UK Pension Accounts

Questions covered:

I have UK ISA account with stocks. It contains a mixture of OEICS, investment trusts, and individual shares. Do I have to report it as PFIC and how much would it cost?

OEICS are collective investment schemes that are treated in the US as PFIC.

The cost of one form 8621 is $150 - this is up to 3 accounts (per form) and we aggregate whenever possible. If more than 3 accounts on a form, each additional account is $50 each.

In this example, each trust or unit share must be reported on a separate form 8621. If preparing 3 or more forms, they are eligible for a 20% discount.

Social Security in the UK (National Insurance)

Contributions to the UK National Insurance system withheld from your paycheck or made on self-employment income are not deductible from the US taxable income and do not qualify for the foreign earned income credit.

You can check your record of UK National Insurance contributions here.

US - UK Social Security Totalization Agreement

Overview

An agreement between the United States and the United Kingdom improves Social Security protection for people who work or have worked in both countries.  It helps people who, without the agreement, would not be eligible for retirement, disability or survivors benefits under the Social Security system of one or both countries.  It also helps many people who would otherwise have to pay Social Security taxes to both countries on the same earnings.

The provisions of the agreement eliminate double Social Security taxation and permit dual residents to use their work in both countries to qualify for benefits.

If you are self-employed

Contributions to National Insurance system make you exempt from contributions to the US Social Security system that otherwise would be required in the US on self-employment income.

How it impacts those who want to earn US Social Security credits

If you have Social Security credits in both the United States and the United Kingdom, you may be eligible for benefits from one or both countries.  If you meet all the basic requirements under one country's system, you will get a regular benefit from that country. If you do not have enough work credits under the U.S. system to qualify for regular benefits, you may be able to qualify for a partial benefit from the United States based on both U.S. and U.K. credits. To be eligible to have your U.K. credits counted, you must have earned at least six credits under the U.S. system.

Although the agreement allows the Social Security Administration to qualify for U.S. retirement, disability or survivor benefits, the agreement doesn’t cover Medicare benefits.

Taxation of Social Security Benefits

US Social Security Benefits

US Social Security benefits received by US citizens and green card holders residing in the UK are exempt from tax in the United States and are taxable only in the UK.

UK State Pension 

UK State Pension and other payments received under the National Insurance legislation by US citizens and green card holders residing in the UK are taxable in both countries.

The foreign tax credit can be applied to eliminate double taxation.

Contributions to Employer Pension Schemes

When a US citizen/green card holder is a participant in a pension scheme established in the UK:

  • a) Contributions paid by or on behalf of that individual to the pension scheme may be excludable in computing his US taxable income

and

  • b) Any benefits accrued under the pension scheme, or contributions made to the pension scheme by or on behalf of the individual’s employer is not treated as part of the employee’s taxable income

However -  exclusion of contributions to the pension scheme is not mandatory. You may report those contributions on Earned Income tab, question -Did your employer contribute to your pension plan (such as Pillar II, Superannuation, KiwiSaver, Employer Matching Contribution, etc.)? to have it added to your annual taxable income.

Considering the high tax rate paid in the UK on earned income, added employer contributions may still leave you tax-free in the US. Your benefit: the added amount will be considered previously taxed - which will reduce the taxable portion of pension payments in the future.

Taxation of UK Pension Benefits

Pensions and other similar remunerations paid to US citizen/green card holder residing in the UK are taxable in both countries.

However, you can eliminate the burden of double taxation. Taxes paid in the UK on pension income are applied as a foreign tax credit against tax owed on the same income in the US.

Self-Invested Schemes (such as ISA)

Individual tax-deferred saving accounts arrangement (ISA) do not qualify for income deferral in the US Income earned on those accounts must be reported on U.S. tax returns.

Report interest earned on the Passive Income > Interest  tab of our Tax Questionnaire

Report dividends on the Passive Income > Dividends tab.

Tie-Breaker Rule to Apply for Treaty Benefits

US green card holders residing in the UK may elect to apply what is known as the tie-breaker rule of the US/UK Tax Treaty and be deemed a resident only of the State (i.e., country) with which their personal and economic relations are closer (UK).

Under such an election, the individual would file form 1040NR and report only income derived from U.S. sourced. The requirement to provide full disclosure of foreign bank accounts remains and tax on income from U.S. sources will be higher than the tax on the same income when applied to US residents filing form 1040.

Self Invested Personal Pension (SIPP)

SIPP is an individual pension plan. UK pensions plans are IRS-qualified, whether it is the employer-sponsored or individual plan. Therefore there is no need to report it as foreign trust. Income in SIPP can be deferred like income in a U.S. IRA account.  Interest in SIPP does not need to be reported on your US tax return.

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