Double taxation on UK private pension for US resident

I'm considering cashing-in a personal pension plan that I have in the UK...established decades ago. I have been a non-resident, living in the US for more than 25 years. I pay tax on my income in the US, and am trying to establish whether it is possible to seek relief from taxation at source via form DT US Individual 2002 (https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/850465/Form_US-individual_2002.pdf) Am I correct that once this form is signed and sealed by both HMRC in the UK and the IRS in the United States, it can then be provided to the private pension company and act, effectively, as an instruction to them not to use the emergency tax rate that would otherwise be applied to 75% of my pension payout? I know the first 25% is paid out tax-free, but am trying to avoid use of the emergency tax rate which will then require me to claw the money back from HMRC, when I will be paying tax on it in the US to the IRS as part of my worldwide income. I'm unclear as to whether Form DT US Individual 2002 can be completed BEFORE the pension payout has begun? Thanks for any assistance and advice.

Hi,
 

Article 17(1) of the UK / USA double taxation agreement, advises that pensions and other similar renumberations, are only taxable in the USA.  If you receive your private pension in regular payments, e.g. monthly, then your non goverment pension is not taxable in the UK and the DT individual form at : Double Taxation: Treaty Relief (Form DT-Individual      ) should be completed and sent to the IRS in the first instance.  The IRS will validate the form and send it to HMRC to process.  However, article 17(2) of the UK / USA double taxation agreement, advises that if "a lump-sum payment derived from a pension scheme established in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in the first-mentioned State".  In this case the contracting state and first mentioned state is the UK : UK/USA DOUBLE TAXATION CONVENTION  ).  Please note you cannot submit form DT indvidual to the IRS before your pension commences payment.  Any tax deducted will be refunded, if appropriate . Thank you.

Thanks for this. So if a lump sum is taken, what tax rate applies on the 75% of value if it's paid to a non-resident with an NT tax code?

Hi
If you are entitled to receive a personal allowance, this would be deducted first.  
Of the remainder, the lowest rate of tax would be applied first (20%), followed by the higher rate (40%) and lastly the additional rate (45%). depending on the amount of taxable lump sum.  
More information in icome tax rates and personal allowances can be found at:
Income Tax rates and Personal Allowances
Thankyou.
Regards.

Thanks so much. One final question, if I may....do those bands (20% 40% and 45%) kick-in AFTER 25% is tax-free AND - if applicable - the deduction of the personal allowance? In other words if my income in the UK is zero, do I receive: 25% of the total lump sum tax free Then GBP 12,570 tax free Then the 20 / 40 / 45% bands? Or is the initial 25% tax free lump sum considered income and counts towards the 12,570 personal allowance? Thanks again for all the help.

Hi,

Yes, the bands kick in after the tax free amount and personal allowances. Please note though that if a US resident, no personal allowances are due.

Thank you.

Thanks very much.

Hello, I am in a very similar position to Mr. Marks and, if I may, I have a few additional questions: If the value of the pension exceeds the £30,000 threshold, is it possible to take a lump sum payment without seeking advice from a financial advisor? Obtaining financial advice is proving to be a problem as I am not UK Domiciled, and the low value of the pension is not attractive enough to entice/engage an advisor who is licensed to provide advice in both the UK and USA. As it appears that my only option is to take regular, monthly payments, is it possible to have the DT individual form validated and in place prior to receiving any payments? As the Individual DT notes (point 4b) indicates an either/or situation, does the IRS typically send the validated form directly to HMRC or does it return it to me to send to HMRC? Thanking you in advance for any assistance and advice. Regards.

Hi Kishmad Bryant,
HMRC cannot advise you on whether to seek advise or not as we are not authorised to provide financial advise.
The DT claim can only be used once the payment is actually in place and not before as we cannot issue a code until the source is noted on your tax records.
Normally the IRS send the form straight to HMRC.
Thank you. 

 

Hello, In January 2024 I cashed in a UK private pension , got a P45 and paid emergency tax of about 40 percent. The pension was started in 1986, I have been living in and paying taxes in US since 1993. I am British Citizen, a US green card holder. Can I reclaim the tax taken in UK and pay it here in the United States to the IRS. Thank you for your help. Regards

Hi gmudford1 Mudford,
Please refer to guidance here:
Tax on your UK income if you live abroad
Thank you. 

Hello, If you withdraw 100% of your UK pension and pay UK emergency tax as a US resident/ tax payer, and per one of your responses above, 17 (b) applies (only taxable in the UK).... Do you need to fill in all of the forms to prove that you are a US tax payer to claim back the amount overpaid as emergency tax? (when there is no other UK income but also, this isn't a double tax situation) or, can you claim this amount back using a self-assessment form if you are a US resident? (who hasn't had to file a UK return or had a UK tax code for > 10 years)

Hi Jennifer Forsythe,
Please refer to guidance here:
Tax on your UK income if you live abroad
Thank you.