returns preparation for an American who owns a profitable UK limited company turns on one question every year: how did the money come out of the company? Salary is reported through UK PAYE and lands on the US return as foreign earned wages that can be excluded under Form 2555 or credited in the general basket on Form 1116. Dividends are taxed in the UK under the dividend rates, never qualify for the US Foreign Earned Income Exclusion, can attract the 3.8% Net Investment Income Tax, and interact with the company-level controlled foreign corporation rules reported on Form 5471.

This guide is written from the preparation side of the desk. It does not tell you which mix to choose; it shows how each extraction route is reported on the UK Self Assessment return and the US Form 1040, which forms each route switches on, and where the errors we see in the returns we prepare usually sit. All UK figures below are for the 2026-27 tax year unless stated, and all US figures are taken from IRS.gov.

What does US UK tax returns preparation involve for an owner-director?

An owner-director is a person who both runs a UK limited company as a director and owns shares in it. For a US citizen or green card holder, that dual role creates two separate reporting streams on each side of the Atlantic: the personal stream (salary, dividends, director's loan account movements) and the company stream (retained profits, which the US may tax even when nothing is paid out).

GOV.UK sets out the three ways to take money out of a limited company at https://www.gov.uk/running-a-limited-company/taking-money-out-of-a-limited-company: salary, expenses and benefits run through a PAYE scheme; dividends paid out of available profits and documented with a board minute and a dividend voucher; and director's loans. The US system does not care what the payment is called in the UK. It classifies each receipt under its own rules, and that classification decides the form, the rate, the foreign tax credit basket and whether the NIIT applies.

Personal UK reporting: PAYE and Real Time Information submissions by the company for salary, then Self Assessment for dividends and any other untaxed income.
Personal US reporting: Form 1040 with Form 2555 (exclusion) or Form 1116 (foreign tax credit), Form 8960 (NIIT) where thresholds are crossed, plus FBAR and usually Form 8938.
Company UK reporting: the CT600 corporation tax return and statutory accounts at Companies House.
Company US reporting: Form 5471 for the UK company as a controlled foreign corporation, and Form 8992 for the shareholder's net CFC tested income inclusion.

How is a director's salary reported on the UK side?

Salary paid by the company is employment income. The company registers as an employer, deducts income tax and Class 1 employee National Insurance under PAYE, reports each payment to HMRC through Real Time Information, and pays employer National Insurance on top. GOV.UK publishes the current Class 1 rates at https://www.gov.uk/national-insurance-rates-letters; for 2026-27 the main employee rate is 8% between the primary threshold and the upper earnings limit and 2% above it, and the employer rate is 15% above the secondary threshold. Company directors have their own annual earnings period rules for National Insurance, which is why director payroll is often run differently from staff payroll.

The salary, plus employer National Insurance, is a deductible expense for corporation tax. GOV.UK confirms at https://www.gov.uk/corporation-tax-rates that the small profits rate is 19% for profits of £50,000 or less and the main rate is 25% for profits over £250,000, with marginal relief between. That deduction matters twice: it reduces UK corporation tax, and it reduces the company's tested income for the US controlled foreign corporation calculation.

How is UK salary reported on the US return?

On Form 1040 the UK salary is wages, converted to dollars, and it is foreign earned income because the services were performed in the UK. That opens two routes, and the choice is one of the most consequential decisions in the file.

Foreign Earned Income Exclusion on Form 2555: IRS.gov confirms at https://www.irs.gov/individuals/international-taxpayers/figuring-the-foreign-earned-income-exclusion that the maximum is $130,000 for 2025 and $132,900 for 2026 per qualifying person, provided the bona fide residence or physical presence test is met.
Foreign tax credit on Form 1116: UK income tax on the salary is credited in the general category, because the Form 1116 instructions at https://www.irs.gov/instructions/i1116 place wages and salary of an individual as an employee in the general category.
No double dip: UK tax attributable to wages excluded under Form 2555 cannot also be credited, so a partial exclusion leaves only the tax on the non-excluded slice available for Form 1116.
Stacking: excluded wages still push the remaining taxable income into the brackets it would have reached without the exclusion, which raises the US rate on dividends and other income.

Social security is the other half of the salary picture. A UK limited company is not an American employer, so US FICA is not withheld from the salary, and the salary is wages rather than self-employment income, so US self-employment tax does not apply to it. UK Class 1 National Insurance applies instead. The US-UK totalization agreement exists to prevent both countries charging social security on the same work; the IRS overview at https://www.irs.gov/individuals/international-taxpayers/totalization-agreements explains the certificate of coverage mechanism used where a question of dual coverage does arise.

How are dividends from your UK company taxed in the UK in 2026-27?

Dividends are paid from post-tax profits, carry no National Insurance, and are reported on the shareholder's Self Assessment return. GOV.UK states at https://www.gov.uk/tax-on-dividends that every individual has a £500 dividend allowance, and for the tax year 6 April 2026 to 5 April 2027 dividends above that allowance are taxed at 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band.

Those figures are new. HM Treasury's policy paper at https://www.gov.uk/government/publications/changes-to-tax-rates-for-property-savings-dividend-income/changes-to-tax-rates-for-property-savings-dividend-income confirms the ordinary rate rose from 8.75% to 10.75% and the upper rate from 33.75% to 35.75% from April 2026, with the additional rate unchanged at 39.35%. For a US return covering calendar 2026, that means dividends paid between 1 January and 5 April 2026 fall into the 2025-26 UK year at the old rates, and dividends paid from 6 April 2026 fall into 2026-27 at the new rates. The UK tax credited on the 2026 Form 1116 therefore has to be built from two UK tax years, not copied from one SA302.

How are UK dividends reported on the US return?

A UK company dividend is ordinary dividend income on Schedule B and Form 1040. Three US rules then decide how much US tax it produces.

First, qualified dividend status. A qualified dividend is a dividend taxed at the lower capital gains rates rather than ordinary rates. Dividends from a qualified foreign corporation can qualify, and IRS Notice 2024-11 at https://www.irs.gov/pub/irs-drop/n-24-11.pdf, which amplifies and supersedes Notice 2011-64, lists the United Kingdom treaty as one that meets the requirement. The holding period rules still apply, and a company that is a passive foreign investment company in the year of the dividend or the prior year cannot pay qualified dividends. A trading company run by its owner-director is normally not a PFIC, but a company that has stopped trading and holds cash and investments needs checking.

Second, the exclusion never applies. Dividends are unearned income, so Form 2555 cannot touch them, however modest the salary.

Third, the Net Investment Income Tax. IRS.gov sets it at 3.8% at https://www.irs.gov/individuals/net-investment-income-tax, applied to the lesser of net investment income or modified adjusted gross income above $200,000 (single or head of household), $250,000 (married filing jointly) or $125,000 (married filing separately), computed on Form 8960. Dividends are net investment income. The IRS position, set out in Q&A 17 at https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax, is that foreign income tax credits are allowed only against regular income tax and may not reduce NIIT. Some practitioners take the position that the US-UK treaty's double tax relief article should allow UK tax to offset NIIT; that is a treaty-based return position that needs disclosure and is contested by the IRS, so it is a decision to be made deliberately, not a default.

Which foreign tax credit basket does UK tax on your dividends go in?

This is the most common error we correct in returns prepared elsewhere. The instinct is to put UK tax on dividends in the passive category, because dividends feel passive. For an owner-director who holds 10% or more of a controlled foreign corporation, that is usually wrong. The Form 1116 instructions at https://www.irs.gov/instructions/i1116 apply a look-through rule: dividends from a CFC to a 10%-or-more US shareholder are treated as passive category income only to the extent they are attributable to passive category income of the CFC. A UK consultancy, agency or trading company mostly earns active income, so most of its dividend is general category income.

The basket matters because Form 1116 limits the credit separately for each category. Put the dividend and its UK tax in the passive basket and two things go wrong: excess UK dividend tax is stranded in a basket with little other income to absorb it, and the general basket loses both the income and the credit it should have carried. Even where a small slice genuinely is passive, the instructions also exclude high-taxed income from the passive category, and UK tax at 35.75% or 39.35% will often exceed the highest US rate on a qualified dividend, moving that slice into the general category as well.

Look-through first: split the dividend by the CFC's own income categories, using the company's earnings and profits analysis from Form 5471.
Apply the qualified dividend rate differential adjustment, which reduces the foreign-source dividend in the Form 1116 limitation fraction.
Test any passive slice for the high-taxed income kick-out before finalising the basket.
Track excess credits: IRS Publication 514 at https://www.irs.gov/publications/p514 allows unused foreign taxes to be carried back and carried forward for 10 years, but only within the same category.

What happens to profits you leave inside the company?

A controlled foreign corporation is a foreign company more than 50% owned, by vote or value, by US shareholders who each own at least 10%. A US citizen who owns most or all of a UK limited company almost always owns a CFC. That brings the company-level regime into the personal return, whatever the salary and dividend mix.

Net CFC tested income is the name Congress gave in 2025 to what was previously called global intangible low-taxed income. Under section 951A as amended by the One Big Beautiful Bill Act, for tax years beginning after 31 December 2025 the shareholder includes their share of the CFC's net tested income, and the old deduction for a deemed return on the company's tangible assets has been removed. The shareholder-level calculation is still made on Form 8992, whose current instructions are at https://www.irs.gov/instructions/i8992. An individual who does not make a section 962 election is taxed at ordinary rates on the inclusion and gets no credit for UK corporation tax paid by the company.

Two tools usually neutralise this for a UK company paying the 25% main rate. The high-tax exclusion is an annual election that removes tested income from the calculation where the income was subject to a foreign effective tax rate above 90% of the US corporate rate; with UK corporation tax at 25% that test is often met, though the effective rate is computed under US tax principles and must be checked each year, particularly for companies in marginal relief or at the 19% small profits rate. The section 962 election lets an individual be taxed on the inclusion as if they were a corporation, with credit for part of the UK corporation tax, at the cost of a second US layer when the profits are later paid out.

How do Form 5471 schedules track salary, dividends and previously taxed profits?

Form 5471 is the information return that describes the UK company to the IRS. The IRS page at https://www.irs.gov/forms-pubs/about-form-5471 lists the schedules that matter here: Schedule I-1 for the CFC-level figures used in the section 951A inclusion, Schedule J for accumulated earnings and profits, Schedule P for previously taxed earnings and profits, and Schedule R for distributions. Salary paid to the owner appears in the income statement and in the related-party transactions schedule; dividends appear on Schedule R and reduce the earnings pools on Schedules J and P.

Previously taxed earnings and profits, or PTEP, are company profits that the shareholder has already included on a US return, for example as net CFC tested income or as an earlier GILTI inclusion. When the company later pays a dividend out of PTEP, that dividend is generally not taxed again in the US. The UK, however, taxes the dividend in full under its own rules in the year it is paid. The result is a timing mismatch: UK dividend tax arrives in a year when there is little or no US income to credit it against, and the credit then depends on the carryover rules and on the category the PTEP sits in. Keeping Schedule P accurate year by year is what makes this work; reconstructing PTEP for a company that has never filed Form 5471 is one of the more time-consuming jobs we take on.

Where does the director's loan account fit?

A director's loan account is the running balance between the director and the company. GOV.UK treats money taken that is not salary, dividend or a repayment of money you put in as a director's loan, with its own UK rules: a corporation tax charge can arise on loans still outstanding nine months after the company year end, and benefit in kind rules can apply to cheap or interest-free loans. The US has no equivalent concept. A genuine loan is not income, but a balance that is never repaid, or is written off, is examined under US principles and may be recharacterised as a dividend or as compensation. We record the balance each year, because a write-off in the UK is usually taxed as a distribution there and must then be matched to a US classification in the same year.

How does the salary and dividend mix change the forms you file each year?

Because each route switches on different forms, a change in the mix from one year to the next changes the whole file. This is the part of US UK tax returns preparation that clients rarely see coming.

Salary only, below the exclusion: Form 2555, FBAR and Form 8938 as needed, Form 5471 and Form 8992 for the company; Form 1116 may not be needed at all.
Salary above the exclusion or FTC chosen instead: Form 1116 general category for the UK income tax on wages, with carryovers tracked.
Dividends added: Schedule B, Form 1116 with look-through analysis, and Form 8960 once modified adjusted gross income passes the threshold.
Profits retained: high-tax exclusion election statement or section 962 election, with Form 8992 and, for a 962 election, corporate-style credit computations.
PTEP distributed: Schedule P and Schedule R movements, with UK tax on the dividend handled through carryovers rather than current-year income.
Switching from the exclusion to the credit: under the IRS rules, revoking the exclusion generally prevents claiming it again for five tax years without IRS approval, so the switch is a multi-year decision.

Worked scenario: one owner-director, one year, both returns

The following is an illustration only. The figures are invented, the taxpayer is fictional, and the exchange rate of $1.30 to £1 is an assumption for arithmetic, not a published rate. Deductions, other income and treaty positions are ignored to keep the mechanics visible.

Illustration: Claire is a single US citizen living in London who owns 100% of a UK consulting company. During calendar 2026 she takes a salary of £60,000 through PAYE and dividends of £150,000, all paid after 6 April 2026. The company's remaining profit is retained and taxed at the 25% main rate.

UK side: the salary is taxed through PAYE and Class 1 National Insurance, with employer National Insurance paid by the company and deducted for corporation tax. The dividends are declared on Self Assessment for 2026-27; after the £500 allowance, the dividend sits on top of her salary and is split between the 35.75% higher rate band and the 39.35% additional rate band, and at this level of total income her personal allowance is withdrawn.

US side: the salary converts to $78,000 and is excluded on Form 2555, well under the $132,900 limit for 2026. The dividends convert to $195,000 and are qualified dividends because the UK treaty is on the Notice 2024-11 list. Because the company is a trading business, the look-through rule puts the dividend and its UK tax in the general category on Form 1116, where UK tax at 35.75% and 39.35% exceeds the US qualified dividend rate and eliminates the US regular tax on the dividend, leaving an excess credit to carry forward.

The NIIT is the trap. Her adjusted gross income after the exclusion is $195,000, below the $200,000 single threshold, so a preparer looking at the face of the return would stop there. But modified adjusted gross income for NIIT adds back the excluded foreign earned income, giving $273,000. Net investment income is $195,000 and the excess over the threshold is $73,000, so NIIT is 3.8% of the lesser figure: $73,000 x 3.8% = $2,774 on Form 8960, which the UK tax cannot offset under the IRS position. At company level, Form 5471 reports the company, its retained profit, the salary as a related-party payment and the dividend on Schedule R, and Form 8992 records the net CFC tested income before a high-tax exclusion election is tested.

Why does the US calendar year versus the UK tax year matter?

The US return runs 1 January to 31 December; the UK personal tax year runs 6 April to 5 April; the company's accounting period can end on any date. Every salary payment and every dividend must be placed in the correct US year by payment date, while the UK tax on it is apportioned from the UK year it belongs to. The April 2026 dividend rate change makes this more visible than usual for calendar 2026, because dividends paid either side of 6 April carry different UK rates. The company's accounting period drives the Form 5471 year and the earnings and profits pools, which may not line up with either personal year.

What if you have missed years of US returns or Form 5471?

Many owner-directors discover the US side only after several years of UK-compliant filing. For non-willful failures by taxpayers living abroad, the Streamlined Foreign Offshore Procedures at https://www.irs.gov/individuals/international-taxpayers/us-taxpayers-residing-outside-the-united-states require the most recent three years of delinquent or amended returns and the most recent six years of FBARs, and the IRS requires those returns to be submitted together with all required information returns, including Forms 5471 and 8938. Taxpayers who comply are not subject to failure-to-file, failure-to-pay, accuracy-related, information return or FBAR penalties under that procedure. The 330-day non-residency test must be met in at least one of the three years.

For owner-directors, the heavy lifting in a Streamlined filing is rarely the salary. It is reconstructing the company's earnings and profits, the net tested income or GILTI inclusions for each year, the high-tax exclusion analysis, and the PTEP balances that determine whether later dividends are taxable. A late FBAR outside Streamlined is filed through FinCEN's BSA E-Filing System with an explanation for late filing; the old delinquent FBAR procedure page is no longer an IRS route and should not be relied on.

A US UK tax returns preparation checklist for owner-directors

P60, P11D and payroll reports for each UK tax year overlapping the US calendar year.
Board minutes and dividend vouchers showing the date and amount of every dividend.
Self Assessment calculations for both UK tax years that overlap the US year.
Statutory accounts, CT600 and corporation tax computations for every company accounting period.
Director's loan account ledger with year-end balances and any write-offs.
Prior Forms 5471, 8992, 1116 carryover schedules and PTEP records.
Bank and investment account statements for FBAR and Form 8938, including company accounts where you have signature authority.

The salary versus dividends question is usually framed as a UK tax planning choice. On the preparation side it is a reporting architecture: each route triggers different forms, different credit baskets, different thresholds and different company-level entries, and a change in the mix reshapes the whole file. Getting the classification right in the first year is what keeps every later year, and every later dividend, reporting cleanly on both returns.