UK Income Tax on Military Retired Pay, Social Security and VA Compensation

Military retired pay. Article 19(2) of the 2001 U.S.-U.K. income tax convention makes a pension paid by a government in respect of services rendered to it taxable only in that country, unless the recipient is both a resident and a national of the other country. A U.S. retiree living in the UK owes no UK income tax on retired pay; one who is also a British national is taxable on it in the UK, and because the United States keeps taxing its citizens, the overlap is relieved by credit. The exemption has a condition. The saving clause in Article 1(4) lets the UK tax its residents as if there were no treaty, and Article 1(5)(b), as replaced by the 2002 Protocol, keeps the Article 19 exemption only for individuals who are neither citizens of the UK nor have been admitted for permanent residence there. A U.S. retiree with time-limited leave keeps it; one granted permanent residence, such as indefinite leave to remain, loses the treaty's protection and is taxed under UK law. U.S. Social Security: taxable only in the UK. Article 17(3) makes social security payments by one country to a resident of the other taxable only in the country of residence, and Article 1(5)(a) lists Article 17(3) among the benefits the saving clause does not touch. So the United States gives up taxing a UK resident's Social Security, even a U.S. citizen's, and the UK taxes it. VA disability compensation. The treaty does not name it. Section 641 of the Income Tax (Earnings and Pensions) Act 2003 exempts wounds and disability pensions, but every head of it is written for members of "the armed forces of the Crown", so it does not on its face reach a U.S. veteran's VA compensation. No HMRC guidance or ruling on VA compensation was found. Ask HMRC or a UK tax adviser before leaving it off a UK return. It is exempt from U.S. tax under 38 U.S.C. 5301.