Double tax on US pension incomr

I reported in my tax return a lump sum payment from my pension in the USA. The 20% Federal tax was deducted from the calculation of my total income. But the remainder was included in my income and the tax calculated on the total. I believe therefore, I have been subject to double taxation on the lump sum. And this is contrary to the tax agreement between the UK and the USA, which states pension income is to be taxed in one State only, and in the case of lump sum payments it is the USA. Is this correct? Am I due a tax refund? Thank you.

Hi,

If you have paid tax on the lump sum pension payment in the US, you may be entitled to claim Foreign Tax Credit Relief on you UK Self Assessment form. This avoids paying tax in both countries on this particular income. Foreign Tax Credit Relief is claimed on the Foreign section of the form.  

Tax on foreign income

Thank you.

I did claim FTCR and the 20% US Federal tax was deducted from the UK tax due on my total income. However, my question is, why was my US pension lump sum included in my income in the calculation of my UK tax. I had paid the Federal tax due on it (20%). So should not the remaining 80% be treated as tax free of UK tax? And the whole of that “Foreign Income” be deducted from my total income, before calculating my UK tax? Thank you for any advice.

Hi Roger Pawling,

If you are a UK resident generally your pension will be subject to income tax as you must declare your worldwide income unless you claim the remittance basis.  
If you have paid 20% tax on the US pension lump sum the foreign tax credit relief will be credited to you on your Self Assessment calculation to avoid paying tax on this twice. 

Thank you.
 

Hi there, I have a similar question to this one. Looking at this forum topic, there is discussion on what a lump sum payment is defined as: https://community.hmrc.gov.uk/customerforums/sa/a8dd4376-d2ee-eb11-ba5e-00155d3bb8ef#de7a5386-d616-ec11-b6e6-002248412b00 The suggestion in this article is that a lump sum payment is defined as: "A lump sum should be a payment that is not a periodic payment". The forum topic also suggests that Article 17 of the US/UK double tax treaty provides different tax treatment for lump sums (Art 17(2) taxable in the state where the pension scheme is resident) than for other pension remuneration (Art 17(1) usually taxable in the state of the taxpayer's residence). UK/US tax treaty: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/507431/usa-consolidated_-_in_force.pdf Therefore, is it correct to say that if Roger's payment has met the definition of being a lump sum payment, then he should pay only tax on it in the country where the payment arose (i.e., in the US)? There was previously a forum article titled "UK Citizen Cashing Out 401k Withdrawal for Home Deposit" that covered this and stated the following: "If you receive a Lump Sum Pension and you will not receive any further payments from that pension scheme, then this will be classed as a one off lump sum pension and will be taxable only in the Country that the payment arises. If paid from USA company then remains taxable in USA even if you are resident in the UK and vice versa." This article no longer appears to exist, but was contributed to by HMRC Admin 5 and 19 and their responses were pretty clear on this matter. Thank you.

Further to mine and Owen J’s submissions on the subject of double taxation of pension lump sums, I have found an HMRC document “DT19853 - Double Taxation Relief Manual: Guidance by country: United States of America: Notes.” This states, referencing Article 17 (Pensions) “Lump Sums A lump-sum payment derived by a resident of one State from a pension scheme established in the other State shall be taxable only in that other State.” I have evidence supplied by the IRS that the payment I received was a “lump sum”, and that it was subject to a 20% Federal tax. Therefore, no part of it should be subject to UK tax. Is this correct?

Hi,

We would agree that according to Article 17, statement number 2 does state that any lump sum payment would taxable only in the US. You can also see the Double Taxation Digest which advises the reliefs on lump sum pensions received in the US.

Digest of Double Taxation Treaties

Thank you.

Thank you for confirming my understanding of the treaty. Because I have been taxed on my lump sum by HMRC, in the tax year just completed, how do I request a review of the tax I have paid and request a refund? Thank you.

Hi,

If you are claiming tax back under the double taxation treaty between the US and the UK, please complete a DT Individual form and send to HMRC by post:

Double Taxation Treaty Relief

Thank you

I have tried completing a DT individual form, but it presumes I am tax resident outside the UK. I am actually a UK citizen resident in the UK. Should I instead request an appeal of the HMRC decision to tax my US lump sum? And if so do I request that in writing to Self Assessment, HMRC, BX9 1AS? Thank you.

Hi,
 

As a UK tax resident, your worldwide income is taxable in the UK. You can claim foreign tax credit relief if tax has been paid in the US . Thank you.

I am indeed a UK citizen, but as per statements from HMRC above, it is not correct to state “your worldwide income is taxable in the UK”. This is because the tax agreement between the UK and the USA specifically exempts lump sum pension payments from all UK taxation. HMRC stated earlier in this dialogue “ We would agree that according to Article 17, statement number 2 does state that any lump sum payment would taxable only in the US. You can also see the Double Taxation Digest which advises the reliefs on lump sum pensions received in the US.”. The online self assessment tax form only calculates UK tax relief on the portion of the lump sum taken as Federal tax. Whereas it should allow UK tax relief on the entire lump sum. Therefore I have been overtaxed. The lump sum has been taxed twice, by the USA and the UK, which is contrary to the agreement between the two states. Thank you for reviewing this once more.

I may be misunderstanding the issue but if, under the DTA, the pension lump sum shall be taxed only in the US, then as I understand it, it should not be entered on the UK tax return. This is certainly the position for a German social security pension, which shall be taxed only in Germany... Have a look at page FN8 of the Foreign Notes (Google FN8 HMRC ) which says: "If you have a pension that’s not taxable in the UK because of a DTA, give full details of the pension’s payer, pension and relevant DTA in the ‘Any other information’ box on your tax return. " I have been advised to say: "I receive a German state social security pension from Deutsche Rentenversicherung Bund, paid via the German Post's Renten Service, which shall be taxable only in Germany under Article 17(2) of the UK/Germany Double Taxation Agreement. The pension has been in payment since XXXX. This statement is made in accordance with SA106 foreign notes, which explain on page FN8 that if you have a pension that is not taxable in the UK because of a DTA, give full details of the pension's payer, pension and relevant DTA in the Any other information box on your tax return." Surely the answer is therefore to amend your return (I assume you are still in time to do that), to remove the entry in the foreign income page and to add the relevant text as advised at FN8. Perhaps HMRC can confirm that is the approach to take.

Hi,

Please write in with further details for your claim to be revisited to:

HMRC,
PAYE and Self Assessment,
BX9 1AS.

Ensure your National Insurance number is provided in your correspondence.

Thank you.

Hi,

You should amend your tax return form to remove the income figure if this is wholly and exclusively taxable in the U.S.  

The text should also go into the additional information box to confirm this. 

Thank you.

I did amend my self-assessment tax return to remove the lump sum payment I had received from my US pension. I was surprised how simple it was to amend a submitted return. And shortly after I received a refund on the payment I had made. It took some work to understand the amount refunded, but it is correct. I am very pleased at the outcome. Thanks to all tax payers who contributed to this thread.

HMRC, please can you clarify how a series of yearly lump sums would be treated in this example. US Pension plans force a "RMD" which can be taken in this way.

Hi,

You can see guidance here:

Tax on foreign income

Thank you.

Can I get some clarity on what HMRC defines as a Lump sum.. Working with a friend looking into taking some 401K withdrawals. There seems a disconnect between USA and UK definitions. Scenario we are trying to avoid is taking a significant withdrawal which will attract 30% withholding in the USA which we would correct via 1040NR as it is being treated as a lump sum... only for HMRC not to treat as a lump sum and being liable for UK tax after the event and pushing him into high tax of tax vs USA return... Really need HMRC to give clear guidelines on what constitutes a lumpsum before he plans retirement cashflows and some clear examples if it is complex.

Hi,

You can find guidance here:

PTM063500 - Member benefits: lump sums: trivial commutation lump sum

Thank you.