Paying Yourself From Your UK Company as a US Citizen: Why Salary and Dividends Work Differently

If you are a US citizen who owns a UK limited company, the standard UK advice — a modest salary topped up with dividends — is optimised for one tax system, not two. The United States taxes those dividends in full with little UK tax behind them to credit, it can tax the company's retained profits to you whether or not you pay a dividend, and it treats salary quite differently from dividends. The right mix for you has to be modelled across both systems, every year.

Key takeaways

The UK default favours dividends because they carry no National Insurance and are taxed at dividend rates. That logic is sound in the UK and incomplete for a US citizen.
The US taxes citizens on worldwide income. A dividend from your own company is foreign-source investment income: the foreign earned income exclusion can never apply to it, and the only UK tax you can generally credit against it is the dividend tax you personally paid.
A UK company you control is almost always a controlled foreign corporation. Its profits can be included in your US income under the anti-deferral rules even if you leave them in the company.
Profits already taxed that way are not taxed again in the US when distributed — but the UK taxes the dividend when paid, creating a foreign tax credit timing mismatch.
Salary is earned income. It can qualify for the foreign earned income exclusion or carry creditable UK income tax, and it reduces the company's profit on both sides of the Atlantic.
Employer pension contributions are deductible for the company in the UK; the US treatment depends on treaty conditions and your facts.
Model the combined outcome annually, and file Form 5471 every year.

Why the UK answer is what it is

If the company pays you a salary it must register as an employer and take Income Tax and National Insurance contributions from your salary payments and pay them to HMRC. Salary is a business cost. A dividend, by contrast, can only be paid out of available profits, and you cannot count dividends as business costs when working out Corporation Tax.

The attraction of dividends is the personal rate. For the 2026 to 2027 tax year, GOV.UK gives a dividend allowance of £500, with dividend tax at 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band — and no National Insurance at all. The trade-offs on the UK side alone are covered in dividends versus salary for UK company owners. The point here is what happens when the same extraction is also reported on a US return.

Dividends on your US return

A US citizen is subject to tax on worldwide income from all sources, wherever they live. A dividend from your UK company is therefore US-taxable income, and three features of the US rules make it less efficient than it looks.

The foreign earned income exclusion does not reach it. The IRS defines earned income as pay for personal services performed, such as wages, salaries, or professional fees, and lists dividends expressly among the types of income that are not earned income.

The corporation tax the company paid is not your tax. IRS Topic 856 requires, among other tests, that the tax must be imposed on you. The company paid its Corporation Tax; you did not. On a dividend, what you can generally credit is the UK dividend tax you personally paid — and at UK dividend rates, particularly within the allowance and the basic rate band, that is often a small figure against the US tax on the same income. The residual is payable to the IRS.

The dividend may be qualified, but that has to be checked. IRS Publication 550 treats a foreign corporation as a qualified foreign corporation if, among other routes, it is eligible for the benefits of a comprehensive income tax treaty that Treasury considers satisfactory. It confirms that dividends from a CFC's earnings not previously taxed can qualify if the other requirements, including holding periods, are met.

For foreign tax credit purposes, Form 1116 applies look-through rules: dividends from a CFC are only treated as passive category income to the extent they are attributable to passive category income of the CFC. A dividend from a trading company therefore generally sits in the general category, alongside salary, rather than being walled off as passive.

The company is a controlled foreign corporation

The Form 5471 instructions define a controlled foreign corporation as a foreign corporation whose US shareholders own more than 50% of the total combined voting power or value, and a US shareholder as a US person owning 10% or more. If you own your UK company outright, both tests are met.

Two anti-deferral regimes then operate. Subpart F reaches certain categories of largely passive or mobile income. Section 951A — long known as GILTI — can reach much of the company's ordinary trading profit. Both can require you to include an amount in your US income for the year whether or not the company pays you anything. Which regime bites, and how hard, depends on what the company earns and owns; the mechanics are set out in Subpart F and GILTI for small foreign company owners.

For an individual, the inclusion is taxed at individual rates with no automatic credit for the company's Corporation Tax. The IRS provides a route around that: shareholders may elect under section 962 to be taxed at corporate rates on these inclusions, so as to be able to claim a credit for certain foreign taxes the CFC paid. Form 1116's instructions confirm that with the election you can claim the credit based on your share of foreign taxes paid or accrued by the CFC. The Form 5471 instructions also refer to a high-tax election, which can matter for a UK company that already pays full Corporation Tax. Whether either election helps is a computation — the election has knock-on consequences when the profits are later distributed — and it is made year by year.

Previously taxed earnings, and the credit timing trap

Once profit has been included in your US income, it becomes previously taxed earnings and profits (PTEP). The company reports it on Schedule P of Form 5471, in your annual PTEP accounts, so that when it is later paid out as a dividend it is not taxed a second time in the US.

The UK does not know any of this. When the dividend is paid, the UK taxes it at dividend rates in that UK tax year. The US income arose in an earlier year, and the US has nothing further to tax now. UK tax arriving in a year with no matching US income can leave credits stranded — and IRS Topic 856 notes that no carryback or carryover is allowed for foreign tax on income included under section 951A. The assignment of UK tax on a PTEP distribution is technical, and it is where a dividend-heavy strategy often loses value. The general mechanics of unused credits are covered in foreign tax credit carryovers.

Salary: earned income, and a different set of tools

Salary is deductible for the company, which also reduces the profit exposed to the US anti-deferral rules. It carries UK income tax through PAYE — a tax imposed on you, so potentially creditable. And it is earned income.

That opens the foreign earned income exclusion. You need foreign earned income, a tax home abroad, and either bona fide residence abroad for an uninterrupted period that includes an entire tax year or physical presence in a foreign country for at least 330 full days in a 12-month period. The source of earned income is where the work is performed, so days you work from the United States produce US-source pay.

The exclusion is not automatically the better choice. IRS Topic 856 is clear that you may not take either a credit or a deduction for foreign taxes on income you exclude. Where UK income tax on your salary is comparable to or higher than the US tax on it, crediting it can shelter the salary and leave excess general-category credits that may help absorb US tax on dividends in the same category. And IRS Publication 54 notes that once chosen, the exclusion remains in effect for that year and all later years unless you revoke it. Salary should also be a genuine reward for work done: the exclusion reaches pay for personal services, not distributions relabelled as pay.

National Insurance, US social security and the totalisation agreement

On a salary from your UK company, the company operates PAYE and National Insurance. The US side is usually quieter than people fear: Publication 54 explains that US social security and Medicare taxes do not apply to wages for services performed as an employee outside the United States unless an exception applies, such as working for an American employer. A company incorporated in the UK is not an American employer by that definition.

The position changes if you spend working time in the United States, or if the company has been treated as transparent for US purposes by election, in which case self-employment tax questions arise. The US-UK totalisation agreement exists to prevent dual coverage and dual contributions for the same work, and a certificate of coverage evidences which system applies. Which country you pay into, and how to document it, is covered in US-UK social security and National Insurance.

Pension contributions from the company

Employer pension contributions are the third route. In the UK, HMRC's Pensions Tax Manual states that employer contributions to a registered pension scheme are deductible in computing profits provided that they are incurred wholly and exclusively for the purposes of the trade, and relief is given only on contributions actually paid.

The US view is where care is needed. Article 18(5) of the UK-USA convention provides that where a US citizen resident in the UK exercises an employment in the UK, borne by a UK-resident employer, contributions to a UK pension scheme attributable to that employment shall be deductible (or excludable) in computing US taxable income. But the relief cannot exceed what the US would allow for a generally corresponding US scheme, and it applies only where the US competent authority has agreed that the scheme generally corresponds. For an owner-director, the questions are whether the contribution is attributable to the employment rather than ownership, which scheme receives it, and how it compares with the limits the treaty imports. It is fact-dependent; review a large contribution before it is made.

Form 5471 every year

Owning a UK company as a US citizen brings an annual Form 5471 filing, typically as a Category 4 and Category 5 filer. The Form 5471 instructions impose a $10,000 penalty for each annual accounting period of each foreign corporation for failure to furnish the required information, with further penalties if the failure continues after IRS notice. It carries the Subpart F, section 951A and PTEP information the analysis depends on. See our Form 5471 service.

Model it annually, across both systems

The right answer depends on your numbers, and it moves. Each year we would want to see:

projected profit, Corporation Tax, and how much income is passive or mobile;
salary, the UK income tax on it, and your US and non-US workdays;
exclusion versus credit;
the dividends you actually need, and whether they come from PTEP;
whether a section 962 or high-tax election helps this year;
any pension contribution; and
the gap between the UK tax year (6 April to 5 April) and the US calendar year.

Only then does it make sense to set the mix. Sometimes the UK default survives; often a higher salary, fewer dividends or a different timing produces the lower combined bill.

How we work on these

We model the extraction on both sides, then prepare the UK and US positions so the company accounts, the UK returns, Form 5471 and your Form 1040 tell one consistent story. A licensed CPA or Enrolled Agent reviews and signs off every US filing; the UK side is reviewed by an ACCA-qualified accountant. Our US-UK cross-border business tax service is built for owner-managers in this position. Before you set this year's salary and dividends, book a confidential consultation.

This article is general information, not tax or legal advice, and does not create a professional relationship. The US treatment of a foreign company and its owner depends on elections, the company's income and assets, and your residence and workdays, and the rules and rates change. Confirm current figures against official guidance before acting.

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Reviewed by a CPA / Enrolled Agent. Last updated: 21 September 2026.

Frequently asked questions

I am a US citizen with a UK limited company. Should I still take a small salary and dividends?+

Not automatically. The small-salary-plus-dividends mix is designed to minimise UK tax: dividends carry no National Insurance and are taxed at UK dividend rates, which GOV.UK gives for the 2026 to 2027 tax year as 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band, above a £500 dividend allowance. A US citizen is also taxed by the United States on worldwide income, and the US treats the same dividend less generously: it cannot be excluded as foreign earned income, and the only UK tax you can generally credit against it is the dividend tax you personally paid, not the Corporation Tax the company paid. On top of that, a company you control is a controlled foreign corporation, so its profits may be taxed to you in the US even if retained. The mix that minimises the combined UK and US bill can be quite different, and it should be modelled each year on actual numbers.

Can I use the foreign earned income exclusion on dividends from my own company?+

No. The IRS defines earned income as pay for personal services performed, such as wages, salaries or professional fees, and lists dividends expressly among the types of income that are not earned income. It makes no difference that you run the company and that its profits come from your own work: a dividend is a return on shares, not pay for services. Salary is different. Salary from your UK company for work performed outside the United States is foreign earned income and can qualify for the exclusion if you have a foreign tax home and meet either the bona fide residence test or the physical presence test of at least 330 full days abroad in a 12-month period. The exclusion is not always the better choice, however, because you cannot also claim a foreign tax credit on UK tax paid on excluded income, and once chosen the exclusion remains in effect for later years unless revoked.

Why can I not credit the UK Corporation Tax my company paid against US tax on my dividends?+

Because it is the company's tax, not yours. IRS Topic 856 sets out the tests for the foreign tax credit, and one of them is that the tax must be imposed on you. Corporation Tax is imposed on the company. When you receive a dividend, the UK tax you have personally paid is the dividend income tax, which at UK dividend rates can be modest, particularly within the allowance and the basic rate band. The US tax on the dividend is then only partly covered, and the balance is payable to the IRS. There is one route to the company's tax: an individual who is a US shareholder of a controlled foreign corporation may elect under section 962 to be taxed at corporate rates on Subpart F and section 951A inclusions, and with that election can claim a credit based on a share of the foreign taxes paid by the corporation. The election has consequences when the profits are later distributed, so it is modelled rather than made by default.

If I leave the profits in my UK company, can the US still tax them?+

Yes, potentially. If US shareholders, each owning 10% or more, together own more than 50% of the voting power or value of a foreign corporation, it is a controlled foreign corporation, and a US citizen who owns a UK company outright meets that test. Two anti-deferral regimes then apply. Subpart F reaches certain categories of largely passive or mobile income, and section 951A, long known as GILTI, can reach much of a company's ordinary trading profit. Either can require you to include an amount in your US income for the year whether or not a dividend is paid. How much, if anything, is included depends on what the company earns and owns and on elections such as section 962 and the high-tax election, which can matter for a UK company already paying full Corporation Tax. Retaining profits in the company, which is often sensible UK planning, does not by itself defer the US tax for a controlling US shareholder.

Will I be taxed twice when the company later pays out profits the US has already taxed?+

Not in the US, but the timing can still cost you. Once a controlled foreign corporation's profit has been included in your US income under Subpart F or section 951A, it becomes previously taxed earnings and profits, tracked in your annual PTEP accounts on Schedule P of Form 5471, so that a later distribution of it is not taxed again in the United States. The UK, however, taxes the dividend when it is paid, in the UK tax year of payment. That UK tax arrives in a year when the US has no further income to tax on the same profit, and credits can be stranded; IRS Topic 856 notes that no carryback or carryover is allowed for foreign tax on income included under section 951A. How the UK tax on a PTEP distribution is assigned and limited is technical, and it is a common source of leakage in a dividend-heavy strategy. It is worth tracking PTEP carefully and planning distribution timing with both systems in view.

Is paying into a pension through my company a better way to extract profit as a US citizen?+

It can be, but the US answer is fact-dependent. In the UK, HMRC's Pensions Tax Manual states that employer contributions to a registered pension scheme are deductible in computing profits provided they are incurred wholly and exclusively for the purposes of the trade, and relief is given only on contributions actually paid. On the US side, Article 18(5) of the UK-USA convention provides that where a US citizen resident in the UK exercises an employment in the UK borne by a UK-resident employer, contributions to a UK pension scheme attributable to that employment are deductible or excludable for US purposes. That relief cannot exceed what the US would allow for a generally corresponding US scheme, and it applies only where the US competent authority has agreed that the scheme generally corresponds. For an owner-director, whether the contribution is attributable to the employment rather than to ownership also matters. A large contribution should be reviewed on both sides before it is paid.

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