US Pension query

sjkr MAAT, AAT Licensed Accountant Posts: 74 ? ? ?

I have a client who is a United States citizen, but resides in the UK. He receives a US pension, and pays tax on the pension in the US. He has recently been advised by a financial adviser that he should also be paying tax in the UK, so he has done this. This means that he is paying tax twice on the same pension. Is this correct? Does anyone have experience of this? I really want to help him quickly as he has a very big tax demand and unfortunately he is terminally ill. Can anyone help?



  • MarieNoelle
    MarieNoelle Moderator, MAAT, AAT Licensed Accountant Posts: 1,369
    Not familiar with this but is there a double taxation agreement with the US that would avoid paying tax twice? HMRC normally has a list of DT agreements in place so could be a good place to check?
  • CeeJaySix
    CeeJaySix Registered Posts: 645
    I've never done this in practice as I don't work in personal tax, but in theory:

    1. There is a double taxation treaty with the US - it's available through the HMRC website. If this treaty provides for relief on pension income, it will state in which country the the income is exempt.

    2. If it is not exempt in one country or the other, assuming he is resident but non-domiciled, and has NOT elected to be taxed on his overseas income on the remittance basis (which would give rise to a hefty charge if resident for >7yrs (£30k) or 12yrs (£50k) - only really used where an individual has a lot of overseas income that they don't bring into the UK), he will be charged UK tax on all his overseas income.

    3. He can them claim double taxation relief on the lower of the foreign tax charged and the UK tax charged on the foreign income. When calculating the amount of UK tax paid on the income, you can treat it as the 'top end' of his income for the purposes of working out which tax band it falls into (ie. if he has UK taxable income >the basic rate limit and say £10,000 foreign pension income, all of the foreign income is liable to UK tax at 40%). This is applied as a tax credit on the tax comp. So following the same example, lets say he suffered £3,000 tax in the US on the income, and in the UK he will suffer 40% (£4,000), the tax credit will be for the lower amount, ie. £3,000. If on the other hand his combined taxable income in total is all in the BR band, he would only suffer £2,000 tax in the UK, and therefore the tax credit will be £2,000. Obviously you'll need to split the foreign income if it straddles a band.

    Hope that helps...
  • stevo5678
    stevo5678 Registered Posts: 325
    When it's the other way round (UK res) you simply do a normal tax return in the UK with their 'world wide income', calculate the UK tax then deduct the foreign tax already stopped. I'd imagine it works the same in the US. So I'd guess you calculate the tax as normal then he will get a credit on his US tax return.
  • sjkr
    sjkr MAAT, AAT Licensed Accountant Posts: 74 ? ? ?
    Many thanks for all replies, a great help!
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