Expatriates – Australian pensions and US army pensions

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US Army pension – UK tax 

You are an American who loves all things British, especially afternoon tea and UK history.  You therefore decide to retire permanently to the UK.  And you choose London because your brother lives nearby.

Now, it is UK tax return season for all tax accountants, of course, and we encounter all sorts of expatriate tax issues like this US one.  In this story, this American national is now living here, and her spouse receives a US army pension.  He served in the Middle East and West Africa and other locations.

We often see US nationals in the UK who receive a US pension.  In most cases, a US pension paid to an expatriate is taxable in the UK in this case.   And if you have paid US tax already on that money, HM Revenue & Customs would give you credit for US taxes paid.   This would reduce your UK tax bill – it means no double tax!

So, this US national in the UK receives a US army pension.  Now, that is a different case.  There is a tax treaty between the UK and US which turns the law on its head.  There is NO UK tax on this pension, and it is only taxed in the US.  

Takeaway: Government pensions (UK or US) such as army/navy payments are fundamentally different when it comes to expatriate tax.

Australian pension – UK tax

We have just examined a US case above which gave an unexpected answer.  This Australian case below makes our clients shout “tax madness” or “most unfair.”

Let’s say you are an Australian couple whose children all live in the UK permanently.  You decide to follow them and retire in Bristol, UK, despite the British harsh weather and different cuisine. 

Let’s take the wife’s Australian pension.  It is an Australian superannuation which has entered the retirement phase and is therefore distributing income to her.  As we may know, when she contributed to the pension plan, those contributions suffered Australian tax “on the way in”.

So, when this client receives this pension in the UK, will the UK tax her or not? Answer: yes, the UK will tax this income in full, using the standard UK tax bands.

We have to doublecheck here and ask, is it true that Australia applies tax to contributions to the plan, then UK later applies tax to the pension?  Unfortunately, it is true.  These expats will be liable to tax twice on these same monies.

I am happy to report that there is certain tax planning available.  There is restructuring possible related to the first lump sum payment; 25% of the pension pot can be paid free of UK income tax.  However, this must be arranged very carefully to deliver the right UK tax relief.