If you’re a British expatriate, you will want to avoid being unnecessarily taxed at source in the UK (including emergency tax). Here’s how.
About the NT Tax Code
An NT Tax Code is an important piece of the jigsaw if you have a pension in the UK and plan on drawing down an income whilst a resident elsewhere. At Plan First Wealth, we are concerned with British expats living in America, but this applies to anyone drawing from a UK pension living anywhere outside the UK.
The usual caveat applies – we are not tax advisers and do not give tax advice. We share relevant information to keep you informed, but we recommend getting advice from a cross-border tax adviser based on your specific circumstances.
What is an NT tax code? It’s a tax code for which you can apply that will designate you as a non-taxpayer in the UK. In other words, having an NT tax code will allow your pension and SIPP providers to pay out your distributions with no UK tax withholding. NT = no tax or non-taxpayer.
If you don’t have an NT tax code, you are likely to get emergency taxed at source, at least on the first taxable payment – i.e. the pension trustee/company paying your income is going to have to deduct “emergency” tax before they remit funds to you. And emergency tax will be high.
This is likely because your Pension or SIPP provider does not have a tax code for you. Unlike the US, where taxpayers essentially elect how much to have withheld, HMRC assigns tax codes that determine your withholding. So, if you haven’t been a British taxpayer for a while then you are unlikely to have a tax code. And thus, when your first taxable distribution is taken, HMRC will force your pension or SIPP trustee to apply a temporary Emergency Tax code.
Following this, they will usually supply a new tax code that withholds at a lower rate.
Trustees will pay out a pension commencement lump sum (PCLS – the 25% “tax free” payment) from a SIPP or pension without any tax withheld. This is because this payment is considered tax free by HMRC. This does not mean it is tax free in the US and you should work with a cross-border tax adviser to correctly report and, if deemed necessary, pay US tax on the PCLS.
It’s not the end of the world if you have UK tax withheld, but it’s a hassle you don’t need or want.
The US and the UK have a robust tax treaty in place, resulting in the UK pension distributions you receive as a US resident should only be taxable in the US. Therefore, you should be able to claim back any tax withheld by HMRC. You likely won’t be able to claim a foreign tax credit on your US taxes, because the US considers these UK taxes a voluntary foreign tax that should be refunded under the terms of the treaty – this is a topic to raise with your tax adviser. In order to claim them back, you may need to follow the steps below to get a US residency certificate.
How to Avoid Automatically Withheld UK Tax
In order to use avoid UK tax withholding, you need to apply for and receive an NT Tax Code.
For British expats living in America, you need to complete Form US-Individual 2002 and submit it along with Form 8802 (plus the “applicable user fee”) to request a US residency certification (IRS Form 6166) to the IRS (not HMRC) at: Internal Revenue Service, P.O. Box 71052, Philadelphia, PA 19176-6052
For any expats not living in the US, here is the Form DT-Individual you need, which you need to send to the tax authority in your country of residence. Look to Note 4 on page 7.
At the end of this process, you will be provided with a tax code that will direct your pension provider to pay your pension distributions gross. Bear in mind that as a UK person/resident/citizen you likely need to declare all your worldwide income to the IRS and US income tax will be due.
This process of applying for an NT tax code takes many months. If you want your first taxable payment to be free from UK withholding tax, then we suggest starting this process at least a year in advance of the payment.
As always, get in touch if you have any questions or queries. We work with British expats living across America and we help them manage their finances, get clarity and confidence over their future and work towards living their best lives.
Plan First Wealth is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.