Does the UK Tax US Social Security Benefits?
Understand how your overseas retirement payments are taxed for UK residents, and navigate the cross-border implications.
When a United States citizen or resident moves to the United Kingdom, questions often arise regarding how their US Social Security benefits will be treated for tax purposes. Understanding the tax implications for Social Security benefits requires examining both UK and US tax regulations, along with the provisions of the tax treaty between the two nations. This dual perspective is necessary to determine where these benefits are taxable and how double taxation is prevented.
UK Taxation of US Social Security Benefits
The UK’s approach to taxing foreign income, including US Social Security benefits, depends on an individual’s tax residency status. An individual is considered a UK tax resident if they spend 183 days or more in the UK within a tax year, or if they meet other criteria under the statutory residence test, such as having a home in the UK for a certain period. If an individual is a UK tax resident, they are subject to UK income tax on their worldwide income, which includes foreign pension income like US Social Security benefits.
Since April 6, 2017, 100% of any foreign pension received by a UK resident is taxable in the UK under normal income tax rules. This means US Social Security benefits are treated as taxable income in the UK, similar to other pension income. The benefits are subject to UK income tax rates applicable to an individual’s total income.
Some specific types of foreign pension income, such as certain disability or dependent’s pensions, might be exempt from UK tax. However, general retirement benefits from US Social Security are included in taxable income. This aligns with the principle that UK residents are taxed on their global income, regardless of where the income originates.
US Taxation of Social Security Benefits
The United States has specific rules for taxing Social Security benefits under its domestic tax laws, irrespective of a recipient’s residency. For US citizens and green card holders, who are subject to US tax on their worldwide income, these rules apply. The amount of Social Security benefits subject to US federal income tax is determined by a calculation involving “provisional income.”
Provisional income is calculated by taking an individual’s adjusted gross income (AGI), adding any non-taxable interest income, and then adding one-half of their Social Security benefits. The Internal Revenue Service (IRS) uses specific thresholds to determine what portion of these benefits, if any, will be taxable. For a single filer, if provisional income is between $25,000 and $34,000, up to 50% of the benefits may be taxable. If provisional income exceeds $34,000, up to 85% of the benefits may be subject to taxation.
For married couples filing jointly, the thresholds are $32,000 and $44,000, respectively, with up to 50% or 85% of benefits becoming taxable. Even if a spouse did not receive benefits, their income is combined for this calculation on a joint return. These rules are outlined in IRS publications.
Relief from Double Taxation
The US-UK Income Tax Treaty plays a significant role in preventing double taxation of US Social Security benefits for individuals residing in the UK. This treaty contains specific provisions designed to allocate taxing rights between the two countries. Article 17 of the treaty, which addresses pensions, social security, and annuities, is relevant.
Under Article 17, US Social Security benefits are included within the definition of “pension” for treaty purposes. This article’s paragraph 1 states that periodic pension payments beneficially owned by a resident of one contracting state (e.g., the UK) are taxable only in that state. This provision means that for a US citizen who is a UK resident, their US Social Security benefits are taxable solely by the UK.
The treaty overrides the domestic US tax rules that would otherwise subject these benefits to US taxation. If a US citizen is a UK resident, their US Social Security benefits are exempt from US federal income tax. This treaty provision eliminates the need to claim a foreign tax credit on the US tax return for taxes paid to the UK on these benefits, as the US cedes its taxing right.
Tax Filing and Reporting
In the UK, if you are a UK tax resident receiving US Social Security benefits, these must be declared on your UK Self Assessment tax return. Foreign income, including overseas pension income, is reported on the supplementary pages SA106.
On the SA106 form, you declare the gross amount of US Social Security benefits received. Since the US-UK tax treaty dictates that these benefits are taxable only in the UK for a UK resident, you would not claim foreign tax credit relief on your UK return for US taxes paid on these benefits, as no US tax should be withheld or due. This ensures compliance with His Majesty’s Revenue and Customs (HMRC) regulations.
For US tax purposes, US Social Security benefits are not taxable on your US federal income tax return if you are a UK resident due to the treaty. When completing Form 1040, you report the total Social Security benefits received on line 6a. On line 6b, you report zero, indicating that none of the benefits are taxable because of the treaty exemption.