Self-employed in the UK as an American: the National Insurance trap

Figures relate to tax year 2025 (US) · 2025-26 (UK)

An employed American in the UK usually has a straightforward position: UK tax is withheld through PAYE, foreign tax credits cover the US side, and the year closes quietly. Go freelance and a second tax appears that most people do not expect and the usual reliefs do not touch.

Self-employment tax is not income tax

US self-employment tax funds Social Security and Medicare, and it applies at a combined rate above 15% on net self-employment profit — worldwide, regardless of where you live. Crucially, the foreign earned income exclusion does not reduce it. Nor do foreign tax credits, because UK National Insurance is not an income tax.

So the freelancer who correctly excludes their income from US income tax can still receive a five-figure US bill for a tax they had never heard of, on income already subject to National Insurance in the UK.

The exclusion removes income tax. It does nothing at all to self-employment tax. That gap is where the surprise lives.

The totalization agreement is the answer

The US and UK have a social security agreement — a totalization agreement — whose entire purpose is to stop people paying into both systems for the same work. It assigns you to one system based on where you are working and for how long.

A US citizen genuinely self-employed in the UK is generally assigned to the UK system: you pay National Insurance, and you are exempt from US self-employment tax. The exemption is claimed by obtaining a certificate of coverage from HMRC and attaching evidence of it to your US return.

The practical checklist

• Apply to HMRC for a certificate of coverage confirming you pay UK National Insurance.
• Attach the coverage statement to the US return each year the exemption applies.
• Keep contributing to National Insurance — the years also count towards your UK State Pension.
• Watch the transition year if you move mid-year; assignment can shift partway through.
• Consider whether trading through a UK limited company changes the picture — it often does, in both directions.

Company or sole trader?

UK advisers often suggest incorporating once profits rise, and for UK tax purposes that can be sound. For an American it introduces Form 5471, potential annual tax on undistributed profits, and a materially heavier compliance load.

That does not make incorporation wrong — it makes it a decision with a US column that most UK advice never includes. Run both sides before the company is formed, because unwinding one afterwards is considerably harder than not creating it.