Does a US citizen freelancing for a US company while resident in the UK have to declare this for UK tax?

Question

I am a US citizen living and working in the UK on a spousal visa. (My husband is British.) I've got the opportunity to do some freelance work for a US company on top of my full-time job, getting paid in US dollars to our own US bank account, but I will have to do the work from the UK. I will of course need to declare it for US taxes, if I do the work while resident in the UK, will the UK be able to claim it for tax purposes as well? I am hoping I can keep income earned from a US company by a US citizen in US currency in the US without involving the UK, but my husband is concerned that I will get double-taxed. Does anyone have any advice on this? Many thanks!

Answer 1

I believe you do have to pay UK tax on it. In particular see http://www.hmrc.gov.uk/cnr/hmrc6.pdf, section 10.2:

Unless you are able to use the remittance basis, when you are resident in the UK you are liable to UK tax on the arising basis of taxation. This means that you are liable to UK tax on all of your earned income, wherever it arises.

The "remittance basis" is something you can use if you have "non-domiciled" status - but even if you do use it:

You will be liable to UK tax on the arising basis for any UK employment income and for any overseas employment income where any of the duties of employment are carried out in the UK.

I would hope/expect that the UK/US double taxation agreements will mean that you only have to pay the higher of UK and US tax in total - i.e. probably UK tax.

Answer 2

There is a comprehensive tax treaty between the US and the UK. For self-employment, the location of the work defines where the tax is due. So if you are performing the work from the UK for a US company on a self-employed basis then tax is due in the UK.

You are able to then claim an exemption on your US tax return using either the Foreign Earned Income Exclusion, or the Foreign Tax Credit method. Which is more favourable depends on the circumstances, but in any case, you will not be taxed twice.

Answer 3

I understand the question relates to work in the UK but I will add some experience with a similar situation I'm aware of with a US citizen working remotely for a US company while in Canada: you need to report this income to both countries, remit the tax due to the host country, and on the US form, report it in the appropriate place as taxes paid on foreign income. You will find this is deductible from your US taxes due, if it's a country with which the US has tax treaties (which Canada is, and as others have indicated, the UK.) For many countries, this will entirely offset US tax due (though the difference is not refundable, so the US won't be mailing you a check.) Of course there are a few tax havens in which US taxes will be higher, and you'll need to pay the difference.

Two aspects that I don't think have come up in the other answers:

• This all applies regardless of your UK status and on whether it's legal under UK law for you to do this work. Even illegal income needs to be reported for taxes. In the Canadian case, the submitter leaves the identification number blank (this would be the Canadian Social Insurance Number) and will be assigned a 9-series number for the purposes of tax filings. This reported income will count towards the individual's RRSP (retirement savings) contribution allowance, if they subsequently become legal (the SIN will be correlated), but I don't think there's a way to contribute to Canada Pension or Employment Insurance. I would expect something analogous to apply in other countries.
• If you still need to file state taxes, you may find that your state does not have a tax treaty with the other country, so this foreign income will be taxed by the state with no offset. This is a big issue with US residents receiving income that's earned and taxed abroad; I don't know how the rules apply in the opposite case. At some point you can quit filing state taxes, if you no longer have US residency, but I don't know the details.

If you're in a fairly simple case, where you are now full-time living in the UK and have no major US holdings, online advice is probably ok. If you continue to have dealings, property holdings, or other business in the US, it's probably best to find an accountant or tax consultant in the UK who specializes in multi-national affairs, at least for your transitional period. Given the reach of US tax laws, these are pretty common, though they can be expensive, as many of them cater to deep-pocket corporations with expat executives. Shop around for one whose fees are reasonable for an individual paying out-of-pocket, or see if your UK spouse's employer can refer you to someone.

Answer 4

The UK operates on a residency based tax system (UK Government informational site for all things government based), and that residency is determined by where you as the worker are based.

Your UK residence status affects whether you need to pay tax in the UK on your foreign income.

Non-residents only pay tax on their UK income - they do not pay UK tax on their foreign income.

Residents normally pay UK tax on all their income, whether it’s from the UK or abroad. But there are special rules for UK residents whose permanent home (‘domicile’) is abroad.

As others have mentioned, there are some situations in which you do not have to pay foreign income to the UK's HMRC, but those situations are complicated and will likely require specific advice beyond "the internet".

As with a lot of tax situations there are exceptions and exceptions to those exceptions.

Regarding being taxed twice, as others have mentioned, the UK and the US have a bilateral double taxation treaty (written in 61 pages of legalese), covering this sort of situation, and HMRC has measures in place to mitigate this, as does the US government. In particular the UK government has this helpful information resource for "Dual residents", which has some information on how this applies to the US and it's taxation.

tl;dr get an independent financial advisor

You likely* have to pay tax on this income in the UK, but even if you don't you almost certainly* have to report it to HMRC (in most cases). If you do have to pay income tax on this in the UK, then you shouldn't* have to pay tax on it twice due to the bilateral double taxation agreement between the US and the UK.

(NB: all of those asterixs in the tl;dr hide a huge amount of complexity that you need to get professional advice on, from an independent financial advisor¹ who is familiar with both UK and US tax law)

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_{1: Yes, these do exist in the UK (and more widely in the EU), and yes they are legally required to be independent (ie not give you actually unbiased advice not based on their commissions). See the Money Advice Service summary on financial advisors, with some helpful key questions to ask and the different fee structures such agents have. There are tied agents (or restricted advisors, who work on a different basis, but if you are dealing with an IFA, then they have rules they must follow and standards they must adhere to including that they must treat their customers fairly.)}