Pension Contributions
Treatment of Pension contributions to UK registered schemes
Most UK employees contribute to a workplace pension through their payroll and typically the employer makes supplementary contributions on their behalf. The employer contributions are generally tax-free. The employee can claim tax relief relative to their personal contributions. Relief for Employee contributions can be, either entirely at source, by way of a reduction in UK taxable pay, or through a combination of a “grossed up” contribution to their pension pot along with a claim on their tax return for higher or additional rate taxpayers.
As UK residents, US expats in the UK can generally apply the US/UK tax treaty to their US federal tax returns and so deduct contributions to UK registered pension schemes from your employment income (subject to the amounts that would be allowed for contributions to US schemes). This results in lower US tax rates and the potential for less US tax and greater foreign tax credit carryovers (for information see our page on Foreign Tax Credits).
If you are a resident in a country other than the UK, then analysis of the relevant US tax treaty needs to be completed (if there is a tax treaty). If there is a similar provision to the UK (such as there is with Germany) then you can similarly deduct the pension contributions from your employment income. If the country does not have a tax treaty or provision allowing the deduction of pension contributions, then you cannot deduct your pension contributions and must also include employer pension contributions as taxable income. This may cause issues if you reside in a low tax jurisdiction, as you may not have enough foreign tax credits to offset the US tax liability.
Even if a deduction is available it is not always beneficial, as including the contributions in US income can create “basis” in the pension, which is tax-free in the US when withdrawn later.
Treatment of Pension contributions to US registered schemes
As per the US/UK tax treaty, US citizens can continue to receive a deduction for pension contribution to US registered pension schemes, if the pensions were opened while they were a resident in the US. This means that if you still have a traditional IRA in the US, then you can continue to contribute and receive the deduction (if eligible). If you are eligible to receive a deduction for US tax purposes, then you can also receive relief for UK tax purposes.
UK Annual Allowance Limitation
Even though contributions may be made to a UK scheme up to the level of “relevant earnings”, the amount eligible for tax relief is governed by the Annual Allowance rules. The current annual allowance is £40,000, but this can be lower if you have flexibly accessed your pension pot or have a high income. Unused allowances carry forward for three years. If your contributions exceed the annual allowance plus any allowable carryovers then tax relief is withdrawn for the excess contribution by way of an annual allowance charge on your tax return. If the tax charge exceeds £2,000 then you may be able to use your pension to pay it. This “scheme pays” option must be applied for directly with the pension provider and cannot be claimed on a tax return.
UK pension contributions are also subject to a separate “Lifetime Allowance”, currently £1,073,100.
You should always consider your overall financial position and take appropriate financial advice when making decisions about how much to contribute to a pension.
Most UK employees contribute to a workplace pension through their payroll and typically the employer makes supplementary contributions on their behalf. The employer contributions are generally tax-free. The employee can claim tax relief relative to their personal contributions. Relief for Employee contributions can be, either entirely at source, by way of a reduction in UK taxable pay, or through a combination of a “grossed up” contribution to their pension pot along with a claim on their tax return for higher or additional rate taxpayers.
As UK residents, US expats in the UK can generally apply the US/UK tax treaty to their US federal tax returns and so deduct contributions to UK registered pension schemes from your employment income (subject to the amounts that would be allowed for contributions to US schemes). This results in lower US tax rates and the potential for less US tax and greater foreign tax credit carryovers (for information see our page on Foreign Tax Credits).
If you are a resident in a country other than the UK, then analysis of the relevant US tax treaty needs to be completed (if there is a tax treaty). If there is a similar provision to the UK (such as there is with Germany) then you can similarly deduct the pension contributions from your employment income. If the country does not have a tax treaty or provision allowing the deduction of pension contributions, then you cannot deduct your pension contributions and must also include employer pension contributions as taxable income. This may cause issues if you reside in a low tax jurisdiction, as you may not have enough foreign tax credits to offset the US tax liability.
Even if a deduction is available it is not always beneficial, as including the contributions in US income can create “basis” in the pension, which is tax-free in the US when withdrawn later.
Treatment of Pension contributions to US registered schemes
As per the US/UK tax treaty, US citizens can continue to receive a deduction for pension contribution to US registered pension schemes, if the pensions were opened while they were a resident in the US. This means that if you still have a traditional IRA in the US, then you can continue to contribute and receive the deduction (if eligible). If you are eligible to receive a deduction for US tax purposes, then you can also receive relief for UK tax purposes.
UK Annual Allowance Limitation
Even though contributions may be made to a UK scheme up to the level of “relevant earnings”, the amount eligible for tax relief is governed by the Annual Allowance rules. The current annual allowance is £40,000, but this can be lower if you have flexibly accessed your pension pot or have a high income. Unused allowances carry forward for three years. If your contributions exceed the annual allowance plus any allowable carryovers then tax relief is withdrawn for the excess contribution by way of an annual allowance charge on your tax return. If the tax charge exceeds £2,000 then you may be able to use your pension to pay it. This “scheme pays” option must be applied for directly with the pension provider and cannot be claimed on a tax return.
UK pension contributions are also subject to a separate “Lifetime Allowance”, currently £1,073,100.
You should always consider your overall financial position and take appropriate financial advice when making decisions about how much to contribute to a pension.
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