UK Tax Relief Reportable on US Return

Hello,

For a US citizen resident in the UK with a pension from a former UK employer.
Not currently working due for health reasons.

Considering contributing to the pension (from savings). The contribution would be of no interest to the IRS as it is not income.
But HMRC provide 20% tax relief on contributions...(even when there is no tax being paid that year).
Would this 20% be reportable as income?

Thanks

Hello,

For a US citizen resident in the UK with a pension from a former UK employer.
Not currently working due for health reasons.

Considering contributing to the pension (from savings). The contribution would be of no interest to the IRS as it is not income.
But HMRC provide 20% tax relief on contributions...(even when there is no tax being paid that year).
Would this 20% be reportable as income?

Thanks

As there is no employer contribution IRS Form 3520 and a substitute Form 3520-A would be filed each year.  Probably best to study the taxation of foreign trusts to establish an answer in this scenario.

As there is no employer contribution IRS Form 3520 and a substitute Form 3520-A would be filed each year.  Probably best to study the taxation of foreign trusts to establish an answer in this scenario.

I see that there is some debate around whether a pension requires 3520/3520A to be filed. Is there something about making a personal contribution (with no employer contribution that year) that changes or clarifies this?

Aside from the 3520/A question --- would the UK tax relief going into the account need to be reported as income?
My understanding is that tax relief on normal (working) contributions are not income as it's just a refund of UK tax -- but in the case where the person is not paying any tax...it would kind of be a negative tax -- is that an "income"?

Aside from the 3520/A question --- would the UK tax relief going into the account need to be reported as income?
My understanding is that tax relief on normal (working) contributions are not income as it's just a refund of UK tax -- but in the case where the person is not paying any tax...it would kind of be a negative tax -- is that an "income"?

In my unexpert view I don't see why the tax relief would be reportable as income to the IRS.  If I am understanding you correctly and can give an example. A person earns £40k gross and reports this as income to the IRS, paying whatever tax that produces, and also pays HMRC taxes on £35k, using foreign tax credits to reduce the IRS taxes. The fact that the HMRC taxable income is only £35k should not be an issue.

In the reverse situation for a USC living in the UK but with US income, would HMRC tax the gross income or the adjusted gross income after contributions have been for 401k,  HSA, etc.

In my unexpert view I don't see why the tax relief would be reportable as income to the IRS.  If I am understanding you correctly and can give an example. A person earns £40k gross and reports this as income to the IRS, paying whatever tax that produces, and also pays HMRC taxes on £35k, using foreign tax credits to reduce the IRS taxes. The fact that the HMRC taxable income is only £35k should not be an issue.

In the reverse situation for a USC living in the UK but with US income, would HMRC tax the gross income or the adjusted gross income after contributions have been for 401k,  HSA, etc.

Yes, that makes sense for the normal case, where the tax relief is just effectively reducing the UK taxable income and the gross gets reported to the IRS. But my example is where there isn't any UK taxable income to reduce

So for example person has 0 income for the year but puts £800 into a Pension. HMRC adds 200 tax relief.
What income gets reported to the IRS ...£0 or £200?

[the tax treaty refers to employee or employer contributions but not this situation]

Yes, that makes sense for the normal case, where the tax relief is just effectively reducing the UK taxable income and the gross gets reported to the IRS. But my example is where there isn't any UK taxable income to reduce

So for example person has 0 income for the year but puts £800 into a Pension. HMRC adds 200 tax relief.
What income gets reported to the IRS ...£0 or £200?

[the tax treaty refers to employee or employer contributions but not this situation]

I still don’t see why it would be reported if that £800 is after tax money. Otherwise the same logic would be applied to lifetime ISA’s where you put in money and the government adds 25% extra. Plenty of other incentive schemes around where it is a private institution giving you money, such as bonus money to open a bank account or transfer balance. Those incentive monies are not taxable by the IRS as far as I know.

I still don’t see why it would be reported if that £800 is after tax money. Otherwise the same logic would be applied to lifetime ISA’s where you put in money and the government adds 25% extra. Plenty of other incentive schemes around where it is a private institution giving you money, such as bonus money to open a bank account or transfer balance. Those incentive monies are not taxable by the IRS as far as I know.

I agree...it *seems* like it would not be taxable. But I am trying to get a definite answer.

Mattd should note that the UK position on pension relief may not be as simple as he has suggested.

He says that he has no current earnings. The basic position is that the maximum that he can tax effectively contribute to a UK pension is £2,808 net (£3,600 gross). He will not be allowed to contribute more than that amount by his pension provider.

The position may more complicated if Mattd has unused pension relief from the three prior years.

Mattd should note that the UK position on pension relief may not be as simple as he has suggested.

He says that he has no current earnings. The basic position is that the maximum that he can tax effectively contribute to a UK pension is £2,808 net (£3,600 gross). He will not be allowed to contribute more than that amount by his pension provider.

The position may more complicated if Mattd has unused pension relief from the three prior years.

Yes...it's essentially this situation...(though I'm asking for someone else, not me). If they contribute £2808 to a UK Pension then is the £792 reportable as income on their US tax return and if so where?

The tax treaty mentions that employer and employee pension contributions [which are not applicable because they are not employed] can be excluded from income but does not reference tax relief.

Thanks

Maybe not entirely relevant but you should be aware - as you're not working and earning an income, HMRC restricts the amount of tax relief you can receive through your pension contribution. You can put in £2,880 per annum and tax relief (claimed by the pension provider) tops it up by £720 to £3,600. If you're working you can put in 100% of your income up to a maximum of £40,000 per annum (watch this space as there is talk of further restrictions here).