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HMRC internal manual

Double Taxation Relief Manual

HM Revenue & Customs
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Double Taxation Relief Manual: Guidance by country: United States of America: Pension Contributions

The new Agreement which applies from 1st January 2004 for US taxes and 6th April 2003 for UK Income Tax contains an Article dealing with pension contributions. It also touches on the taxation of the income, profits and gains accruing to pension schemes.

The term “pension scheme” is defined for the purposes of the treaty at Article 3(1)(o). This means that Treaty benefits are for approved schemes only. As section 615 ICTA 1988 schemes, which are UK established trusts for non-residents, are not approved they do not come within the definition of “pension scheme” in Article 3(1)(o) because they are not “generally exempt from income taxation in that State”. They are therefore not included in the list in the Exchange of Notes.

So called US section 401(k) plans are included within the definition of a pension scheme as they are within the definition of a pension scheme in Article 3(1)(o) because they are a type of section 401(a) plan.

It is a feature of several UK treaties from 2003 onwards that pension contributions made in one country are recognised for tax purposes in the other.

The general premise of these is that if a member of a pension scheme established in one country goes to work (as an employee or in a self-employed capacity) in the other country, the state of residence will not tax the scheme member on income earned by the scheme unless it is paid to him (or for his benefit). Nor will tax be payable if income is transferred to another pension scheme until the benefits are actually received.

Under the new Agreement, contributions to the scheme by that member (or those paid on his behalf) will be tax-deductible in the state of residence. In the same way, benefits accrued under the scheme, or employer contributions to the scheme, will not be treated as part of his taxable income and those contributions will be tax-deductible for the employer. The reliefs available cannot exceed those allowed by the state of residence for contributions of the same amount to a scheme established in the state of residence.

The conditions for getting the relief are as follows

contributions were made by or on behalf of the individual or (in the case of an employee) his employer to the pension scheme (or to a similar scheme for which it was substituted) before the individual began to exercise an employment or self-employment in the other contracting state, and

the competent authority of the other State agrees that the pension scheme generally corresponds to a pension scheme established in that other State.

Where someone comes to work in the UK we will regard the first condition as having been met if the individual was a member of the US scheme before beginning to exercise an employment or self-employment in the UK.

The types of scheme that would be accepted as “generally corresponding” are those listed in the Exchange of Notes.

Relief will be restricted where contributions to a pension scheme are deductible or excludable in computing a person’s taxable income in the host country if he is subject to tax there not on his total income but only on amounts remitted to that country. Relief is available only on a corresponding proportion of the pension contributions.

An example
Individual’s total income, profits and gains
Income, profits and gains remitted to the UK *

Contributions deductible in computing individual’s UK taxable income - £4,500 (i.e. 90% of individual’s total contributions).

Guidance on the procedures for claiming relief from UK income tax on contributions to US pension schemes under Article 18 will be provided in an Update that will be issued by the Inland Revenue’s Audit and Pension Schemes Services in 2004.