US citizen: UK pension limits?

[blueoak7]

US citizen living in UK

US 401k annual contribution limit is 22,500$
UK annual contribution limit is now 60,000£

As a US citizen living and working in the UK only - and of course still paying and filing US taxes - can I contribute up to the 60,000£ limit to my UK pension without concern?

Thanks

[freakyfriday]

I know several friends who have maxed out UK SIPP pension contribution and are US citizens. None, who have lived in the US (and have US pensions etc), or have even retired.

You might need a tax specialist who handles US citizen in UK taxes.

[TedSwippet]

As a US citizen living and working in the UK only - and of course still paying and filing US taxes - can I contribute up to the 60,000£ limit to my UK pension without concern?

Article 18 paragraph 5 of the US/UK tax treaty suggests not -- or at least, not easily. This part of the treaty is a painful read; not that any of it is exactly light reading. Fortunately the treaty Technical Explanation is somewhat clearer, although not what you'd want to hear (and from the way you phrased your post, you may have already suspected this obstructive US tax roadblock):

Paragraph 5 generally provides U.S. tax treatment for certain contributions by or on behalf of U.S. citizens resident in the United Kingdom to pension schemes established in the United Kingdom that is comparable to the treatment that would be provided for contributions to U.S. schemes. Under subparagraph (a) of paragraph 5, a U.S. citizen resident in the United Kingdom may exclude or deduct for U.S. tax purposes certain contributions to a pension scheme established in the United Kingdom. Qualifying contributions generally include contributions made during the period the U.S. citizen exercises an employment in the United Kingdom if expenses of the employment are borne by a U.K. employer or U.K. permanent establishment. Similarly, with respect to the U.S. citizen’s participation in the U.K. pension scheme, accrued benefits and contributions during that period generally are not treated as taxable income in the United States.

The U.S. tax benefit allowed by paragraph 5, however, is limited to the lesser of the amount of relief allowed for contributions and benefits under a pension scheme established in the United Kingdom and, under subparagraph (b), the amount of relief that would be allowed for contributions and benefits under a generally corresponding pension scheme established in the United States.

One way around this might be to not invoke the treaty here, but instead use otherwise unused foreign tax credits to neutralise US tax on pension contributions. Whether this works or not depends heavily on your earnings, comparative UK and US tax rates, and so on. And of course, "generally corresponding pension scheme" is somewhat woolly.

[tubaleiter]

Agree with TedSwippet - will try to frame it in the way I think about it, but the details are no different.

First question - do you want to deduct UK pension contributions from your income on US taxes?

Option 1 = Yes you do want to deduct the contributions on your US taxes. Therefore you must claim treaty protection for the contributions, and the treaty is relatively clear that your US-deductible contributions cannot exceed the US limit. I think that any excess contributions would still be tax-deferred, don't need annual reporting of capital gains, dividends, etc., still protected from PFIC, etc. (see Article 18 Para 1), they just form an after-tax cost basis when it comes time to withdraw.

Option 2 = No you don't want to deduct the contributions on your US taxes. Therefore you don't need to claim treaty protection for the contributions, since you don't want to deduct them. So you don't care about the US limits, only the UK ones. All your contributions get treated like the contributions over the limit in Option 1.

Note that Option 1 and Option 2 can have very similar or identical tax consequences, it's just a matter of how you report them. As a simple example, only using contributions under the limit, and making some broad assumptions about tax and exchange rates:

Option 1: £10k contribution. You deduct this on your US taxes, so there's no UK or US tax paid on the £10k. When it comes time to withdraw, you use UFPLS (no 25% tax free up front, but 25% tax free on each withdrawal), so you pay UK tax on 75% of each withdrawal and US tax on 100%. UK tax on 75% of each withdrawal is slightly higher than US tax, so your FTC each year more than offsets the US tax. End result - no US or UK tax up front, only UK tax on 75% of withdrawals.

Option 2: £10k contribution. You do not deduct this on your US taxes, but the UK tax on your income (less the £10k pension contribution) is higher than US tax on your entire income (including the £10k contribution), so you have enough FTCs to offset that extra £10k - therefore no US tax due on the contribution anyway. Withdrawal situation is the same, except that you also have a US cost basis on the pension. Tax calculations on this can get complicated (see IRS pubs 939 and 575, with a very strong cup of coffee!), but the very short answer is that you'll owe less US tax because you've already included the contributions in US taxable income. But the UK tax on 75% of a withdrawal is even more likely to be higher than US tax on the withdrawal, due to the cost basis, so net result is the same - UK tax on 75%, no US tax.

So that's a lot of words, but it's a complicated topic. Short answer - if you want to exceed the US limit, it's probably simplest to not try to deduct the contributions, but it should work either way.

Note I haven't touched on the question of foreign grantor trust filing (forms 3520 & 3520A) and possible loss of PFIC protections, which some interpretations require if your personal contributions exceed employer contributions - that's a whole different rabbit hole!

[cjking]

I know nothing about the legalities here, but I'd guess the simplest way around any issues would be to make employer contributions?

How can an individual "make" employer contributions?
1. Salary sacrifice. Some employers will let you specify how much they should contribute, reducing your salary to offset any contributions they make above the standard level.
2. Be your own employer: work as a contractor via your own one-man company.

[TedSwippet]

I know nothing about the legalities here, but I'd guess the simplest way around any issues would be to make employer contributions?

Unfortunately not.

[asteroidnix]

I know nothing about the legalities here, but I'd guess the simplest way around any issues would be to make employer contributions?

Unfortunately not.

I think this comes down to interpretation and judgement call again. I've seen posters here argue for this. Doubt there will ever be a definitive answer here.

[blueoak7]

Agree with TedSwippet - will try to frame it in the way I think about it, but the details are no different.

Mega helpful answer!
Not sure what I'm gonna do but definitely appreciate the different options.

[TedSwippet]

I know nothing about the legalities here, but I'd guess the simplest way around any issues would be to make employer contributions?

Unfortunately not.

I think this comes down to interpretation and judgement call again. I've seen posters here argue for this. Doubt there will ever be a definitive answer here.

Can you cite one? (Genuine question; not just being argumentative!)

Under the US/UK treaty, pension contributions can be US tax-deferred, at least up to $22.5k or so. And there are certainly differences of opinion about whether or not the ratio of employer to employee contributions changes the nature of a UK pension when mapping it onto US trust classifications.

Beyond these though -- or outside them if not electing in to the treaty -- normal non-treaty US rules apply. And these are ... well, let's just say "unhelpful". For example:

Generally, if a U.S. taxpayer is vested in a funded foreign employer pension plan, even if he or she cannot currently take distributions from the plan, the U.S. may tax current year employer contributions. If the employee is considered a “highly-compensated employee” (currently defined as individuals who earn more than $115,000 per year), the earnings and accretions in the foreign pension plan may also be taxable in the U.S. in the current year, in addition to the employer contributions.

The taxpayer will get “basis” in the plan for U.S. purposes for the amounts included in current year taxable income, and may therefore not be taxed again for U.S. purposes at a later date on these amounts. However, the foreign jurisdiction’s laws may not provide for an increase in tax basis in the plan for amounts that were taxable in the United States, as the employer contributions and earnings within the plan had not been taxed in the foreign jurisdiction (often not until distributions are taken from the plan). The result is a potential for double taxation. This is usually negated by the use of foreign tax credits, which offset U.S. income tax liabilities by the amount of foreign income taxes paid. However, it is possible that the timing mismatch of when each country determines that the individual has received taxable income prevents the use of foreign tax credits.

Ouch.

[asteroidnix]

Can you cite one? (Genuine question; not just being argumentative!)

Touched upon this in following thread: viewtopic.php?p=6991322#p6991322

Edit: Maybe we are talking again different things? I was referring to the debate on > 50% "employee" contributions creating potential PFIC issues.