Working Remotely From the UK for a US Employer: Tax, Payroll and Treaty Issues

If you are UK tax resident and physically working from the UK for a US employer, the United Kingdom has the primary right to tax your employment income — even though your employer, your payslip and your bank may all be American. As a US citizen or green card holder you still file a US return every year, but the treaty and foreign tax credits normally prevent double taxation. The harder problems usually sit on the employer's side: US payroll was never designed for a UK-resident employee, and your desk in London can quietly create tax obligations for the company itself.

Key takeaways

• Once you are UK resident under the Statutory Residence Test, the UK taxes the salary you earn for work physically performed in the UK — where the employer sits is irrelevant.
• You still file Form 1040. From a high-tax country like the UK, the foreign tax credit usually beats the foreign earned income exclusion, but the choice deserves proper modelling.
• US payroll withholding does not discharge UK obligations. The employer may need UK PAYE, a shadow payroll, or an employer-of-record arrangement.
• Social security is settled by the US–UK totalization agreement: a certificate of coverage keeps you in one system, never both.
• A remote employee can create permanent-establishment exposure for the employer — especially one who negotiates or signs contracts from the UK.
• California and New York do not always let go when you leave, and 401(k) participation from abroad has traps of its own.

Who taxes your salary first: UK residence and the SRT

The UK decides residence mechanically, through the Statutory Residence Test — a framework of automatic tests and "sufficient ties" rules built mostly on day counts, work patterns, and connections such as available accommodation and family. The popular 183-day rule is only one branch of it: you can become UK resident well below that threshold once enough ties accumulate, and working full-time in the UK is itself an automatic residence trigger. The test runs against the UK tax year, which runs 6 April to 5 April, and split-year treatment can divide the year you arrive.

Once you are UK resident, the position on employment income is simple and often surprises people: pay for duties physically performed in the UK is taxable in the UK first. Under the US–UK income tax treaty, the country where the work is done generally holds the primary taxing right over the employment income of someone resident there. Your employer's Delaware incorporation, your dollar salary and your US bank account change nothing. The UK taxes the work because the work happens in the UK.

You still file a US return: FEIE or the foreign tax credit

US citizenship-based taxation means the move changes nothing about your obligation to file Form 1040 — worldwide income, every year, regardless of where you live. What changes is how you eliminate the double tax, and there are two main routes.

The foreign earned income exclusion (FEIE, claimed on Form 2555) lets qualifying taxpayers exclude foreign earned income up to an annually adjusted cap, provided they meet either the bona fide residence test or the physical presence test. It is the route most remote workers have heard of, and for genuinely mobile digital nomads paying little foreign tax anywhere, it can be the right one.

For someone settled in the UK, the foreign tax credit (Form 1116) is often better. UK tax on employment income is generally higher than the US federal tax on the same income, so crediting UK tax against the US bill typically wipes out the US liability — and the surplus carries forward, as we explain in foreign tax credit carryovers for US expats. The credit route also keeps income "in the system" for purposes the FEIE quietly damages, including the ability to make IRA contributions and to claim the refundable portion of the child tax credit. And revoking the FEIE once elected generally locks you out of it for five years without IRS consent, so the choice should be modelled, not defaulted.

Do not forget the informational side: a UK bank account, workplace pension or investment account can trigger FBAR and FATCA reporting even when no US tax is due. If you have been working from the UK for a while without filing at all, the streamlined filing procedures exist precisely for that situation.

The employer-side problem: US payroll for a UK-resident employee

Here is where most remote arrangements are quietly non-compliant. A US company that keeps a UK-resident employee on ordinary US payroll — W-2, federal withholding, FICA — is running the wrong country's payroll. US withholding does not satisfy UK obligations, and the employee ends up over-withheld in America while under-collected in Britain.

The UK expects PAYE — Pay As You Earn — to be operated on the earnings of an employee working in the UK, and a foreign employer with a sufficient UK presence acquires UK payroll obligations of its own; even where it has none, responsibility for accounting for the tax can shift to the employee directly. HMRC's PAYE guidance for employers is the starting point, but the right structure depends on the facts. In practice, companies choose between a handful of models:

• Register a UK payroll. The US employer registers with HMRC and operates PAYE (and, where applicable, National Insurance) on the UK employee's pay — clean, but it puts the company squarely on HMRC's radar and requires ongoing compliance.
• Shadow payroll. The employee stays on US payroll for delivery of pay, while a parallel UK payroll calculates and remits the UK tax and NIC due. Common for formal secondments; heavier to administer.
• Employer of record (EOR). A third-party UK entity legally employs the individual, runs compliant UK payroll, and bills the US company. The fastest route for a company with one UK-based person and no UK entity, at the cost of a fee and a triangular employment relationship.
• Independent contractor. Tempting, and sometimes legitimate — but reclassifying an employee as a contractor without changing the reality of the relationship creates employment-status risk in the UK and misclassification risk in the US. If the person works set hours, under direction, exclusively for one company, calling them a contractor does not make it so.

Which model fits depends on headcount plans, the employee's seniority, and how long the arrangement will last. It is a conversation to have before the first UK working day, not after the first HMRC letter.

National Insurance, Social Security and the totalization agreement

Employment taxes have a second layer: social security. Without relief, a UK-based employee of a US company could face National Insurance contributions in the UK and Social Security and Medicare taxes in the US on the same wages. The US–UK totalization agreement exists to prevent exactly that. Under it, an employee generally pays into the social security system of the country where the work is performed — so a settled UK-based employee pays UK National Insurance, not FICA — while a temporary assignment from the US can remain in the US system for a limited period, documented by a certificate of coverage.

The certificate matters. It is the paperwork that lets the US employer stop FICA withholding without creating an exposure, and it is issued by the country whose system continues to apply. The IRS maintains an overview on its totalization agreements page. Getting this wrong is expensive in both directions: double contributions if nobody claims the relief, or gaps in benefit records if contributions simply stop.

Permanent establishment: the risk you create for your employer

A question every US employer should ask before approving a UK remote arrangement: does this employee give us a taxable presence in the UK? Under the treaty, a permanent establishment — a fixed place of business, or a dependent agent who habitually concludes contracts — can pull a slice of the company's business profits into UK corporation tax, with registration and filing obligations to match.

One employee writing code from a spare bedroom rarely crosses the line by itself. The risk concentrates in what the employee does: a salesperson negotiating and closing UK or European deals, a country manager, or anyone with authority to bind the company is a materially different proposition from a back-office developer. Home offices, open-ended arrangements and client-facing roles all push toward PE; short, genuinely personal-choice stays push away from it. Employers should document the role, restrict contract-signing authority where sensible, and take advice before the arrangement hardens into the status quo. For the employee, this is worth understanding too — it is often the real reason a US employer refuses a remote request, and the reason an EOR or a properly structured secondment is offered instead.

State taxes that follow you: California and New York

Leaving the US does not always mean leaving your state. States set their own residence rules, and the aggressive ones — California and New York most prominently — look at domicile and continuing connections, not just where you sleep. Keeping a California driving licence, a home, registered vehicles or close family ties can leave you arguably still resident and still taxable. New York's convenience-of-the-employer doctrine adds a further reach: in some circumstances it treats remote days worked for a New York employer as New York work days. Neither state honours the FEIE the way the federal return does, and neither is bound by the US–UK treaty. Before the move, it is worth formally severing state ties and building a clear paper trail of non-residence — we cover the mechanics in our guide to state taxes for US expats from California and New York.

401(k) and pensions while working from the UK

Retirement plans deserve a brief word. Continued 401(k) participation is usually possible while you remain on a US payroll, but the interaction with UK tax is not symmetrical: the UK does not automatically respect US plan deferrals, and the treatment of employer contributions and plan growth turns on the treaty's pension provisions. Joining a UK workplace pension instead creates US reporting questions and a treaty analysis of its own. If you elect the FEIE, excluded income can also shrink the compensation base available for US retirement contributions. The right answer follows from the payroll structure chosen above — one more reason to settle the employment architecture first and the benefits second.

Getting the structure right early

Remote work across the Atlantic is entirely workable — thousands of people do it — but the compliant versions are deliberately structured: residence position confirmed under the SRT, the FEIE-versus-credit choice modelled, payroll run in the right country, a certificate of coverage in place, and PE risk assessed and documented. The non-compliant version — a UK resident sitting indefinitely on ordinary US payroll — tends to work fine right up until it doesn't.

At Next Tax Source this is core US–UK expat tax work, and a licensed CPA or Enrolled Agent reviews and signs off every return and every position before it goes anywhere. If you are planning the move — or have already made it and suspect the payroll is wrong — book a confidential consultation and we will map the clean route for your specific facts.

This article is general information, not tax advice, and does not create a professional relationship. Residence rules, treaty positions and payroll obligations are fact-specific and change; confirm the current position with a licensed professional before acting.

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Reviewed by a CPA / Enrolled Agent. Last updated: 4 September 2026.

Official sources: HMRC Statutory Residence Test (RDR3) | IRS Foreign Earned Income Exclusion | IRS Foreign Tax Credit | IRS Totalization Agreements | HMRC PAYE for employers