US-UK · Journal
UK Dividends on a US Tax Return: Qualified Rates, FTC and NIIT
When UK dividends get the 0/15/20% US rates, how UK tax becomes a foreign tax credit on Form 1116, and why the 3.8% NIIT still applies to Americans in the UK.
When UK dividends get the 0/15/20% US rates, how UK tax becomes a foreign tax credit on Form 1116, and why the 3.8% NIIT still applies to Americans in the UK.
If you are a US citizen or green card holder living in the UK, every dividend you receive must go on your US return as well as your UK Self Assessment. Dividends from ordinary UK-listed companies usually count as qualified dividends in the US, because the UK is on the IRS list of approved treaty countries, and the UK income tax you pay on them can be claimed as a foreign tax credit. Dividends from UK funds and many investment trusts usually do not qualify, and the 3.8% Net Investment Income Tax cannot be reduced by a foreign tax credit.
The US taxes citizens and green card holders on worldwide income. The treaty's saving clause (Article 1(4)) preserves that right, while Article 1(5) keeps Article 24, the double-tax relief article, available to you. Article 24(1) requires the US to credit UK income tax, but only "subject to the limitations of the law of the United States". That wording matters when we reach the NIIT. For the broader picture, see how the US-UK treaty prevents double tax on income.
According to IRS Publication 550, qualified dividends are ordinary dividends taxed at the same 0%, 15% or 20% maximum rates that apply to net capital gain. A dividend from a foreign company qualifies only if all of these are true.
A foreign company counts if it meets any one of three tests:
The current approved-treaty list is in IRS Notice 2024-11, which superseded Notice 2011-64, and the United Kingdom is on it. A treaty-eligible UK company passes, whether or not its shares trade in the US.
"Eligible" also means meeting the treaty's Limitation on Benefits article (Article 23). Regularly traded listed companies generally do. For a private company, including your own, it depends on ownership and activity, so check rather than assume.
Publication 550 is explicit: a corporation is not a qualified foreign corporation if it is a passive foreign investment company in the year the dividend is paid or the year before. This is why UK fund distributions fail the test even though the fund is UK-resident.
You must have held the shares for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. Long-term holders pass easily. People who trade around dividend dates often fail.
UK brokers do not issue Form 1099-DIV, so you or your preparer must decide which dividends qualify, holding by holding.
UK companies pay dividends gross: HMRC's manual says dividends "do not have income tax deducted" (INTM343510), and the notional dividend tax credit ended on 6 April 2016. The UK tax is simply what your Self Assessment return computes.
For 2026-27 (6 April 2026 to 5 April 2027), GOV.UK sets out:
The increase of 2 percentage points on the basic and higher rates was announced at Budget 2025 and applies from 6 April 2026 (GOV.UK policy paper). Dividends that fall within your unused Personal Allowance (standard £12,570) are also tax-free. The band a dividend falls into depends on your other income, because dividends are taxed as the top slice.
So the creditable UK tax is only what is actually charged on the dividend, and a basic-rate taxpayer's 10.75% can fall short of the 15% US rate.
| Dividend source | Qualified for US rates? | UK tax (2026-27, UK resident) | US treatment |
|---|---|---|---|
| UK-listed plc shares held directly (general account) | Usually yes: UK treaty test, if holding period met and not a PFIC | Dividend rates after £500 allowance: 10.75% / 35.75% / 39.35% | 0/15/20% rates; UK tax creditable on Form 1116 (passive) |
| UK plc held as an ADR on a US exchange | Usually yes (treaty test or readily tradable test) | Same as above for a UK resident | Same as above |
| UK OEIC, unit trust or UK-domiciled ETF | Generally no (typically a PFIC) | UK tax on the distribution | PFIC regime and Form 8621; not qualified |
| UK investment trust (listed closed-ended fund) | Generally no (commonly a PFIC; check each trust) | Dividend rates after allowance | PFIC regime and Form 8621; not qualified |
| Shares or funds inside a Stocks and Shares ISA | Individual shares may qualify; funds still PFICs | None (ISA is UK tax-free) | Fully taxable in the US; no UK tax, so no credit |
| Your own UK limited company | Possibly, if treaty-eligible under Article 23 and paid from untaxed earnings | Dividend rates after allowance | Form 5471; CFC rules; previously taxed earnings are not taxed again |
The credit is claimed on Form 1116. Dividends fall into the passive category, which the instructions define to include "dividends, interest, royalties, rents, annuities". The steps:
1. Convert the dividends to dollars. You can use the spot rate on the date received or the IRS yearly average rate. For 2025 the IRS published average was 0.759 pounds per dollar; you divide the sterling amount by that figure.
2. Enter foreign-source gross dividends on line 1a of the passive-category Form 1116, after any qualified-dividend adjustment (see below).
3. Enter the UK tax attributable to those dividends in Part II. Only the UK income tax charged on the dividend counts, not tax on your salary or other income.
4. Convert the UK tax. On the cash method, the instructions use "the rate of exchange in effect on the day you paid the foreign taxes". If you choose the accrual method, you generally use the average rate for the year the tax relates to.
5. Compute the limit. The credit cannot exceed the US tax on your passive-category foreign income. Anything above the limit carries back one year and forward ten years in the passive category (see foreign tax credit carryovers).
The UK tax year runs 6 April to 5 April, with the balancing payment due by 31 January after the year ends. A cash-method US filer can therefore claim UK tax in a different US year from the dividend. The Form 1116 instructions let a cash-basis filer elect to credit taxes when they accrue by ticking "Accrued" on a timely filed original return. The choice binds all future years, so treat it as a one-way decision.
This is the step most DIY returns miss. Entering the full qualified dividend on line 1a would compute the credit limit as if it were taxed at ordinary rates, allowing more credit than the US tax it actually bore. The 2025 instructions say to multiply foreign-source qualified dividends by 0.4054 if taxed at 15% and 0.5405 if taxed at 20%, and to leave out dividends taxed at 0% from line 1a altogether.
There is an adjustment exception. For 2025 returns you can elect not to adjust if both apply:
The NIIT is a 3.8% tax on the smaller of your net investment income or your modified adjusted gross income above a threshold. Form 8960 instructions set the thresholds at $250,000 (married filing jointly or qualifying surviving spouse), $125,000 (married filing separately) and $200,000 (single or head of household). Dividends are net investment income, and living abroad does not take you outside it.
The IRS position is clear. Its NIIT questions and answers state that foreign income tax credits under sections 27(a) and 901(a) "may not be used to reduce your NIIT liability", because those credits apply only against chapter 1 tax. The Form 1116 instructions make the same point: regular tax liability "does not include the section 1411 net investment income tax". Foreign income taxes can, however, be deducted in computing net investment income (Form 8960, line 9b), subject to how you treat foreign taxes that year.
⚠ Caution on the treaty argument. Some practitioners argue that treaty double-tax articles give a credit against the NIIT regardless of the Code. On 31 August 2026 the US Court of Appeals for the Federal Circuit reversed the Court of Federal Claims in Estate of Bruyea v. United States (US-Canada treaty), and in the companion case Christensen (US-France treaty). The court held that the Code "precludes such a credit" and that the treaty does not independently provide one. The Tax Court reached the same result in Toulouse (2021). The US-UK treaty's Article 24(1) contains the same US-law limitation. A refund claim on this theory is now a high-risk position needing specific professional advice. It is not a planning route, and nothing here recommends it.
Assumptions (illustrative only): a US citizen resident in England, filing US married filing jointly. Other UK income (salary) already uses the Personal Allowance and basic-rate band. In 2026-27 they receive £20,000 of dividends from FTSE-listed UK plcs held directly for years, so the dividends are qualified. For simplicity we use one exchange rate of $1.30 per £1 for both income and tax (not an IRS rate), assume the dividends fall in the US 15% qualified-dividend bracket, and assume household MAGI is above the $250,000 NIIT threshold.
UK tax on the dividends
US tax before credit
Foreign tax credit (Form 1116, passive)
Net Investment Income Tax
Result: about $9,063 UK tax plus $988 NIIT, roughly 38.7% of the dividend.
The basic-rate contrast. Take a basic-rate UK taxpayer receiving £5,000 of qualified dividends at the same illustrative rate. UK tax is (£5,000 − £500) × 10.75% = £483.75, about $628.88. US tax at 15% on $6,500 is $975. The credit covers only about $628.88, so roughly $346 of US tax remains. Basic-rate UK taxpayers can owe a US top-up; higher-rate taxpayers usually build excess credits.
Under the Form 8621 instructions, a foreign corporation is a PFIC if 75% or more of its gross income is passive, or if at least 50% of its assets (on average) produce passive income. Most UK-domiciled funds, including OEICs, unit trusts, UK-listed ETFs and most investment trusts, meet one of those tests.
For a US holder:
Mechanics and elections are covered in PFIC tax rules for US investors abroad.
A US person who controls more than 50% of a foreign company, or is a 10% US shareholder of a controlled foreign corporation, generally files Form 5471 every year. The penalty for failure to file is $10,000 per company per year.
Salary versus dividend planning for American owner-managers is covered in paying yourself from a UK company as a US citizen.
Qualified status, the Form 1116 adjustment, the accrual choice and the PFIC and CFC overlays all interact. If you hold UK funds or your own company, or your income is near the NIIT thresholds, have the return prepared by someone who works on both systems. A licensed CPA or Enrolled Agent reviews and signs off our US returns, and an ACCA-qualified accountant handles the UK side. See our US-UK expat tax service, or model the combined position with the global tax calculator. This article is general information, not advice on your circumstances.