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us expat tax guide – united kingdom

Should I report my UK pensions even if I’m self-employed?

Yes, if you are self-employed and living in the UK, you must report your UK pensions as a foreign trust. Since you are the only contributor to your pension fund, your personal contributions exceed any employer contributions, which are zero. 

This means you need to file foreign trust forms for your pension.

Is there any way around reporting my UK pension as a foreign trust?

No, there is no way around it. Because your contributions are more than employer contributions (which are zero), you are required to file foreign trust forms for your pension plan.

But will this affect my US tax liability? This generally won’t impact your US tax liability, as the earnings within the pension are not taxable until withdrawal. However, it is still important to remember to file the forms correctly and on time to avoid penalties. The filing deadline is March 15, and an extension can be requested until September 15. 

Missing these deadlines can result in a US$10,000 penalty.

What do I need to file if I’m a US citizen or Green Card holder self-employed in the UK?

If you are self-employed, you need to report income and expenses on Schedule C, which is to be attached to your tax return. This schedule calculates your net self-employment income, which is then included in your 1040 tax return. 

You can offset your US income tax liability with any income taxes paid to HMRC (HM Revenue & Customs) in the UK.

What tax is self-employment income subject to?

Net self-employment income is subject to self-employment tax, which includes Medicare and Social Security taxes. 

Due to the US-UK Totalization Agreement, self-employed individuals in the UK do not have to pay US Social Security and Medicare taxes. However, you must attach a statement to your tax return indicating that your business is in the UK and is exempt from these US taxes under the Totalization Agreement.

Can I use the Foreign Earned Income Exclusion for self-employment tax purposes?

While the Foreign Tax Credit (FTC) is generally better, you can use the Foreign Earned Income Exclusion (FEIE) if needed. The FEIE allows self-employed income to be excluded up to a certain limit, which is beneficial if you do not have enough foreign tax credit to use.

What is Form 8858?

Form 8858 is an Information Return for Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs). Starting from the 2019 tax year, self-employed individuals must complete this form. It is due at the same time as your 1040 income tax return.

Why do self-employed businesses have to file Form 8858?

A self-employed business is considered a foreign branch, which fulfills the requirement for the filing of Form 8858. This form provides information about the foreign branch and is often a copy of your Schedule C with additional details. 

Failing to file Form 8858 can result in penalties and a US$10,000 fine every 30 days.

Also, remember your FBARs. The Foreign Bank Account Report (FBAR) or FinCEN Form 114 is required if you have a financial interest in or authority over foreign accounts with a combined balance exceeding US$10,000 at any point during the year. Failing to file FBARs can lead to severe penalties, including a US$10,000 fine per violation, and up to US$100,000 (to be adjusted for inflation) or 50% of the account balance for willful violations.

If I’m self-employed, can I claim a Child Tax Credit Refund?

Yes. However, if you are self-employed and wish to claim a child tax credit refund, you must have contributed to the equivalent of social security in your country of residence, such as National Insurance in the UK.

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