Are U.K. Social Security Benefits Taxable in the U.S.?
The United Kingdom and the United States have an agreement that defines which Social Security system of the two nations covers an individual working outside his home country. U.S. citizens are entitled to U.K. Social Security from work history in that country. In addition, a U.K. citizen who worked in the U.S. may still receive benefits from the U.K. Regardless of whether recipients of U.K. Social Security benefits live in the U.S. or the U.K. – or anywhere else – their tax status under U.S. laws determines if the payments are taxed by the U.S.
Coverage Country
Under the agreement, the U.S. Social Security system normally covers any employee in the U.S. Similarly, U.K. Social Security normally covers any employee in the United Kingdom. An exception occurs for a worker assigned for less than five years to a different country than the one where his employer is located. In this situation, the worker is still covered by Social Security of his home country. A self-employed individual is generally taxed and covered only by the Social Security system in his country of residence.
U.K. Benefits
Two tiers of benefits are paid under the U.K. Social Security system. The basic pension is payable to individuals who have worked for a minimum length of service. You can count years taxed by the U.S. system toward the U.K. minimum. Therefore, individuals who worked in both countries are potentially eligible for U.K. Social Security. The second tier is the additional pension, which is based on both length of work and amount of earnings under the U.K. system – but not credits under U.S. Social Security. You’re entitled to benefits from the U.K. and the U.S. if you have enough credits with both systems.
U.S. Citizens and Residents
U.S. citizens are taxed on their worldwide income from all sources. U.K. Social Security is treated the same as U.S. Social Security income for these individuals. A noncitizen of the U.S. is taxed the same as citizens only if he is a resident alien of the U.S. Therefore, even if you are a U.K. citizen, your Social Security benefits are taxable in the U.S. if you are a resident alien under U.S. tax laws. You are a nonresident alien for any period that you are not classified as a U.S. resident alien or citizen. A nonresident alien is taxed on U.S. source income only.
Residency Tests
You are a resident alien for the tax year if at any time during the year you meet the “green card test” by having lawful permanent residency status under U.S. immigration laws. An alternative test is the "substantial presence test," which is based on a calculation of the number of days present in the U.S. during both the current year and the last three years. Despite meeting the substantial presence test, you’re allowed to still claim classification as a nonresident alien when you were present in the U.S. for less than 183 days during the year, you maintain a tax home in another country, and you have a closer connection to that country than to the U.S.
References
Writer Bio
Brian Huber has been a writer since 1981, primarily composing literature for businesses that convey information to customers, shareholders and lenders. Huber has written about various financial, accounting and tax matters and his published articles have appeared on various websites. He has a Bachelor of Arts in economics from the University of Texas at Austin.