- 1 UK Employer Contributions & US Tax Treatment
- 2 Foreign Retirement Contributions (In General)
- 3 UK Tax Treaty Article 18 (5)
- 4 Important: “Borne By an Employer”
- 5 UK Tax Treaty Article 18 (5)(i)
- 6 UK Tax Treaty Article 18 (5)(ii)
- 7 UK Tax Treaty Article 18 (5)(b) Limitation
- 8 UK Tax Treaty Article 18 (5)(d)
- 9 Unreported UK Foreign Pension?
- 10 About Golding & Golding, A PLC
UK Tax Treaty Article 18 (5) – Employer Contribution US Tax Treatment
Unlike many other IRS bilateral tax treaties between the United States and a foreign country, the tax treaty between United States and United Kingdom has a very thorough, and comprehensive section on retirement and pension.
UK Employer Contributions & US Tax Treatment
While many of the issues we deal with involve a UK citizen who also has U.S. person status — and unreported accounts or income to the IRS — there is a second category of individual we also work with frequently.
It is a U.S. person who is working in the United Kingdom and earning retirement pension contributions from a UK Employer.
Foreign Retirement Contributions (In General)
While the general rule is that contributions made by a Foreign Employer and into a foreign retirement pension are not deductible on a U.S. tax return, the rules are ldifferent if you’re working in the UK for a UK Employer
UK Tax Treaty Article 18 (5)
If you are a U.S. Citizen in the UK, earning a pension from your UK based employer, you should take notice of this analysis:
“(5) (a) Where a citizen of the United States who is a resident of the United Kingdom exercises an employment in the United Kingdom the income from which is taxable in the United Kingdom and is borne by an employer who is a resident of the United Kingdom or by a permanent establishment situated in the United Kingdom, and the individual is a member or beneficiary of, or participant in, a pension scheme established in the United Kingdom.”
Non-Technical Translation Article 18 (5)
When a U.S. citizen resides in the United Kingdom and works for a UK based UK employer, if the US citizen as part of a pension scheme which the employer participates in, then the US. Citizen may be entitled to certain benefits.
Important: “Borne By an Employer”
This is very important language.
Because the fact that the pension must be Borne by the employer is crucial .
See, in many foreign countries such as the UK, there are retirement accounts which are called personal retirement or personal pension such as Aviva/Friends Life –– which are more personal investment types of accounts as opposed to an employer retirement fund.
Presumably, these “personal pensions” are not borne from an employer, and would not be included in this exception to otherwise taxable income.
UK Tax Treaty Article 18 (5)(i)
(i) contributions paid by or on behalf of that individual to the pension scheme during the period that he exercises the employment in the United Kingdom, and that are attributable to the employment, shall be deductible (or excludable) in computing his taxable income in the United States.
Non-Technical Translation Article 18 (5)(i)
When a U.S. citizen receives employer contributions that meet the requirements of article 18 section 5, the U.S. citizen may be able to exclude or deduct the income as part of his taxable income.
UK Tax Treaty Article 18 (5)(ii)
(ii) any benefits accrued under the pension scheme, or contributions made to the pension scheme by or on behalf of the individual’s employer, during that period, and that are attributable to the employment, shall not be treated as part of the employee’s taxable income in computing his taxable income in the United States.
This paragraph shall apply only to the extent that the contributions or benefits qualify for tax relief in the United Kingdom.
Non-Technical Translation Article 18 (5)(ii)
For the US citizen that qualifies under article 18 subsection 5, any benefits that accrued under the pension scheme addition to contributions made pension scheme by (or on behalf of) the employer — and which are in relation to the US citizens employment for that employer — we’ll not be taxed (currently)
UK Tax Treaty Article 18 (5)(b) Limitation
(b) The reliefs available under this paragraph shall not exceed the reliefs that would be allowed by the United States to its residents for contributions to, or benefits accrued under, a generally corresponding pension scheme established in the United States.
Non-Technical Translation Article 18 (5)(b)
In other words, you’re not entitled to any greater benefit under UK law that you would be entitled to under US law freight comparable benefit.
Thus, if you’re receiving some type of equivalent 401K contribution on behalf of your UK employer, you would be entitled to the same benefit that you will receive had been a US employer for a US 401(k) — but no greater benefit.
UK Tax Treaty Article 18 (5)(c)
(c) For purposes of determining an individual’s eligibility to participate in and receive tax benefits with respect to a pension scheme established in the United States, contributions made to, or benefits accrued under, a pension scheme established in the United Kingdom shall be treated as contributions or benefits under a generally corresponding pension scheme established in the United States to the extent reliefs are available to the individual under this paragraph.
Non-Technical Translation Article 18 (5)(c)
This reiterates eligibility requirements.
UK Tax Treaty Article 18 (5)(d)
(d) This paragraph shall not apply unless the competent authority of the United States has agreed that the pension scheme generally corresponds to a pension scheme established in the United States.
Non-Technical Translation Article 18 (5)(d)
This section is very important. It basically says that in order for the UK pension to qualify, it has to correspond to a pension scheme established in United States. This is to avoid personal pensions, QROPS, in other types of pensions which generally do not qualify under US law, to be included as part of the US citizens pension plan an attempt to avoid US tax on employer contributions.
Unreported UK Foreign Pension?
If you never reported the foreign pension, or your foreign employer “over-contributed” to the pension, you may be out of both Tax and Reporting compliance.
About Golding & Golding, A PLC
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.