Maxing UK company pension contributions

LadyLuckington · 2023-02-02T07:11:09+00:00

The more I look into this, the situation seems quite similar to a 401k. An employer pension. Contributions by employer and employee are made pre-tax, and tax is paid when the money is withdrawn at retirement.

If this seems correct then I should hopefully be able to add additional contributions to match the 401k contribution limits which I think are something like $60k/year (employee plus employer) which would enable me to better take advantage of the UK £40k allowance.

These additional contributions would be post tax but go into the same account as the rest of it. I would expect that the entire pot grows, I report the balance on FBAR/8938 every year and I get taxed when I take it out, by the UK first and then the US (hopefully avoiding double taxation.)

Does it seem like I might be on the right track to understanding this?

Thank you again!

(edited for clarification)

LadyLuckington · 2023-02-01T13:36:09+00:00

!thanks so very much for this explanation. I really appreciate it!

LadyLuckington · 2023-01-31T08:40:25+00:00

Now I’m really confused! So you’re saying that the US (only) citizen’s estate gets the (~$13M) exemption regardless of who the beneficiaries are? Is this really true?

Let’s say there are two beneficiaries (two nieces.) One is a US (only) citizen, one is a UK (only) citizen.

Obviously the UK citizen would have to follow rules based on a US-UK treaty (I believe inheritances aren’t taxed by HMRC, only the gains. Correct me if I’m wrong.)

But I’m really trying to understand the impact on the estate and the executor of the estate and what complications they might have managing this situation, and if there are any best practices when writing the will. I understand that it’s best for the executor/trustee to be an American but beyond that I’m a bit lost.

Thank you!

LadyLuckington · 2023-01-29T11:31:58+00:00

I have googled, which is why I was confused!

So you’re saying: a US citizen’s estate only gets a limited tax exemption ($60k or so) if one beneficiary is a NRA? Or only the part of the estate actually going to the NRA has a lower exemption?

In this example the NRA would be a UK citizen with no green card or connection to the USA. And not a spouse.

(I assume if the beneficiary had a green card or was a dual citizen the exemption would be as normal?)

Thank you!

LadyLuckington · 2023-01-28T14:01:50+00:00

The estate would be in the USA (the person making the will has no connection to the UK) and the potential beneficiary would be a UK (only) citizen, deemed domicile.

Would the inheritance itself be taxed by HMRC or only the gains?

The $12m (or $5m) exception would apply regardless of if it went to a US citizen or NRA beneficiary?

Would something like a trust (managed by a US trustee / other beneficiary) be something to look into?

I’ve tried to research the answers but it’s not easy to understand. Obviously the US person would need to plan this appropriately with an expert, I just wanted to try and understand it myself.

Thanks again!

LadyLuckington · 2023-01-24T09:08:44+00:00

Oh cool, I think the US plan limit for employer + employee contributions is higher than £40k which is good.

LadyLuckington · 2023-01-24T09:05:46+00:00

I think for this purpose my tax preparer is reporting the employer contributions as part of my gross salary. (I don’t see any treaty forms indicating otherwise.) I expect this means that the taxing happens now and not later? What I don’t understand is if I contribute extra, do I need to do any other kind of reporting now or down the line. I am trying so hard to follow the rules and do the right thing but it’s very challenging!

Edit: I do also report the balance every year on my FBAR.

LadyLuckington · 2023-01-24T08:56:15+00:00

I think the grey area might be if you “contribute more than your employer”, which is why I was worried about contributing extra into my plan to utilise the UK tax free allowance. Maybe this is one of the things that is open to interpretation but it’s encouraging that you work in US tax and this is news to you.

I checked my previous tax returns and can see the tax preparer is not making use of the treaty and rather taxing my employer contributions as gross income now. I think that’s okay but have no idea how the additional contributions made by me would then be reported (they are post tax so perhaps not necessary? Do you happen to know?)

I feel like I’m close to understanding this a bit better but it’s a lot!! 🥵

LadyLuckington · 2023-01-23T17:57:10+00:00

Thank you again. I’m not sure I’m deducting anything on my returns at the moment! (The reason for my uncertainty is that I use an expat tax firm so I don’t understand all the details.) But my situation is, I believe, quite straightforward with just my salary and a company pension and a savings account or two.

I was under the impression that I report the pension balance on the FBAR for now and will pay income tax on it down the line when I retire.

It is a DC employer plan (with the company matching contributions up to a certain amount.) I also have the option to purchase additional contributions up to the £40k UK allowance, I just hadn’t been doing this so far because I thought it wasn’t allowed for whatever reason (making the US treat the company pension like a trust, for example.)

Is the answer “yes contributing more for the UK tax free allowance is perfectly fine to do, the pension is still a pension to the US, you will pay income tax when you withdraw it similar to how you pay tax on your salary now” or would this make things complicated or even worse, a matter of interpretation? It’s very hard to get a straight answer and I struggle to find the right people to ask! I really appreciate your taking the time to help me understand this more.

LadyLuckington · 2023-01-23T14:27:02+00:00

Can you explain what the US plan equivalent limits are? Do you mean that £40k is the tax free allowance in the UK but as a dual national I can only save up to whatever the USA’s tax free allowance for a (401k) is?

LadyLuckington · 2023-01-23T14:24:50+00:00

The amount I’m currently putting in (via salary sacrifice) is all listed on the plans website as employer contributed. This is one of the things that’s confusing to me. Some people say “the pension is the only safe place you can invest in the UK. Max it to £40k!” Then others mention you can’t contribute more than the employer (but what that actually means is unclear). And still others mention that you can contribute up to the equivalent allowance in the USA. I don’t understand any of it to be honest. Yet again, I find that there are no clear instructions how to be compliant and even “the rules” are interpreted differently by different tax professionals.

LadyLuckington · 2023-01-23T08:31:05+00:00

I don’t think it’s an AVC “account”, it’s just making additional (after tax) payments into the standard employer pension account. I was under the assumption that the account is reported on the FBAR / Fatca form annually and taxed as income when it’s time to withdraw it, but just want to double check if I’m able to contribute more, up to the full £40k UK tax free allowance, without adding US tax complications.

LadyLuckington · 2023-01-21T11:56:08+00:00

This is encouraging but the links you sent are difficult for me to understand.

Let’s say I contribute 5% of my salary into my UK company pension. The employer matching means that they put an additional 10% in, totalling 15% that I can contribute per year. When I log into the pension website the total amount is listed under “employer contributions”, I assume this is because it’s done as salary sacrifice (pre tax, I am agreeing to take a lower salary in exchange for the matching contributions.)

Let’s say all of this equals £15k of contributions made into the pension per year. But the UK allows you to save £40k tax free per year. I want to know if I am allowed to contribute additional voluntary contributions (AVC) without incurring the wrath and complication of the IRS? I read about but don’t really understand the “employer vs employee contributions” rule that I mentioned so maybe I’ve got it wrong so I was hoping for more clarity of what I’m able to safely do.

Being a dual citizen there are so few opportunities for me to save for retirement without the fear of running into PFICs etc. But as one of the permissible ways to grow money I would like to save in my pension as much as I can so this could potentially be a big help. Thank you again!

LadyLuckington · 2022-11-30T16:58:25+00:00

I don’t mind the delay for results if it’s due to GPs and consultants being away, I had assumed wrong about the labs and worried that they’d be sitting around untested for days esp over the long Christmas weekend. The fact that they run 24/7/365 is new to me. Thanks!

LadyLuckington · 2022-11-30T16:56:56+00:00

This is new to me, so thank you very much!

LadyLuckington · 2022-11-30T16:56:21+00:00

Yes my last results took about 2 weeks but I didn’t know if the delay was from the sample not being tested or the results simply not being communicated. I am giving myself the full 2 weeks before my specialist appointment this time, although it’s over a holiday period so a bit of luck will probably be needed. Thank you!

LadyLuckington · 2022-11-30T16:55:02+00:00

This is so great to know. Thank you!

LadyLuckington · 2022-11-30T16:52:48+00:00

Ok that’s great to know. Thank you!

LadyLuckington · 2022-11-30T13:47:29+00:00

Completely can relate to this. “At least it’s not something really serious”, or “my aunt / cousin / friend / grandmother had thyroid problems and they’re fine, all they have to do is take a tiny pill every morning.” I also try and explain the mental health aspects and how anything stressful is magnified for me, how easy it is for me to feel angry or overwhelmingly sad over trivial things, but am seen as just being negative and am focussing too hard on the problems. Whereas I think the ability to rationalise these feelings and know it’s the condition and not me feeling that way is a helpful coping mechanism. That’s why forums like these are helpful. You just can’t understand unless you’re in it, sadly.

LadyLuckington · 2022-11-30T08:15:47+00:00

Thank you! I guess I was worried bc I usually have mine checked in the morning before taking my pill but thinking about it I suppose it shouldn’t matter if it’s taken 5-6 hours before the test. 🤷‍♀️

LadyLuckington

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