The UK trading allowance for US citizens removes small side income from UK tax only. The IRS ignores it. An American in Britain reports the profit on Schedule C, and owes US self-employment tax from just $400 of net earnings unless the US-UK totalization agreement applies. The planned rise to £3,000 from April 2027 widens that gap.
On 28 October 2026, the government published a GOV.UK policy paper raising the allowance from £1,000 to £3,000 from 2027 to 2028, and lifting the Self Assessment reporting threshold for trading income to match. It reads as simple good news for up to 1.4 million people. For an American selling pottery or doing weekend consulting, it means more income HMRC will never see and the IRS still expects.
What the UK trading allowance does, and what it doesn't
Under the current GOV.UK guidance, gross trading income of £1,000 or less in a tax year gets full relief: no UK tax and, generally, no need to tell HMRC. Above that, you can deduct £1,000 instead of actual expenses (partial relief), and you must register for Self Assessment. The allowance is unavailable for income from your employer, your spouse's employer, or a company or partnership connected to you, and it does not apply to partnership income.
The change still needs the Finance Bill 2026-27 to amend Part 6A of the Income Tax (Trading and Other Income) Act 2005. Until that is enacted, treat £3,000 as announced policy rather than law. The £1,000 limit applies throughout 2026 to 2027.
Three UK-to-US mismatches
| Point | UK treatment | US treatment |
|---|---|---|
| Small profit | Exempt within the allowance | Fully reportable on Schedule C (Form 1040) |
| Measure | Test is on gross income; allowance can replace actual costs | Actual, substantiated business expenses only |
| Social security | No Class 4 National Insurance on exempt income | 15.3% self-employment tax if net earnings reach $400, unless exempt under the totalization agreement |
| Period | 6 April to 5 April | Calendar year |
| Foreign tax credit | No UK tax paid on this income | No direct Form 1116 credit from this income; other general-category credit may still help |
The second row catches people out most often. HMRC only asks for your gross figure when you are under the limit, so many sellers stop tracking costs. The IRS allows only expenses you can prove. "Keep records" is also what the GOV.UK guidance says, so keep them to Schedule C standard from the first sale.
Why $400 is far below the UK threshold
The IRS guidance on self-employment tax abroad requires it once net earnings reach $400, wherever you live. Net earnings are 92.35% of profit, so the trigger is about $433 of profit. At the IRS 2025 yearly average rate of 0.759 pounds per dollar, that is only about £329. Reaching it also creates a US filing duty, even for someone otherwise under the normal filing threshold.
The foreign earned income exclusion does not cure this. The IRS is explicit that you take all self-employment income into account for self-employment tax, even where Form 2555 excludes it from income tax.
Worked example: pottery sales on the side
Illustrative figures, using the IRS 2025 rate of 0.759 as a stand-in for future averages. Alex, a US citizen resident in Bristol and employed full-time, sells ceramics online.
| Item | 2026 to 2027 sized side income | 2027 to 2028 sized side income |
|---|---|---|
| Gross sales | £900 | £2,800 |
| Provable costs | £100 | £300 |
| UK tax and Self Assessment | None (under £1,000) | None if the £3,000 limit is enacted |
| US profit on Schedule C | £800 = $1,054 | £2,500 = $3,294 |
| Net earnings at 92.35% | $973 | $3,042 |
| Self-employment tax at 15.3%, if not exempt | $149 | $465 |
As an employee taxed at UK rates, Alex may well have excess general-category foreign tax credits from salary that shelter the US income tax on the profit, which is why the self-employment line is the number to focus on. Credits do not reduce self-employment tax. Our foreign tax credit pillar explains how the baskets work.
The totalization answer, and its practical snag
Under the US-UK Social Security agreement, a self-employed person generally pays only into the system of their country of residence. So for most Americans genuinely resident in Britain, US self-employment tax should fall away. The IRS expects a certificate of coverage, with a copy attached to Form 1040 each year you claim the exemption.
Here is the practical wrinkle. If your whole side trade sits within the allowance, you pay no Class 4 National Insurance and no UK return shows the trade. The agreement allocates coverage by residence, but you may then have little UK paperwork to support a certificate request. Our recommendation:
- Request the certificate from HMRC early, describing the trade accurately.
- Keep evidence of UK residence and the date trading began.
- Where HMRC won't issue one, take advice on the return position rather than simply omitting Schedule SE. In some cases paying the tax and later claiming is the safer route.
- Read our totalization agreement guide and our note on being a US citizen self-employed in the UK.
A decision table for small UK side income
| Your facts | US step | UK step |
|---|---|---|
| Profit under about $433, not a business | Consider hobby treatment under section 183; income may still be reportable as other income | Allowance likely covers it |
| Profit over about $433, UK resident | Schedule C; apply for totalization exemption | No return if within the limit and no other reason to file |
| Gross above the allowance, high costs | Schedule C with actual costs | Register; compare allowance with actual expenses |
| Income from your employer or connected company | Report as wages or Schedule C on the facts | Allowance unavailable |
| Trading through a UK Ltd | Corporate reporting, see our US owners of UK companies pillar | Allowance does not apply to company profits |
Watch the tax-year boundary too. Sales from January to 5 April 2027 sit in the UK's £1,000 year but share a US calendar year with sales taxed under the new limit. Keep monthly totals, not annual ones, so that both returns can be built from the same ledger.
What to do before April 2027
- Add up all side income for 2026 to 2027. HMRC tests the total of your trades, not each one.
- Check whether prior years' Schedule C reporting was missed. If it was, see our US expat tax returns page on catching up.
- Set up a simple monthly ledger with receipts in both currencies' records.
- Apply for your certificate of coverage before filing your next Form 1040.
- Re-check the Finance Bill when it is enacted, in case the final law differs from the policy paper.
Frequently Asked Questions
Does the UK trading allowance reduce US tax for an American?
No. The UK trading allowance is a relief from UK income tax under Part 6A of the Income Tax (Trading and Other Income) Act 2005, with no effect on US tax. A US citizen reports worldwide income, so trading profit that HMRC exempts is still reported on Schedule C of Form 1040, using actual provable expenses rather than the allowance.
When does the trading allowance increase to £3,000?
A GOV.UK policy paper published on 28 October 2026 says the trading allowance and the Self Assessment reporting threshold for trading income will rise from £1,000 to £3,000 from 6 April 2027, starting with tax year 2027 to 2028. The change is to be legislated through Finance Bill 2026-27, so the £1,000 limit applies until then.
Do I owe US self-employment tax on small UK side income?
Possibly. The IRS requires self-employment tax where net earnings from self-employment are at least $400, including for taxpayers living abroad. An American resident in the UK can generally claim exemption under the US-UK Social Security agreement, which assigns self-employed coverage to the country of residence, supported by a certificate of coverage attached to Form 1040.
Can I claim a foreign tax credit on income covered by the UK trading allowance?
Not from that income, because no UK tax was paid on it. However, a UK employee may have excess general-category foreign tax credits from salary on Form 1116, which can sometimes offset US income tax on the side profit. Those credits never reduce US self-employment tax, which is calculated separately on Schedule SE.
Do I have to tell HMRC about side income within the allowance?
Generally not. GOV.UK guidance says that gross trading income of £1,000 or less in a tax year usually needs no notification to HMRC, though records should be kept. Income from your employer, your spouse's employer or a connected company or partnership cannot use the allowance. A separate reason to file Self Assessment does not by itself remove the relief.
Is there a UAE equivalent of the UK trading allowance?
Not in the same form. The UAE Federal Tax Authority applies corporate tax to individuals conducting business only where annual business turnover exceeds AED 1 million, under Cabinet Decision No. 49 of 2023. A US citizen in Dubai still reports the profit on Schedule C and faces US self-employment tax, since there is no US-UAE totalization agreement to remove it.
Get your side income reported properly
A small side business should not need a big compliance project, but it does need the right records and a clear answer on self-employment tax. Book a consultation and we will review your UK and US position before the £3,000 rule begins.
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