Hired as a contractor in London

I'm a US citizen completing a masters in the UK this month. My student visa allows me to work until January 2021.  I was lucky enough to get "hired" by a company in the UK.  They are paying me as a contractor - i.e., not an employee. I need to invoice them monthly and they pay me a monthly amount of £3100.  I believe they brought me on as a contractor because they want to see if I work out and then I would hope to get hired as an employee and they would provide me a work visa.

My question is around taxes. I do not know what's required of me in the UK related to taxes? In the US I know I would need to pay quarterly taxes as a contractor (self-employed person).  What am I considered in the UK?  What do I need to be concerned with in terms of taxes?
 

The first question, the primary question is your status for this engagement. HMRCs status tool is not the law, but not a bad place to start: https://www.gov.uk/guidance/check-employment-status-for-tax

From my understanding, on a student visa you cannot be self-employed, which is what this sounds like. I had to pass up a similar opportunity because I couldn't legally take it on under the terms of my student visa.

In addition to the taxation question you're asking, you likely want to confirm that you're legally able to undertake a contracting job before it causes any issues.

The first question, the primary question is your status for this engagement. HMRCs status tool is not the law, but not a bad place to start: https://www.gov.uk/guidance/check-employment-status-for-tax

Came back as
Self-employed for tax purposes for this work

Came back as
Self-employed for tax purposes for this work

You're almost certainly going to need to confirm that this is legal to take on under a student visa, then. Students are not allowed to be self-employed.

You're almost certainly going to need to confirm that this is legal to take on under a student visa, then. Students are not allowed to be self-employed.

I checked with the employer and I was wrong on the payroll front. They are paying me as an employee. The only difference is that I have a contract for the duration since my visa is over next year and they need to get my on a work visa. I guess with getting paid by payroll they will deal with taxes.  I was confused because there was a contract with a tentative end date.  The invoicing clause in the contract didn't apply to me in terms of salary (it was related to suplimental things I need to buy).

Also, the paper I signed says this is an "Internship"

Sorry about my confusion but today I received my first paycheck. I’m trying to understand the deductions and how they relate to me as a US citizen.

I see:

PAYE - which I understand is the equivalent of withholding. Is this the same as the US where they withhold and then when I file a tax form with the UK I may owe more or get money back?

Employee national insurance contribution - I think this is like social security. Do I have to pay this even though I’m a US citizen?

Retirement plan? - they are using some retirement plan company and withholding some money from my payroll - how does this work?

Sorry about my confusion but today I received my first paycheck. I’m trying to understand the deductions and how they relate to me as a US citizen.

I see:

PAYE - which I understand is the equivalent of withholding. Is this the same as the US where they withhold and then when I file a tax form with the UK I may owe more or get money back?

Employee national insurance contribution - I think this is like social security. Do I have to pay this even though I’m a US citizen?

Retirement plan? - they are using some retirement plan company and withholding some money from my payroll - how does this work?

PAYE - which I understand is the equivalent of withholding. Is this the same as the US where they withhold and then when I file a tax form with the UK I may owe more or get money back? - Yes, similar to US withholding and if you have overpaid or underpaid then doing a self assessment return will result in a refund or you paying them. Most people in the UK never have to file a return and the PAYE system will either adjust the withholdings the following year or send a refund or ask for money if the difference is large.
 My son is a UK/US dual citizen living in England and he never has to file a UK return because he has no foreign income at all.  He does have to file a US return each year to declare his UK income which is then zero'ed out with the FEIE form

Employee national insurance contribution - I think this is like social security. Do I have to pay this even though I’m a US citizen? Yes, equivalent to FICA in the US and you do have to pay it.

Retirement plan? - they are using some retirement plan company and withholding some money from my payroll - how does this work? This will be a DC plan similar to a 401k, my son also has this

PAYE - which I understand is the equivalent of withholding. Is this the same as the US where they withhold and then when I file a tax form with the UK I may owe more or get money back? - Yes, similar to US withholding and if you have overpaid or underpaid then doing a self assessment return will result in a refund or you paying them. Most people in the UK never have to file a return and the PAYE system will either adjust the withholdings the following year or send a refund or ask for money if the difference is large.
 My son is a UK/US dual citizen living in England and he never has to file a UK return because he has no foreign income at all.  He does have to file a US return each year to declare his UK income which is then zero'ed out with the FEIE form

Employee national insurance contribution - I think this is like social security. Do I have to pay this even though I’m a US citizen? Yes, equivalent to FICA in the US and you do have to pay it.

Retirement plan? - they are using some retirement plan company and withholding some money from my payroll - how does this work? This will be a DC plan similar to a 401k, my son also has this

Thank you!

So it sounds like I may not have to worry about filing in the UK, but I do know that I will have to file in the US. I can see how PAYE works and it makes sense. I guess there’s no need to file if I don’t have any other property/deductions etc since the UK government should know my salary and what taxes I’ve paid already. How do they keep track of me as a US citizen? ie, do I get assigned some equivalent of a social security number?

Is the national heath insurance paid out of my contribution to the Employee national insurance contribution?

As for the defined contribution plan, I don’t remember receiving anything about this at my job. As a US citizen will this money deducted mean anything to me? Will I ever see it?

Thank you!

So it sounds like I may not have to worry about filing in the UK, but I do know that I will have to file in the US. I can see how PAYE works and it makes sense. I guess there’s no need to file if I don’t have any other property/deductions etc since the UK government should know my salary and what taxes I’ve paid already. How do they keep track of me as a US citizen? ie, do I get assigned some equivalent of a social security number?

Is the national heath insurance paid out of my contribution to the Employee national insurance contribution?

As for the defined contribution plan, I don’t remember receiving anything about this at my job. As a US citizen will this money deducted mean anything to me? Will I ever see it?

As long as you only have sources of incomes that are reported to HMRC then you don't need to file a self assessment (SA). My sister's husband died recently and the following year she sold a second home of theirs. They each had UK share and share funds, his were sold and consolidated into her account and their financial advisor told her she need to file a SA as the combined capital gains of the share sales plus 2nd home sale exceeded her tax-free allowances. I helped her do it last year, and then just this week she filed again and yesterday received an email from HMRC telling her what she owed and that she did not need to go back to filing SA, PAYE would be sufficient.
You can run through this Q&A to see if you should be filing SA
https://www.gov.uk/self-assessment-tax-returns/who-must-send-a-tax-return

Other than reporting your income to the IRA as part of FATCA they don't keep track of you as a USC. When you get your first pay advice slip it should include your National Insurance number that has been assigned to you and is the equivalent of the US SS number. Make a note of it as it is used to track your UK equivalent of SS, which you can keep track of online.
https://www.gov.uk/log-in-register-hmrc-online-services

Your NI insurance contributions should spelled out on your pay advice each month, and over time you can keep track of them online using the link above.

Any contributions your employer makes to your DC plan should be reported as income when you file your US return.  i.e. IRS reported income = Gross income + employer contribution to DC pension plan.

As long as you only have sources of incomes that are reported to HMRC then you don't need to file a self assessment (SA). My sister's husband died recently and the following year she sold a second home of theirs. They each had UK share and share funds, his were sold and consolidated into her account and their financial advisor told her she need to file a SA as the combined capital gains of the share sales plus 2nd home sale exceeded her tax-free allowances. I helped her do it last year, and then just this week she filed again and yesterday received an email from HMRC telling her what she owed and that she did not need to go back to filing SA, PAYE would be sufficient.
You can run through this Q&A to see if you should be filing SA
https://www.gov.uk/self-assessment-tax-returns/who-must-send-a-tax-return

Other than reporting your income to the IRA as part of FATCA they don't keep track of you as a USC. When you get your first pay advice slip it should include your National Insurance number that has been assigned to you and is the equivalent of the US SS number. Make a note of it as it is used to track your UK equivalent of SS, which you can keep track of online.
https://www.gov.uk/log-in-register-hmrc-online-services

Your NI insurance contributions should spelled out on your pay advice each month, and over time you can keep track of them online using the link above.

Any contributions your employer makes to your DC plan should be reported as income when you file your US return.  i.e. IRS reported income = Gross income + employer contribution to DC pension plan.

Thank you! Great info.

I looked again at my paystub and the DC plan deduction is employee based - i.e., The only deduction on the employer side is "Employer National Health insurance deduction" - which makes sense since that's the equivalent of an employer side of Social security.  However for the DC plan / pension deduction, that's on my side (employee) and that's about 2-3% of my gross. So I guess this is a pension (DC plan) that I may have access to in the future?

Thinking about taxes more in both the UK and the US, I can see that the UK will owe me money because I'm working a part-year (started recently) and I believe the UK system goes from April 6-April 5 (instead of calendar year in the US). So based on my calculations they are just taking out taxes based on the assumption I'm working a full-year...I guess I'll see what happens but it looks like I should get money back (or as mentioned, transfered credit to next year).

As for US taxes, I understand that I can use the FEIE or tax credit, but how do I translate pounds translate to US dollars? i.e., If I make 10,000 pounds this calendar year what exchange rate would I use and when?

Thank you! Great info.

I looked again at my paystub and the DC plan deduction is employee based - i.e., The only deduction on the employer side is "Employer National Health insurance deduction" - which makes sense since that's the equivalent of an employer side of Social security.  However for the DC plan / pension deduction, that's on my side (employee) and that's about 2-3% of my gross. So I guess this is a pension (DC plan) that I may have access to in the future?

Thinking about taxes more in both the UK and the US, I can see that the UK will owe me money because I'm working a part-year (started recently) and I believe the UK system goes from April 6-April 5 (instead of calendar year in the US). So based on my calculations they are just taking out taxes based on the assumption I'm working a full-year...I guess I'll see what happens but it looks like I should get money back (or as mentioned, transfered credit to next year).

As for US taxes, I understand that I can use the FEIE or tax credit, but how do I translate pounds translate to US dollars? i.e., If I make 10,000 pounds this calendar year what exchange rate would I use and when?

With my son's DC plan it was similar to the US 401k in that his employer gave him the details of the firm handling the account so he can now log onto a website and see how much is in, etc.

Almost certainly HMRC will owe you money, or not.  With my son, during his first year in the UK he started work in October and for the first couple of months or so tax was taken through PAYE but in January or February most of it was refunded and ongoing much less was taken out so that by April 5th the tax taken was correct. This is because you are initially put on a tax code that assumes you have been working for someone else from April 6th but when no P45 appears and it becomes apparent that no other other earnings have occurred then an adjustment is made.

For regular monthly payments I use the published IRS average tax rate which is published each year towards the end of January for the previous year.  Google "irs average tax rate" to get to
https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates

Or you can use XE.com or similar and look up what the tax rate was on each payday when you received the money. I use XE.com for "lumpy payments" such as dividends and sale of shares.

With my son's DC plan it was similar to the US 401k in that his employer gave him the details of the firm handling the account so he can now log onto a website and see how much is in, etc.

Almost certainly HMRC will owe you money, or not.  With my son, during his first year in the UK he started work in October and for the first couple of months or so tax was taken through PAYE but in January or February most of it was refunded and ongoing much less was taken out so that by April 5th the tax taken was correct. This is because you are initially put on a tax code that assumes you have been working for someone else from April 6th but when no P45 appears and it becomes apparent that no other other earnings have occurred then an adjustment is made.

For regular monthly payments I use the published IRS average tax rate which is published each year towards the end of January for the previous year.  Google "irs average tax rate" to get to
https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates

Or you can use XE.com or similar and look up what the tax rate was on each payday when you received the money. I use XE.com for "lumpy payments" such as dividends and sale of shares.

Excellent! I feel like I know so much more now! Thank you.

I suppose the only question left is related to US tax deferal. Last year I was able to contribute a little bit to a Roth IRA since I was working in the US. I know from reading other places that if you use the FEIE (given my small UK salary) I would be excluding all earned income and therefore can't contribute to a Roth IRA. However, I have heard that I may want to use the tax credit instead, but I don't understand how that would help.

I suppose the only question left is related to US tax deferal. Last year I was able to contribute a little bit to a Roth IRA since I was working in the US. I know from reading other places that if you use the FEIE (given my small UK salary) I would be excluding all earned income and therefore can't contribute to a Roth IRA. However, I have heard that I may want to use the tax credit instead, but I don't understand how that would help.

I don't believe you will qualify to contribute to a Roth IRA since your US modified adjustable gross income (MAGI) will be zero. My son's earned income last year appeared on form 1040 line 1 and then the FEIE on line 7a is the same amount but negative, so his AGI on line 8b is zero.  I may well be wrong though so worth asking and reading around although this article on the IRS website seems to say that you can't contribute more than your taxable compensation for the year.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

For 2020 and 2019, the total contributions you make each year to all of your traditional IRAs  and Roth IRAs can't be more than:

$6,000 ($7,000 if you're age 50 or older), or
If less, your taxable compensation for the year