You look at your US interest payment and the number is off – about a third short of what it should be. That’s the default 30% the IRS takes from interest paid to anyone who isn’t American, skimmed off before the money ever reaches your account.
Here’s the part almost nobody spells out. If you’re a UK resident, 30% is rarely the amount you’re actually meant to pay. It’s usually zero.
Two separate rules get you there – a tax treaty, and a domestic exemption that doesn’t need the treaty at all. Which one applies, and whether you ever see 30% disappear again, almost always comes down to one thing: whether a single form was sitting with your broker before the interest was paid.
Why 30% Gets Withheld in the First Place
The IRS lumps US-source interest paid to a non-US person into a category called FDAP income – fixed, determinable, annual or periodic – and the statutory default is 30% of the gross payment, taken before it reaches you. That’s NRA withholding: the rule for nonresident aliens, and it applies whether or not you actually owe any tax at all. 30% is just the starting position. It’s not the answer.
Two Routes to Zero
Route 1: The Tax Treaty
Article 11 of the UK-US tax treaty says interest earned by a UK resident from US sources is taxable only in the UK. That means the US gives up its right to tax it entirely – no US withholding, 0% at the US end – and the interest is simply taxed by HMRC as ordinary UK income, the same as any other interest you earn. HMRC’s own Double Taxation Relief manual confirms this from the UK side, and IRS Tax Treaty Table 1 is where the rate itself is published.
Route 2: The Portfolio Interest Exemption
Route two doesn’t need the treaty at all. The domestic portfolio interest exemption – set out in Internal Revenue Code sections 871(h) and (i) – exempts most interest paid on registered-form debt from US withholding, regardless of where you live. This isn’t limited to Treasuries: ordinary listed US corporate bonds qualify too, since almost everything trades in registered form now (bearer bonds stopped being issued in 2012). The two conditions are that you don’t own 10%+ of the voting power of the company paying you, and the interest isn’t contingent on the payer’s profits.
In practice: most UK holders of US Treasuries or listed corporate bonds get to zero through portfolio interest alone, with the treaty sitting behind it as a second way to reach the same place.
Plain US bank, savings & loan, or credit union deposit interest doesn’t go through either exemption above – it’s simply not treated as taxable income for a nonresident alien in the first place, so there’s nothing to withhold and no form to file. More on that below the table.
| Your situation | Exemption that applies | Form needed (filed with your broker or payer) | Rate with no form on file |
|---|---|---|---|
| Publicly traded US corporate bond interest | Portfolio interest (treaty backs it up too) | W-8BEN | 30% |
| US Treasury interest | Portfolio interest (treaty backs it up too) | W-8BEN | 30% |
| US bank, savings & loan, or credit union deposit interest | Not taxable to a nonresident alien – no exemption needed because there’s nothing to exempt | None | Not taxed or reported |
| Loan or notes to a US company where you hold 10%+ of its voting power | Portfolio interest is off the table (excluded once you cross 10%), but the treaty’s Article 11 has no such ownership threshold and still applies | W-8BEN or W-8BEN-E citing Article 11 | 30% without a form; 0% with a valid form claiming Article 11 |
| Contingent interest – where your return depends on the payer’s profits rather than being a fixed rate | Neither exemption reaches 0%; the treaty instead caps the rate at 15% | W-8BEN or W-8BEN-E citing Article 11 | 30% without a form; 15% with a valid form citing Article 11 |
Bank and Savings Interest: A Simpler, Separate Rule
If your US interest comes from an ordinary bank account, savings and loan, or credit union deposit, forget everything above – it doesn’t apply. The IRS treats this interest as nontaxable and non-reportable for a nonresident alien, full stop. No W-8BEN, no Form 1042-S, no withholding to begin with, because unlike bond or brokerage interest, this category was never inside the treaty or the portfolio interest system to begin with. If a US bank has withheld tax on plain deposit interest, that’s worth querying with the bank directly – it shouldn’t have happened.
The Form That Actually Decides Your Rate
What determines whether you pay 0% or 30% isn’t your residency, your intentions, or even which exemption you technically qualify for. It’s whether Form W-8BEN is on file with your broker before the interest is paid.
The form certifies you’re a non-US person and claims the reduced or exempt rate. You give it to your broker or payer directly – never to the IRS – and once it’s signed, it’s generally valid through the end of the third calendar year after signing.
Helen is a UK resident with £150,000 in US corporate bonds held through a UK brokerage platform, paying $4,500 a year in interest. In year one, no W-8BEN was on file, so her broker withheld 30% ($1,350) before the money ever reached her account. In year two, having submitted the form, the full $4,500 arrived. Nothing about Helen’s actual tax position changed between those years – only the paperwork did.
Her broker still issued a Form 1042-S both years. In year two, it simply showed $0 withheld. That’s not an error – it’s the exemption working as intended.
Already Lost the 30%? Here’s How You Get It Back
If you’re reading this because 30% is already gone, the fix isn’t a call to your broker asking for it back – it’s a US tax return. Once a payment has gone out taxed at 30%, the broker can’t simply reverse it.
You claim the refund by filing Form 1040-NR, reporting the income and the tax withheld, and asking the IRS to return the difference between what was taken and what was actually owed – which, if the exemptions above apply to you, is often the entire amount.
The claim has to land by whichever is later: three years from when you filed the relevant return, or two years from when the tax was paid. If you’ve never filed a 1040-NR before – common for UK retail investors with no prior US tax obligations – the three-year option doesn’t apply, since there’s no earlier return to count from. So your real deadline is two years from the date each year’s tax was withheld, and that clock runs separately for every year’s payment. Miss it and the money is gone, with no appeal.
Will This Be Taxed Again in the UK?
Where the exemptions genuinely don’t reach – contingent interest, or a 10%+ shareholder loan without a treaty claim – real US tax does get withheld. The UK won’t tax the same income twice on top of it: HMRC’s foreign tax credit relief lets you offset the US tax against your UK bill on that income, up to the UK tax due.
Where the treaty or portfolio interest already brought the US rate to 0%, there’s nothing left to credit – the interest is just taxed once, under ordinary UK rules. One wrinkle specific to this treaty: contingent interest is capped at 15% under Article 11. So if the full 30% was withheld because no form was on file, only 15% of it counts toward your UK credit. The other 15% isn’t something HMRC will credit against your UK bill – you have to get that back from the IRS directly, via the 1040-NR refund route above.
For UK Businesses: Loans and Contingent Interest
If your UK business has lent money to, or holds notes issued by, a US counterparty, there are two things to check before assuming 0% applies.
Ownership. If you hold 10% or more of the voting power in the US borrower, the domestic portfolio interest exemption is unavailable – that exemption specifically excludes large shareholders. But the treaty doesn’t carry the same exclusion: Article 11 of the UK-US treaty doesn’t mention an ownership percentage at all. So a UK business holding 10%+ of a US borrower can still reach 0% on fixed-rate interest by filing a W-8BEN-E citing Article 11, as long as it’s the beneficial owner of the interest. Losing the domestic exemption doesn’t close off the treaty route.
Structure. Interest that’s contingent on the payer’s profits – rather than a fixed rate – is carved out of both routes to zero. The treaty taxes it at 15% instead of 0%; a W-8BEN-E citing Article 11 gets you down to that 15% rather than the statutory 30%, but not lower. Contingent structure is the thing that actually blocks 0%, not ownership on its own – worth checking before the first payment goes out, not after.
The Two Things Worth Checking Today
If you’re an individual holding US bonds, Treasuries, or brokerage interest: check whether a valid W-8BEN is actually on file with your broker right now. Your own view of your tax situation doesn’t set the rate – the form does.
If you’re a business lending to a US counterparty: check whether the interest is contingent, and separately, whether you hold 10%+ of the borrower. Contingent structure caps you at 15% under the treaty no matter what; 10%+ ownership only knocks out the domestic exemption, leaving the treaty route to 0% on fixed-rate interest still open.
And if 30% has already been taken, the deadline that matters is the 1040-NR refund window – not getting round to it eventually.
Book a US withholding review with Monx
We’ll check whether your W-8BEN is correctly filed, confirm which exemption applies to your interest income, and flag anything that needs a 1040-NR refund claim. Monx also runs a full US tax service for Americans living in the UK – covering annual federal filing, FBAR and FATCA, and catching up on unfiled returns – if that’s the situation you’re in instead.
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