For British ex-pats living in the US, many tax-related topics cause confusion. In this blog post, we will discuss the UK NT tax code, which relates to UK tax withholding.
Please note: we are not tax advisers and we do not give tax advice. That being said, due to our relationship with our clients and the vantage point we have over their affairs, we are often the first ones to spot possible issues, including the ones we are discussing here.
NT Tax Code (UK)
In the UK, taxpayers are assigned a tax code by HMRC. Employers or pension providers use it to determine how much income tax to withhold from someone’s paycheck or pension.
Pension and SIPP distributions are paid (and taxed) through the PAYE system in the same way as earned income, but no National Insurance contributions are withheld. Our understanding is that every payment that goes through PAYE has a tax code supplied by HMRC – the pension trustee or employer has no control over the code.
Most UK residents have an active tax code, but expats who have been out of the country for years may not have an active UK tax code. As such, when they make their first taxable distribution, HMRC automatically assigns an “Emergency Tax” code. This sets automatic withholding at a high rate. After this first payment HMRC will create a tax code for the taxpayer and a new, likely lower, tax code will be applied, and tax withheld from future distributions will be lower.
If you are a British expat in the US with a UK pension or SIPP, then you probably want to avoid tax withholding in the UK. This is because pension distributions from a UK pension plan to a US resident beneficiary are only subject to tax in the United States due to the US/UK tax treaty. Since you are likely only subject to US tax, you can avoid UK withholding by applying for an NT tax code. An NT tax code is a non-taxpayer (or no tax) tax code, meaning that no tax withholding is required from your pay or your pension.
Unless you have an NT Tax Code, your pension or SIPP provider will be forced to withhold tax from each taxable distribution. It does not matter how long you have been out of the UK or that the distributions are likely only subject to US tax.
If tax is withheld, as a non-resident non-taxpayer you should be able to recover it from HMRC, assuming you have no tax liability/exposure in the UK, but it will be a hassle and it will take time. You may be able to recover it in the US, but this relates to whether foreign tax credits are available, which is uncertain.
Consult your tax adviser for advice on this matter.
The US/UK tax treaty should – although is not guaranteed to – help you avoid most double taxation associated with pensions. Having an NT tax code and avoiding all UK withholding would make your life easier.
For more information on the NT Tax Code, including specific instructions on the process, please check out this blog.
The single best piece of advice we can give British expats living in America is to employ a US/UK-specific cross-border tax adviser to prepare your tax returns and advise you. Doing it yourself as an expat is an act of madness in our opinion and employing a local CPA/EA is often insufficient. Even employing a CPA/EA who says they have expatriate experience may not be enough. We strongly believe that British expats should work with cross-border tax advisers who have specific UK/US knowledge and expertise, who understand the intricacies of UK products and, crucially, how they interact with the US and who are familiar with the US/UK tax treaty.
In a perfect world, every expat would consult such a professional before moving to the US and get their finances in order before emigrating here. Second best is to start working with one now and voluntarily clear up any issues that they diagnose. It will be stressful, and it may be costly, but probably far less stressful and costly than having the IRS identify the same issues.
* Everyone knows what a CPA is, but not an EA. EA stands for “Enrolled Agent”, as in enrolled with the IRS to represent taxpayers (most obviously by submitting tax returns). An EA is a tax advisor who is a federally authorised tax practitioner by the US Dept of Treasury. Enrolled Agent status is the highest credential awarded by the IRS.
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.