Structuring a London Relocation Package for Tax Efficiency
Getting the London relocation package tax position right means designing the offer around two tax systems at once: the assignee stays a US taxpayer wherever they live, while the UK taxes the work they perform in London. Structure the base, allowances, equity, and social security before the move,e and you protect both the employee's take-home pay and the employer's cost.
By the TaxYork US-UK Tax Team — reviewed by a US-UK dual-qualified adviser (CPA / Enrolled Agent).
Why does a London relocation package tax bill get so complicated?
An American executive posted to London does not cease to be a US filer. The United States taxes its citizens and green card holders on worldwide income, regardless of where they live, so the assignee files a Form 1040 every year and is also liable for UK income tax on their London duties. When two revenue authorities assess the same salary, the London relocation package tax outcome depends entirely on how the offer is structured rather than on its headline figure.
The friction points are predictable. Base pay is taxed in both countries and relieved of tax through credits or exclusions. Cash allowances for housing and cost of living are almost always taxable. Relocation reimbursements are treated very differently on each side of the Atlantic. Equity compensation has to be split by workday. Pension contributions and social security each follow their own treaty. Handle these levers deliberately, and the package works; ignore them, and the employee incurs a surprise liability that quickly becomes the employer's problem. Our team covers the wider filing picture in our guide to US expat tax in London.
Base salary versus allowances: which levers actually move the tax
The first structuring decision is the split between base pay and separately identified allowances. Both are earnings, but they behave differently once reliefs are applied. The London relocation package tax result turns on this split. Base salary attributable to UK workdays sits squarely inside the UK tax net and, for the US return, can be sheltered by either the foreign earned income exclusion or the foreign tax credit. Allowances labeled for housing or the cost of living are taxable. Yet, a portion of a housing allowance can be recovered under the US foreign housing exclusion, which sits on top of the earned income exclusion.
Because UK income tax and National Insurance usually bite harder than the equivalent US federal charge at executive salary levels, most well-built London assignments lean on the foreign earned income exclusion and foreign tax credits so the same pound is not taxed twice. The 2026 exclusion caps foreign earned income at $132,900 under Internal Revenue Code section 911, with married assignees each able to claim their own. That still leaves plenty of an executive salary exposed, which is where the credit for UK tax paid does the heavy lifting.
Tax equalization or tax protection?
The single most important clause in an executive move is the tax settlement policy, and there are two common models.
Tax equalization keeps the assignee in the same net position they would have held had they never left home. The employer deducts a "hypothetical tax" from pay — roughly the US tax the employee would have owed at home — and then meets the employee's actual US and UK liabilities in full. Any windfall from favorable foreign rules accrues to the employer, and the employer bears any excess cost. Tax protection is gentler: the employee pays their own tax, but the employer tops up if the assignment leaves them worse off than at home, and they can keep any savings. We break the mechanics down in our explainer on tax equalization.
The hidden cost of equalization is "tax-on-tax". When the employer pays the employee's UK liability, that payment is itself taxable income, generating additional tax, which is again grossed up. A robust London relocation package tax policy budgets for this compounding rather than discovering it at year-end reconciliation.
Feature
Tax equalisation
Tax protection
Who bears the excess tax
Employer
Employer (top-up only)
Who keeps a tax saving
Employer
Employee
Hypothetical tax withheld
Yes
No
Cost predictability for the employer
Higher but larger
Lower and variable
Best suited to
Long, senior assignments
Shorter or junior moves
How are relocation and removal costs taxed on each side?
Relocation reimbursements are one of the sharpest contrasts between the two systems. In the United States, the Tax Cuts and Jobs Act suspended the moving-expense exclusion, so almost every employer-paid moving reimbursement is now taxable wages to the employee, with active-duty military the narrow exception. Structuring that reimbursement as a grossed-up payment, rather than assuming it is tax-free, avoids a nasty shortfall on the US return.
The UK is more generous. HMRC allows up to £8,000 of qualifying relocation costs free of income tax and National Insurance, covering removals, temporary accommodation, legal fees and travel between the old and new homes, as long as the relocation is indeed intended to fill the London position. That £8,000 ceiling has remained unchanged since the 1990s, so for a senior relocation, the exemption is usually exhausted quickly, and the excess becomes a taxable benefit. Coordinating the UK exemption with the US taxable treatment is central to accurately costing the move.
Housing, cost-of-living allowances, and the foreign housing exclusion
London housing is expensive enough that a dedicated allowance is standard, and the US tax code recognizes this. Beyond the earned income exclusion, an assignee can claim the foreign housing exclusion for rent and related costs above a base amount. For 2026, the base is $21,264, and because London is a designated high-cost location, the IRS publishes a higher ceiling — around $68,600 — well above the standard cap that applies to ordinary locations.
In practice, that means a large part of a London rent bill can be excluded from US tax before the foreign tax credit is even considered. Cost-of-living adjustments, by contrast, get no special US relief and are simply taxable earnings on both returns, so they are best sized net of tax when the package is agreed. Modeling the housing exclusion and the CoLA together, rather than in isolation, keeps the London relocation package tax cost honest for both parties.
Equity compensation: sourcing RSUs and options by workday
Stock awards are where cross-border packages most often go wrong. An RSU or option granted while the executive worked in New York but vesting after they arrive in London straddles both tax systems. The gain is sourced between the two countries by counting workdays over the relevant vesting period, so a portion is UK-taxable and a portion remains US-taxable. Each country grants credit for the other's tax on the overlap.
Getting the workday apportionment and the payroll withholding right on both sides is essential; a mismatch typically produces double withholding that takes months to unwind and inflates the overall London relocation package tax cost. Employers should confirm before the move which awards will vest during the London assignment and how each jurisdiction will report them, so that PAYE and US withholding align from day one.
Pensions and social security across the border
Continuing to fund a US 401(k) or an employer pension during a London posting raises a treaty question. The US-UK income tax treaty, under Article 18 CA, can preserve tax-favored treatment for cross-border pension contributions. Still, where the arrangement and the contributions meet the treaty's condition, should the PLLD be reviewed before the first UK payroll run rather than after?
Social security is one of the higher everyday costs. Without planning, the executive could face UK National Insurance and US FICA on the same earnings. The US-UK totalization agreement prevents that: a certificate of coverage keeps a temporarily assigned employee in a single system — usually their home one — for a posting of up to five years, so only one country's social charges apply. Securing that certificate early is one of the cheapest and highest-value steps in the whole exercise, and we walk through it in our note on the US-UK totalization agreement.
The UK's FIG regime and split-year treatment
Since 6 April 2025, the UK has replaced the old remittance basis with the four-year foreign income and gains regime. A new arriver who has been a non-UK resident for the previous ten years can claim 100% relief on foreign income and gains for their first four years of UK residence, whether or not the money is brought into the UK. For a US executive with investment income, foreign dividends, or a share portfolio outside the UK, that shelter can be worth far more than any salary structuring. Note the trade-off: claiming FIG forfeits the UK personal allowance and the capital gains annual exempt amount for that year, so the election needs to be modeled each year. We compare the options in detail in our guide to the UK FIG regime.
Arrival timing matters too. UK split-year treatment can divide the tax year of arrival into a non-resident part and a resident part, so UK tax only bites from the date the London role begins rather than retrospectively across the whole year. Aligning the contractual start date, the physical move, and the split-year conditions can remove a full slice of income from the UK charge.
FEIE or foreign tax credit: choosing the US mechanism
On the US return, the assignee must decide how to relieve double taxation. The foreign earned income exclusion removes a band of foreign salary from US tax, while the foreign tax credit on Form 1116 offsets US tax pound-for-pound with UK tax paid. Because UK rates exceed US federal rates for most executives, the foreign tax credit alone often wipes out the US liability. It generates carryover credits, sometimes making it the stronger choice than the exclusion. The two interact in technical ways — electing out of the exclusion has a five-year lock-out — so the decision belongs in a full projection, which we set out in FEIE versus the foreign tax credit.
Worked example: a New York VP relocating to Canary Wharf
Take Maria, a US citizen VP moving to London in September 2026 on a three-year assignment with a $260,000 base salary, a $70,000 housing allowance, and RSUs vesting over the term. Her employer runs a tax equalization plan, deducting a hypothetical US tax and covering her actual UK and US bills. A certificate of coverage under the totalization agreement keeps her on US FICA and out of UK National Insurance.
On her US return, she claims the foreign housing exclusion against her Canary Wharf rent and takes foreign tax credits for the higher UK tax on her base. Split-year treatment means UK tax starts from her September arrival, not the previous April. Her non-UK dividend income is sheltered by a FIG claim for the first few years. The headline package looks costly, but once each lever is applied, the employer's equalized cost is materially lower than a naive gross-up would suggest.
Work with TaxYork on your London assignment.
Every relocation is different, and the difference between a well-structured package and an expensive one is usually decided before the employee boards the plane. TaxYork's US-UK specialists model the full cost, draft the equalization policy, and file on both sides. Email hello@taxyork.com, call 020 3488 8606, or visit taxyork.com to plan your London move.