revisiting UK taxation of US income

As long as I've been at this I should know the answer, but I've been trying to get those brain cells to file for a week now (and done some searches here) and just can't dredge the info up.

I have, besides some more liquid assets, four sources of retirement income:  1) US Social Security; 2) a pension from a state university in the USA; 3) a small 403b account; and, 4) a small DCP account with Fidelity set up by my employer during a period where they could not actually pay all my salary.  I'm currently only drawing from 1&2.

Tax issues:

1 & 2) I know that if I was in the UK, due to the tax treaty, my SS income above the standard personal allowance there would be taxable at the rates of whichever of the countries (Scotland, England, etc.) I lived in and not taxable in the USA at all. So no problems there. Via the tax treaty, my state university pension was considered exempt by HMRC when I was living there last, so I assume that would not have changed. (I hope?) It would be fully taxable to the IRS.

3) My 403b investments are currently rolling tax free in the USA, but I will have to start taking minimum distributions in a couple of years.  I am a little confused about retirement tax-free lump sum allowances (from the UK's side of taxes) vs just arranging a quarterly payment. If I were to end up in the UK again, would it be better to try to move the 403b to a UK retirement scheme entirely (if so, can you recommend one I can look at?) or take a quarter of it up front and then just have smaller periodic payments later on that would be taxable to the UK? Alternately, would it be better to move it to a traditional IRA before moving to the UK? I assume the difference between a 403b and an IRA is negligible to HMRC?  (It's too late for me to do a Roth, as I'm not employed, so that option is out.)

4) The deferred compensation plan.  The Uni put that money aside for me when they could not actually pay my full salary during a budget crisis. So it's actually my salary from the 1990s that's been sitting in a pot gaining interest income. Would the UK tax that as income for the year in which I start taking it out of the plan, or would they only tax interest accrued, or....?

Just trying to make sure I have my ducks in a row again, in case.  Thanks.

PS  Are the proceeds of US government EE savings bonds taxable in the UK?

Are you not resident in the usa now?

If so there is no uk tax on any of your income from anywhere 

Yes, I'm US resident. See " I know that if I was in the UK, due to the tax treaty...." and "If I were to end up in the UK again...."  and "Just trying to make sure I have my ducks in a row again, in case.  Thanks." 

I am planning for the near future. I need to know if it's fiscally doable, just as I did the last time we moved.

Thanks.

Yes, I'm US resident. See " I know that if I was in the UK, due to the tax treaty...." and "If I were to end up in the UK again...."  and "Just trying to make sure I have my ducks in a row again, in case.  Thanks." 

I am planning for the near future. I need to know if it's fiscally doable, just as I did the last time we moved.

Thanks.

gotcha.and i don’t know the answers for 3 and 4

Ok, just to make sure I understand things.

I expect a significant downturn in the US economy - with so many people being laid off, tariffs, etc., - that will negatively impact the investments I have in my small DCP (about $25k)  and my 403B.  As I am no spring chicken, the old adage of just wait for the market to correct itself and in a decade you'll have your level of worth in the investments back to where it was probably is not going to be useful to me.  I want  to preserve as much of that money as I can for the Daughter's inheritance. (I'm told Fidelity will roll it into an IRA for her if she wishes, when she inherits my accounts. But I want to check out all available options.)

[Cut for TMI]

Basically I'm trying to suss out 1) which country is safer to keep that money without losing value, and 2) which place would provide a better return on any investment, given the taxes thing and other legalities.

General advice is appreciated.

As long as I've been at this I should know the answer, but I've been trying to get those brain cells to file for a week now (and done some searches here) and just can't dredge the info up.

I have, besides some more liquid assets, four sources of retirement income:  1) US Social Security; 2) a pension from a state university in the USA; 3) a small 403b account; and, 4) a small DCP account with Fidelity set up by my employer during a period where they could not actually pay all my salary.  I'm currently only drawing from 1&2.

Tax issues:

1 & 2) I know that if I was in the UK, due to the tax treaty, my SS income above the standard personal allowance there would be taxable at the rates of whichever of the countries (Scotland, England, etc.) I lived in and not taxable in the USA at all. So no problems there. Via the tax treaty, my state university pension was considered exempt by HMRC when I was living there last, so I assume that would not have changed. (I hope?) It would be fully taxable to the IRS.

3) My 403b investments are currently rolling tax free in the USA, but I will have to start taking minimum distributions in a couple of years.  I am a little confused about retirement tax-free lump sum allowances (from the UK's side of taxes) vs just arranging a quarterly payment. If I were to end up in the UK again, would it be better to try to move the 403b to a UK retirement scheme entirely (if so, can you recommend one I can look at?) or take a quarter of it up front and then just have smaller periodic payments later on that would be taxable to the UK? Alternately, would it be better to move it to a traditional IRA before moving to the UK? I assume the difference between a 403b and an IRA is negligible to HMRC?  (It's too late for me to do a Roth, as I'm not employed, so that option is out.)

4) The deferred compensation plan.  The Uni put that money aside for me when they could not actually pay my full salary during a budget crisis. So it's actually my salary from the 1990s that's been sitting in a pot gaining interest income. Would the UK tax that as income for the year in which I start taking it out of the plan, or would they only tax interest accrued, or....?

Just trying to make sure I have my ducks in a row again, in case.  Thanks.

PS  Are the proceeds of US government EE savings bonds taxable in the UK?

To start addressing these questions:
1. What citizenships do you have,
2. For each of the most recent 5 UK tax years (including the current rax year) were you UK resident under the SRT, or alternatively non-UK resident.

To start addressing these questions:
1. What citizenships do you have,
2. For each of the most recent 5 UK tax years (including the current rax year) were you UK resident under the SRT, or alternatively non-UK resident.

Dual Irish and USA. (Not UK.)

Left the UK at the end of August 2020, and had no ties at all to the country at that point. No UK source income at any point. So I would say non-UK resident for all five. I think I did file a part-year resident self-assessment form for the 2020/21 tax year and there was no tax to pay (confirmed by a letter from HMRC) for that year.

When I was living in the UK HMRC said that my US govmt. pension was covered by the tax treaty and so taxable only in the USA.  My US social security was taxable only in the UK. The SS amount only passed the personal allowance during the final full year we lived there, and so I did pay tax on the amount above that threshold to the UK for that one year.

I am hoping to sort out the future should I move back to Scotland. (Which is becoming very much more appealing as each day passes.)

Thanks.

Hi Nan.

To answer your question on savings in the UK.  Yes, any interest would be taxable in both countries but the first £1,000 of interest is tax free in the UK anyway, so probably only US tax due, but with SS not being taxed in the USA your US income is probably below the standard deduction anyway.

You should not invest in any “pooled” investments in the UK (a mixture of stocks and bonds similar to a mutual fund) as they will be punitively taxed by the US as Passive Foreign Investment Companies. Plenty of UK banks offer good interest bearing options, plus NS&I with both instant access and and fixed term income options available to US citizens. NS&I are backed by the UK Treasury up to £5m, UK banks insured up to £85k each bank.

I mostly use NS&I rather than shopping around just for the ease of FBAR filing each year. As long as your foreign financial accounts don’t exceed $200k at year end or $300k at some point during the year you don’t have to report them as part of your IRS return.

Hi Nan.

To answer your question on savings in the UK.  Yes, any interest would be taxable in both countries but the first £1,000 of interest is tax free in the UK anyway, so probably only US tax due, but with SS not being taxed in the USA your US income is probably below the standard deduction anyway.

You should not invest in any “pooled” investments in the UK (a mixture of stocks and bonds similar to a mutual fund) as they will be punitively taxed by the US as Passive Foreign Investment Companies. Plenty of UK banks offer good interest bearing options, plus NS&I with both instant access and and fixed term income options available to US citizens. NS&I are backed by the UK Treasury up to £5m, UK banks insured up to £85k each bank.

I mostly use NS&I rather than shopping around just for the ease of FBAR filing each year. As long as your foreign financial accounts don’t exceed $200k at year end or $300k at some point during the year you don’t have to report them as part of your IRS return.

Thanks!

[Edited for too much personal info]

Looks like cashing out sooner rather than later may be best.

https://www.cbsnews.com/news/stocks-down-why-is-the-stock-market-down-today-trump-tariffs-gdp/

Looks like cashing out sooner rather than later may be best.

https://www.cbsnews.com/news/stocks-down-why-is-the-stock-market-down-today-trump-tariffs-gdp/

Thanks for the reminder. Our son was asking about this so I just checked with him now and he moved his money from the US to the UK today. Our daughter moved a big chunk of her money over in 2023 and bought a house here that is rented out.

I took my wife’s advice and we cashed in her Roth IRA last summer and she has since bought 2 houses close by which are now rented out.

I hope he got a good rate. At least he'll have the certainty of knowing it's not going to devalue. I've been trying to get through to my guy at Fidelity all morning and they are just (of course) swamped. Gave up after being on hold for an hour, will try again a bit later.

So, I'm still trying to figure out the timing of things.  For now I'm hedging my bets and not touching the 403b. That could change. In the meantime -  I will be drawing down my DCP account. It's about $25,000. (A 401a account). If I take it as a lump sum here this year, about a quarter of it will be taxed at 12% by the IRS and the remainder at 22%. The State of NY will also tax it, so the US side of taxes on this would be about $5,000. (+/-)

If I waited to take it in the UK, the first 25% of it as a lump sum distribution would not be taxed, correct? So the taxable amount would be $18,750.  This would be taxed at the Scottish Basic Rate of 20%, since my SS income would have pushed me just into that tax band. So that would be $3,750 on the DCP. (+/-)

If I wait until 2016, just before leaving,  and if the current tax scheme is allowed to expire I'll be back in the 25% bracket, but the DCP would be taxed at 28% in the USA. At that point, it'd be wiser to wait and draw it while in the UK. Assuming it is not losing value too much.

I would do the same for my 403b the following year.


I am not up on what is happening to income taxes in the UK.  Any sense of how much they are going to be increasing in the next few years?








(The above is/are calculated with my other income figured in to get the rate of taxation.)

I hope he got a good rate. At least he'll have the certainty of knowing it's not going to devalue. I've been trying to get through to my guy at Fidelity all morning and they are just (of course) swamped. Gave up after being on hold for an hour, will try again a bit later.

So, I'm still trying to figure out the timing of things.  For now I'm hedging my bets and not touching the 403b. That could change. In the meantime -  I will be drawing down my DCP account. It's about $25,000. (A 401a account). If I take it as a lump sum here this year, about a quarter of it will be taxed at 12% by the IRS and the remainder at 22%. The State of NY will also tax it, so the US side of taxes on this would be about $5,000. (+/-)

If I waited to take it in the UK, the first 25% of it as a lump sum distribution would not be taxed, correct? So the taxable amount would be $18,750.  This would be taxed at the Scottish Basic Rate of 20%, since my SS income would have pushed me just into that tax band. So that would be $3,750 on the DCP. (+/-)

If I wait until 2016, just before leaving,  and if the current tax scheme is allowed to expire I'll be back in the 25% bracket, but the DCP would be taxed at 28% in the USA. At that point, it'd be wiser to wait and draw it while in the UK. Assuming it is not losing value too much.

I would do the same for my 403b the following year.


I am not up on what is happening to income taxes in the UK.  Any sense of how much they are going to be increasing in the next few years?








(The above is/are calculated with my other income figured in to get the rate of taxation.)

Re: Your last question, Rachel Reeves and the Labour Government have pledged not to raise income tax, but that could change on the basis that the economic outlook has changed (increasing defence spending). She is scheduled to give the "Spring forecast" on Wednesday 26 March, so we might learn more at that point.

Thank you.  I need to be watching that closely - along with everything else going on over there, really. I have been checking in on UK news several times a week, and local Glasgow news almost daily.  But I need the bigger picture, and that is one of the larger pieces.

Regarding taking your 401a as a lump sum if you were back in the UK. None of it would be taxed by HMRC as, unlike the USA, they do not invoke the savings clause. I and my wife have made a number of lump sum withdrawals from our IRAs while living here and in every instance they have only been taxed by the IRS. (The tax treaty says a lump sum withdrawal is only taxable by the country in which the account is, but the IRS invoke the savings clause so lump sums withdrawn from a UK “IRA” is fully taxed by the IRS.)