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Paying US Tax on UK Pension

Paying US Tax on UK Pension

Old Mar 11th 2020, 1:25 pm
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Default Paying US Tax on UK Pension

Last year I began receiving my UK pension. When I recently filed my IRS tax return I handed over the P60 from my UK company to the accountant. Under the dual taxation agreement I do not pay any tax in the UK. When my US accountant completed the tax document I was surprised at the amount of tax I would be paying in the US on my UK pension - allowing for $/GBP conversion it was over twice what I would have paid in the UK. I have asked my US accountant to check this and if it is correct I guess I will have to pay I just assumed the amount would be similar. My UK accountant was unable to comment on US tax matters but suggested it may have pushed my overall income into a higher tax bracket. I wondered if other people have had similar experiences.

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Old Mar 11th 2020, 3:58 pm
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Default Re: Paying US Tax on UK Pension

Whether in the US or UK you pay tax on the basis of "bands" aka "brackets" - there is some that is tax free, then as your income increases you pay at a higher rate - so if your income in the US is less than $12,200 as a single person, you pay no tax, then 10% on the next $9,700, and 12% on the next almost-$30k, but if you go over the aggregate of those, so about $52k, the next band is 22%, on the next roughly $24,700. Therefore if you income from other sources in the US was (only) around $52k, then you'd paying $4,570 or about 8.8% or $52k, but adding your British pension on top, would lead to you paying 22% on your British pension income. So suppose you had $15k of UK pension income the tax at 22% would be $3,300 and the aggregate tax of $7,870ish on $69,700 would have jumped to an average of 11.75%.

The situation is similar in the UK, but with fewer bands, so after the personal allowance (on £12,500) would only pay 20% in the UK, so higher than the the US's 10% and 12% bands. ..... On what basis do you think you'd be paying so much less tax on your pension in the UK? Or are you calculating assuming that you'd get a personal allowance in the UK AND a "standard deduction" in the US?

Last edited by Pulaski; Mar 11th 2020 at 4:04 pm.
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Old Mar 11th 2020, 8:44 pm
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Default Re: Paying US Tax on UK Pension

If you live in New York City where the OP appears to be located, then your marginal Federal tax bracket is almost certainly 24% and most likely higher or you could not afford to live there. Add on state and local taxes and you are at 34% or higher. That is a lot more than the marginal rate of 20% in the UK. With that said, even if you had paid UK tax on the pension you would still have to pay the difference to the US, so you are no worse off than if you had paid tax on the pension in the UK. As Pulski states, perhaps you thought the pension could be taxed in the UK instead of the US thus benefiting from the UK tax free allowance. Unfortunately assuming you are a citizen or green card holder the US taxes you on all of you worldwide income.
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Old Mar 12th 2020, 8:01 pm
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Default Re: Paying US Tax on UK Pension

Thanks to Pulaski and Glasgow Girl for your responses. In answer to GG's comment I knew I had to pay tax in the US on my pension as I was not paying tax in the UK, and I hold an E2 visa.

This is the first year my company pension kicked in and was just surprised at the level of US taxation I was paying. It is what it is.
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