US-UK Social Security Totalization Agreement: Benefits and Taxation

Summary

The Social Security Totalization Agreement between the U.S. and the U.K. is designed to prevent double taxation and ensure benefit coverage for workers who have split their careers between the two countries. It eliminates dual social security tax obligations for both employees and self-employed individuals, ensuring they generally only pay into one country's system. This agreement allows for the combination of work credits from both nations to help individuals meet eligibility requirements for social security benefits in either country. However, the amount of the U.S. benefit is based solely on U.S. earnings. U.S. Social Security payments to UK residents are taxed only in the UK, and the agreement does not extend to Medicare benefits, which require separate qualifications. [i]

Key aspects of this agreement include:

• Eliminating Dual Coverage for Employees:

Employees and employers typically only pay social security taxes to the country where the employee works. Special rules may apply, for example, if an employer sends an employee from one Agreement country to another for five years or fewer, the employee continues to be covered by the home country and is exempt from coverage in the other country.

• Eliminating Dual Coverage for Self-Employed Workers:

U.S. Social Security covers self-employed U.S. citizens or resident non-U.S. citizens, even if they live and work outside the United States. Under these agreements, self-employed workers who would normally have to pay social security taxes to both countries will only have to pay to one country, the host country.

• Monthly Benefits:

These agreements enable the combination of credits from the United States and an Agreement country to help individuals qualify for benefits they may not otherwise be entitled to under each country’s system alone.

• Payment of Benefits:

If you meet all the basic requirements under one country’s system, you get a regular benefit from that country. The agreement may also help qualify for a partial benefit based on combined credits.[ii]

Example: Suppose you spent seven years working in the U.S., making regular contributions to the Social Security system through payroll deductions. Later, you relocate to the U.K. and continue working until retirement, contributing to the U.K. state pension system. Upon retirement, you receive your U.K. state pension, calculated based on your contribution years in the U.K.

In the U.S., eligibility for Social Security benefits requires a minimum of ten years of contributions, which your seven years do not meet. However, the totalization agreement between the U.S. and the U.K. allows you to use three years of your U.K. contributions to meet the U.S. ten-year requirement for Social Security benefits.

The benefits you receive from the U.S. will be calculated solely on your seven-year contribution period in the U.S. The additional years contributed in the U.K. are only used to establish eligibility, not to increase the amount of your U.S. Social Security benefits.

It's also important to note that independent or voluntary contributions to the U.S. Social Security system are not permitted.

Conversely, a U.S. person working in the UK may be eligible to make voluntary contributions to fill gaps in their National Insurance (NI) record. Gaps in the NI record could result from periods when you were not working or were working abroad.

The totalization agreement does not directly affect eligibility for making voluntary contributions.

If you're eligible and decide to make voluntary contributions, you can do so by contacting HM Revenue and Customs (HMRC). Detailed guidance on how to make these contributions, including payment methods and deadlines, is available on the HMRC website.[iii]

• Taxation of Social Security Benefits:

The HMRC forum provides guidance on the taxation of US Social Security benefits for UK residents. According to Article 17(3) of the UK/USA Double Taxation Treaty, US Social Security payments to a UK resident are taxable only in the UK. These payments should be declared on the foreign pages of the UK Self-Assessment tax return, and since no US tax is deducted from these payments, no Foreign Tax Credit Relief can be claimed. The income is converted to sterling and taxed at the individual's marginal rate depending on other taxable income received. For more detailed information, visit the HMRC community forum post directly​.[iv]

• Medicare:

Although the Totalization Agreements count foreign credits to help qualify for U.S. retirement, disability, or survivor benefits, they don't cover Medicare benefits. Credits in an Agreement country cannot establish free Medicare hospital insurance entitlement.

If you retire in the U.S., you may still qualify for Part B (Medical Insurance) if you are 65 years or older and a U.S. citizen or an alien who has been lawfully admitted for permanent residence and has been residing in the United States for five continuous years prior to the month of filing an application for Medicare.[v]