How to report my UK pension on US tax return? (Guidelines) (2024)

Is the UK State Pension taxable in the US?

The UK State Pension is an exception and does not need to be reported on your US tax return.

However, employer-provided pensions, private pensions, and SIPPs (Self-Invested Personal Pensions) are subject to reporting on your US tax return and on your FBAR as foreign financial accounts.

How does the treaty affect the taxation of UK pensions for US citizens?

The US-UK Tax Treaty has provisions to avoid double taxation on your UK pension. It also introduces “reciprocal pension exemption,” which respects the tax-exempt status of certain pension distributions in one country by the other.

This treaty, however, does not extend to the 25% tax-free lump sum withdrawal from UK personal pensions, which the IRS taxes, a point often overlooked by US citizens and Green Card holders.

How can US expats benefit from the US-UK tax treaty provisions?

The US-UK tax treaty, in general, helps US expats in the UK avoid double taxation on their income, including pensions, by defining which country has the right to tax specific income types.

For pensions, it often means the country of residence has taxing rights, with provisions to claim tax relief or credits in the other country to prevent double taxation.

This treaty is crucial for maximizing the benefits of cross-border income and pensions for US expats living in the UK. For detailed guidance, reviewing the treaty provisions and consulting with a tax professional is highly recommended.

Do I need to file a US Foreign Trust Return (Forms 3520 and 3520-A) for my UK pension?

It depends on the nature of your pension.

Trust-based pensions often require reporting when the account holder has contributed more funds to their pension than their employer has; namely on Forms 3520 and 3520-A, due to their structure and the relationship between contributors and trustees.

A typical example of a trust-based pension in the UK is NEST.

It’s important to remember that the distinction between employer contributions and employee contributions, along with whether your pension is contract-based or trust-based, plays an important role in determining your reporting obligations.

If your pension is contract-based, Foreign Trust returns do not need to be filed with the IRS no matter how much has been contributed by the account holder.

A typical example of a contract-based pension in the UK is Aviva.

Aviva points out the difference between contract-based and trust-based pensions here:
https://www.aviva.co.uk/business/workplace-pensions/corporate/contract-and-trust-pensions/

Consulting with a tax professional experienced in the US-UK tax treaty, as well as the taxation of foreign income, is highly recommended to ensure requirements are handled effectively. They can also ensure compliance with tax laws from both sides while potentially minimizing your tax liabilities.

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What is the difference between contract-based and trust-based pensions?

Contract-based pensions are individual arrangements directly with pension providers, giving the holder personal control and responsibility for investment choices.

Trust-based pensions, on the other hand, are managed by trustees who make investment decisions on behalf of all participants in the scheme.

The main difference lies in who controls the investment decisions and the structure of management, impacting how they’re reported for tax purposes in the US. For comprehensive details, it’s best to consult a tax professional.

When should I file my US Foreign Trust Return?

The specific deadlines for these forms, Forms 3520 and 3520-A are generally April 15th, with an extension available until October 15th.

What types of UK pensions are there?

UK pensions can generally be divided into three main categories:

• State Pension: A regular payment from the government, which you’re eligible for once you reach the State Pension age. The amount you receive depends on your National Insurance record​​.
• Workplace Pensions: Arranged by your employer, these can be either defined benefit schemes, offering a guaranteed income in retirement based on your salary and length of employment, or defined contribution schemes, where you and your employer contribute to a pension pot that’s invested, with the retirement income depending on contributions and investment growth ​​.
• Personal and Stakeholder Pensions: These are defined contribution pensions that you arrange yourself. They include Self-Invested Personal Pensions (SIPPs), offering a wide range of investment choices, stakeholder pensions with low minimum contributions and capped charges, and personal pensions typically offered by insurance companies.

How are UK pensions taxed in the UK?

• State Pension: Taxed as income, but you don’t pay National Insurance contributions.
• Workplace and Personal Pensions: Contributions are tax-free up to certain limits. Defined benefit schemes pay out a retirement income that’s taxable. Defined contribution pots can be accessed from age 55 (rising to 57 from 2028), with up to 25% as a tax-free lump sum, and the remainder taxed as income when withdrawn​ (but the 25% tax-free is taxable by the IRS).

Which IRS forms would be used to report on UK and foreign pensions?

The main forms involved in your tax return include:

• Form 8938: If you have foreign financial assets above a certain threshold, including pensions, you may need to file this form with your 1040.
  • Attach this to your annual tax return, due April 15, with extensions available.
• Form 3520: Required for transactions with foreign trusts or receipt of large gifts from foreign entities, which may apply to some pension plans.
  
  • Due on the same date as your income tax return, April 15, with an extension option to October 15.
• Form 3520-A: This provides information about the foreign trust, its US beneficiaries, and any US persons treated as an owner of any portion of the foreign trust under the grantor trust rules.
  • Due March 15. An extension is available to September 15, but must be requested before March 15.
  • $10,000 penalties are often issued when Form 3520-A is filed late.
  • If you’re late, talk to a tax professional about filing a substituted 3520-A with your federal tax return.
• Form 1116: If you’re claiming a Foreign Tax Credit to avoid double taxation on income that includes your pension, this form is necessary.
  • Filed alongside your Form 1040 to claim the Foreign Tax Credit, due April 15, with extension possibilities.
• FinCen Form 114 (FBAR): Include employer–pensions, personal pensions and SIPP balances on your Foreign Bank Account Report.
  • Must be filed by April 15, with an automatic extension to October 15.

Understanding and applying the tax treaty between the US and the UK can offer benefits, such as taxing pension distributions more favorably in some cases. However, it’s essential to understand these rules carefully to ensure compliance and optimize your tax situation.

A tax professional experienced in this field can provide tailored advice based on your specific situation, helping to ensure that you meet your reporting obligations while minimizing your tax liability.

Can I exclude my UK pension income from US taxable income under the Foreign Earned Income Exclusion?

The Foreign Earned Income Exclusion (FEIE) generally does not apply to pension income. UK pensions are not considered “earned income” (which typically covers wages, salaries, or professional fees). Pensions are treated as unearned income, so the FEIE would not be applicable in this case​​.

Can I deduct medical expenses paid out of my UK State Pension?

No, you don’t need to. You’re not reporting your UK state pension income to the IRS.