drhewitt

Hi,

I have recently begun making voluntary National Insurance Contributions to the UK state pension. I live in the United States.

My question is this. Under the tax treaty, it looks as if one could deduct pension contributions from their income tax return.

Is this true?

Info taken from the article below:

http://www.weil.com/news/pubdetail.aspx?pub=8292


Taxation of Pension Contributions

Article 18 of the Tax Treaty deals with cross-border pension contributions and is generally intended to remove barriers to the flow of personal services (i.e., employees) that could otherwise result from differences in the US and UK laws regarding the deductibility of pension contributions. This is the first US tax treaty to allow US citizens residing in another country to deduct, for US tax purposes, contributions made to a foreign pension plan.

US Citizens Residing in the UK and Participating in a UK Pension Plan. The Tax Treaty allows US citizens resident in the UK to deduct, for US tax purposes, contributions to a pension plan established in the U.K. This deduction is only available while the US citizen continues to reside in the UK. The US citizen’s deduction is limited to the lesser of (1) the amount deductible in the UK for contributions and benefits under a UK-established pension scheme and (2) the amount that would be deductible in the US for contributions and benefits to a generally “corresponding pension scheme” established in the US. In addition, US citizens will not be taxed by the US as the pension benefit accrues, provided the UK-established pension scheme is a generally “corresponding pension scheme” (as described below).

Corresponding Pension Schemes. The Notes to the Tax Treaty state that “corresponding pension schemes” include:

In the UK: (1) Approved employment-related retirement benefit schemes (for purposes of Chapter 1 of Part XIV of the Income and Corporation Taxes Act of 1988) and (2) Personal pension schemes approved under Chapter IV of Part XIV of such Act).

In the US: (1) Qualified plans under IRC § 401(a), e.g., 401(k) plans, (2) Individual Retirement Accounts (including traditional, SEP and Roth IRAs) and (3) Qualified plans under IRC § 403(a) and (b).

Employees Residing Abroad But Participating in Home Country Plans. For both US and UK citizens, the Tax Treaty provides that each may stay in their home country pension plans when working and residing in the host country without suffering the current potential for adverse tax consequences. The Tax Treaty allows employees transferring between the UK and the US (and vice versa) to remain in their respective home country pension plans without having employer contributions to these plans taxed as imputed income by their host countries. In addition, both employer and employee contributions to the home country pension plan will be tax-deductible in the host country. However, the above rules only apply if:

(1) The tax relief granted by the host country for employee contributions to home country plans is limited to the amount of relief that would have been available under a pension plan established in the host country, e.g., a UK resident who participates in a US 401(k) plan would not be able to deduct more than the 401(k) limit proscribed under IRC Section 402(g) (for 2004, $13,000).

(2) The employee must have already been a member of, and participating in, the home country pension plan before moving to the host country.
(3) If the employee is only taxed on the amount remitted or received in the host country, the available tax relief will be reduced proportionally.
(4) The pension plan must be accepted as a generally “corresponding pension scheme” (as described above) by appropriate authorities in the host country.

For example, this means that a US citizen temporarily working in the UK may continue to make contributions to a US-based 401(k) plan, and the individual may deduct or exclude from income in the UK such contributions to the 401(k) plan.

drhewitt

I found this info...


http://www.amcham.ch/events/content/...ects_DHart.pdf


Pension Contributions – to Non US Qualified Plans –
Generally NOT deductible from US taxable income

US/UK Tax Treaty – allows US Citizens / Green Card Holders to make
US deductible contributions to certain UK pension plans up to US
qualifying limits. Currently max $49,000 or 100% salary

drhewitt

http://www.britishamericantax.com/Tax_Issues.html

One limited circumstance allowed to US citizens and residents under the new US/UK treaty is the right to have contributions to a UK pension plan treated the same as a contribution to a US qualified plan.

BTJ

But the text you posted has nothing to do with state pensions. If nothing else NICs are not deductible in the UK against income tax, why should they be in the US.

Steve_

Well it's not a tax because it's voluntary and it's not a pension either. The ECHR ruled a few years ago that there is no connection between NI and your state pension, because the govt. pays out the pension from general revenue, of which NI is only a part, iirc.

But anyway, even if it was covered, Class 2 contributions are around $220 a year so you're talking about the tax on $220. Meh.

Never-ending source of amazement to me the British govt. pays out a full state pension when you could have given them so little money.

Anyway this is what you should be reading: https://www.socialsecurity.gov/inter..._Texts/uk.html not the tax treaty.

drhewitt

Thanks for the tips.

I recently made a payment of £625 for tax year 2010. I wanted to know if I could deduct this from my 1040 tax return.

It seems that voluntary payments to the state pension do not count. It is not a tax if it's voluntary.

Michael

I don't think it matters whether it is voluntary or not. FICA payments are not deductible so it would seem that the equivalent UK NIC payments would also not be deductible. Therefore if NIC payments were deductible, then non citizens would have a tax advantage over citizens.

Since employees on a L-1 visa can opt to pay NIC payments instead of FICA payments for up to 5 years, if NIC payments were deductible then opting in would be a non brainer since FICA is not deductible.

Tax treaties are meant to equalize taxation not create tax advantages for non citizens.

Steve_

But they frequently do though. I can think of various tax treaty fiddles and also other tax fiddles.

For example, say you're an F-1/M-1/J-1 student and you're working in the US on OPT, you're exempt from payroll taxes (i.e. FICA). If you were in college in your home country doing the same work you'd probably have to pay whatever the local payroll taxes are.

There are books on the subject. A pretty common one is to marry an American widow/er so you can claim the spousal social security payments, Canadians do that all the time.

nun

I do not believe that you can deduct voluntary NICs from your US taxes.

It looks as if you are paying Class 3 NICs. See if you qualify for Class 2 NICs. They are less expensive.