Pension Contributions
Treatment of Pension contributions to UK registered schemes
Most UK employees contribute to a workplace pension through their payroll and typically will have further supplementary contributions made on their behalf by their employer. Employer contributions to workplace pensions are typically tax-free, and the employee can claim tax relief in respect to their personal contributions. Relief for employee contributions can be given either entirely through the payroll by way of a direct reduction in their taxable (or NIable) pay, as is the case with net pay or salary sacrifice schemes, or through a combination of a "grossed up" contribution to their pension pot (whereby a portion of the tax paid by the individual is reclaimed and added to the pension contribution) along with a claim on their tax return for higher or additional rate taxpayers through a "relief at source" scheme.
US expats living in the UK can generally apply the provisions of the US/UK tax treaty to their US federal tax returns and therefore deduct contributions to UK registered pension schemes from employment income (subject to the amounts that would be allowed for contributions to US schemes). This results in lower US tax rates and greater availability of foreign tax credits (for more 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). Many tax treaties will contain similar provisions on pension contributions to the US/UK tax treaty (for example, the US/Germany treaty) which allow pension contributions to be excluded or deducted from your employment income. However, residents of countries that do not have a US tax treaty in place or which do not provide for deduction/exclusion of pension contributions (for example, the US/Switzerland tax treaty) generally cannot deduct foreign employee pension contributions from their US taxable income and must also include employer pension contributions as taxable income. This may cause issues US persons who reside in a low tax jurisdiction, as you may not have enough foreign tax credits to offset the US tax liability on the increased income.
While pension contributions may be deducted or excluded from US taxable income under a treaty provision, this may not always be a beneficial position to take, as including the contributions in US income can create a US "basis" in the pension, which allows a portion of any future distributions from the foreign pension to be excluded from US tax in the future
Treatment of Pension contributions to US registered schemes
As outlined in the US/UK tax treaty, US citizens living in the UK can continue to receive a deduction for contributions to US-registered pension schemes as long as they began contributing to the pension scheme while they were living in the US. This means that, for example, if you still have a traditional IRA in the US, then you can continue to contribute to the IRA and receive UK tax relief on the contribution (if eligible) even while resident in the UK.
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 (down to a minimum of £4,000 per year in 2021/22). Unused allowances carry forward for three years.
If your total pension 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 request that your pension provider pays the charge using funds within the pension. 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 will have further supplementary contributions made on their behalf by their employer. Employer contributions to workplace pensions are typically tax-free, and the employee can claim tax relief in respect to their personal contributions. Relief for employee contributions can be given either entirely through the payroll by way of a direct reduction in their taxable (or NIable) pay, as is the case with net pay or salary sacrifice schemes, or through a combination of a "grossed up" contribution to their pension pot (whereby a portion of the tax paid by the individual is reclaimed and added to the pension contribution) along with a claim on their tax return for higher or additional rate taxpayers through a "relief at source" scheme.
US expats living in the UK can generally apply the provisions of the US/UK tax treaty to their US federal tax returns and therefore deduct contributions to UK registered pension schemes from employment income (subject to the amounts that would be allowed for contributions to US schemes). This results in lower US tax rates and greater availability of foreign tax credits (for more 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). Many tax treaties will contain similar provisions on pension contributions to the US/UK tax treaty (for example, the US/Germany treaty) which allow pension contributions to be excluded or deducted from your employment income. However, residents of countries that do not have a US tax treaty in place or which do not provide for deduction/exclusion of pension contributions (for example, the US/Switzerland tax treaty) generally cannot deduct foreign employee pension contributions from their US taxable income and must also include employer pension contributions as taxable income. This may cause issues US persons who reside in a low tax jurisdiction, as you may not have enough foreign tax credits to offset the US tax liability on the increased income.
While pension contributions may be deducted or excluded from US taxable income under a treaty provision, this may not always be a beneficial position to take, as including the contributions in US income can create a US "basis" in the pension, which allows a portion of any future distributions from the foreign pension to be excluded from US tax in the future
Treatment of Pension contributions to US registered schemes
As outlined in the US/UK tax treaty, US citizens living in the UK can continue to receive a deduction for contributions to US-registered pension schemes as long as they began contributing to the pension scheme while they were living in the US. This means that, for example, if you still have a traditional IRA in the US, then you can continue to contribute to the IRA and receive UK tax relief on the contribution (if eligible) even while resident in the UK.
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 (down to a minimum of £4,000 per year in 2021/22). Unused allowances carry forward for three years.
If your total pension 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 request that your pension provider pays the charge using funds within the pension. 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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