TAX ON PENSION
There are two categories of pension:
A resident individual can have a state pension, private pension, or both.
Pensions can also be divided into two types: -
The basic difference is what each plan promises its participants
Country rules - Canada, the United Kingdom
Tax relating to pension in the U.K. normally include the following: -
1. Contribution to the pension,
2. Income earned from the assets in the pension,
3. Distribution received from the pension.
Broadly speaking:
income that is paid into a private pension is exempt from income tax;
income earned from investments within the pension fund is also exempt (and capital gains are exempt from capital gains tax);
money received from the pension is taxed.
This is often referred to as "exempt-exempt-taxed" or "EET" treatment.
Comparison - UK and Canada
Private pensions
In the United Kingdom |
In Canada |
In the USA |
ISA Individual Savings Account |
TFSA Tax Free Savings Account |
Roth IRA Roth Individual Retirement Account |
Self-invested Personal Pension (SIPP) for employees |
|
401k plan |
Small Self-Administered Scheme (SSAS) for self-employed or owner-directors |
Registered Retirement Savings Plan (RRSP) |
401k plan |
Comparison – <Exempt-Exempt-Taxed, the E-E-T route>
|
Contribution |
Earning |
Withdrawal |
Withdrawal age |
Canada (RRSP) [E-E-T] |
Tax-exempted, subject to the limit of 18% of reported income or CAD $27,830 (2020) |
Tax-exempted |
Taxed |
at age 71 |
The U.K. (SSAS) [E-E-T] |
Tax-exempted, subject to limit GBP 40,000 per year |
Tax-exempted |
Taxed |
at age 75 |
The U.S. [E-E-T] 401k plan |
Tax-exempted, subject to the limit of $20,500 under age 50 and over, $27,000 [*] |
Tax-exempted |
Taxed |
at age 72 |
[*] 2023 adjustment
401(k) plan limits |
2022 |
2023 |
Change |
---|---|---|---|
Maximum salary deferral for workers |
$20,500 |
$22,500 |
+$2,000 |
Catch-up contributions for workers 50 and older |
$6,500 |
$7,500 |
+$1,000 |
Total contribution limit |
$61,000 |
$66,000 |
+$5,000 |
Total contribution limit, plus catch-up contribution |
$67,500 |
$73,500 |
+$6,000 |
Savings Account Comparison - <Taxed-Exempt-Exempt, the T-E-E route>
|
Contribution |
Income earned and gains after contribution |
Distribution/withdrawal |
Canada (TFSA) |
Taxed, contribution limited to CAD $6,000 per year |
Tax-exempted |
Tax-exempted |
The U. K. (ISA) |
Taxed, limited to GBP20,000 per year |
Tax-exempted |
Tax-exempted |
The U.S. (Roth IRA) |
Taxed, limited to US$6,000 (or 7,000 for those aged 50 or above) |
Tax-exempted |
Tax-exempted |
TFSA = Tax-free savings account; ISA = Individual savings account; Roth IRA = Roth individual retirement arrangement
Recommended articles:
China Tax & Investment Consultants Ltd Copyright 2000-2023. All rights reserved. Notice of Copyright and Disclaimer