UK pensions and US tax: workplace pensions, SIPPs, lump sums and the treaty

The US-UK tax treaty treats UK pensions far better than ISAs or UK funds, but the protection has limits, and the famous 25% tax-free lump sum may not be tax-free for you.

The short version

• Growth inside a UK pension is generally not taxed by the US until you draw it, under Article 18(1) of the US-UK tax treaty, which applies to US citizens too [1].
• Workplace pensions get extra help. Article 18(5) lets a US citizen living and working in the UK exclude employer contributions from US income and deduct their own, within UK relief limits and US limits for a comparable US plan [1].
• Self-funded SIPPs are a gray zone. They generally get the growth deferral, but your own contributions usually don't get a US deduction.
• The 25% tax-free lump sum is usually taxable for Americans living in the UK. For Americans who move back to the US, whether the treaty keeps it tax-free is contested.
• The UK State Pension and US Social Security work together through a totalization agreement [7], and the treaty decides which country taxes the benefits.

USD conversions in this guide use the Federal Reserve H.10 rate of October 30, 2026 (USD 1.3398 per GBP), rounded. This is general information on a complicated topic; a US expat tax preparer who works on both US and UK returns can check your situation.

Why pensions are different from ISAs

The treaty includes a "saving clause" that lets the US tax its citizens as if the treaty didn't exist. That's why most treaty benefits don't help Americans living abroad. But the clause has carve-outs, and pensions are among them: Article 1(5) lists Articles 17 and 18 among the provisions the saving clause doesn't override, though some parts of them are limited to non-citizens [1]. Congress's Joint Committee on Taxation explained, when the treaty was up for approval, that Article 18(1) and 18(5) are among these exceptions [9].

In plain English: a UK pension can work much like a 401(k) or IRA in the IRS's eyes. An ISA can't.

Workplace pensions and employer contributions

Most London employers must automatically enroll eligible staff in a workplace pension. The legal minimum is 8% of qualifying earnings in total, with at least 3% from the employer [3]. Many employers pay much more, often through "salary sacrifice," where you give up some salary in exchange for a bigger employer contribution.

What Article 18(5) does

Without the treaty, the IRS might treat your employer's contributions as taxable compensation, and your own contributions wouldn't be deductible. Article 18(5) fixes that for a US citizen who [1]:

• is resident in the UK,
• works in the UK for a UK employer (or one with a UK permanent establishment), and
• belongs to a UK pension scheme.

If those apply, your contributions are deductible and your employer's contributions and the benefits accrued are excluded from your US income, but only to the extent they qualify for UK tax relief [1]. Two limits apply on top [1]:

1. US caps. The relief can't exceed what the US would allow for a "generally corresponding" US plan. Big contributions or salary sacrifice arrangements can bump into 401(k)-style limits.
2. Competent authority approval. The scheme must be one the US competent authority has agreed generally corresponds to a US plan. Mainstream UK registered workplace schemes are generally treated as covered, but confirm with your preparer.

UK limits for 2026/27

You can also carry forward unused allowance from the previous three tax years [4].

SIPPs: self-invested personal pensions

A SIPP is a personal pension you run yourself, often used by freelancers or to consolidate old pots. Its US treatment splits in two:

• Growth: Most practitioners treat a SIPP as a UK pension scheme, so Article 18(1) deferral applies, and income inside it isn't taxed by the US until it's paid out [1].
• Contributions: Article 18(5) is tied to employment with a UK employer. Money you put into a SIPP yourself, especially if you're self-employed, generally doesn't get a US deduction, even though HMRC tops it up with tax relief.

A side benefit many advisers point to: funds held inside a treaty-covered pension are widely treated as sheltered from the worst of the PFIC rules that make UK funds so painful in ISAs. Practitioners don't all agree, and you may still have reporting obligations.

The 25% tax-free lump sum: the contested part

In the UK, you can usually take up to 25% of a pension tax-free, up to £268,275 (about USD 359,400), from the age your scheme allows, usually 55 at the earliest [5]. How the IRS sees it depends on where you live when you take it.

If you live in the UK when you take it

Article 17(2) says a lump sum from a UK pension scheme is taxable only in the UK [1]. But that paragraph isn't on the list of saving clause exceptions, so the US can still tax its citizens on it. HMRC's own manual notes that the treaty doesn't stop either country taxing its own residents unless the provision is specifically listed [2]. Result: generally taxable on your US return, apart from any amounts already taxed to you, with no UK tax to credit against it.

If you've moved back to the US

Article 17(1)(b) says the US should exempt the part of a UK pension that would be exempt in the UK if you were a UK resident [1]. Many practitioners read that as keeping the 25% lump sum tax-free for US residents. Others argue a lump sum falls under 17(2) instead, and HMRC's manual notes that the US treats the lump sum provision as an anti-avoidance measure [2]. The IRS hasn't published clear guidance on UK lump sums, so this is a judgment call. Get a US expat tax preparer's view before you take a large sum, and think about timing relative to your move.

The State Pension and the totalization agreement

The UK State Pension is based on your National Insurance record. You need 35 qualifying years for the full new State Pension of £241.30 a week (about USD 323) [6], and a minimum number of qualifying years to get anything at all.

The US and UK have a totalization agreement, which does two jobs [7]:

1. No double Social Security tax. Workers sent temporarily from one country to the other can stay in their home system with a certificate of coverage. Self-employed people must attach a copy to their US return every year [7].
2. Combining work credits. If you don't have enough US credits for a US benefit, UK coverage can help you qualify for a partial one, as long as you have at least six US credits [7]. US coverage can also count toward a UK basic pension if you have at least one year in the UK system [7].

How the benefits are taxed

• US Social Security paid to a UK resident: Article 17(3) gives taxing rights to the country where you live, and that paragraph is a saving clause exception [1]. In practice, many Americans retired in the UK report it to HMRC rather than paying US tax on it.
• UK State Pension paid to an American living in the UK: the UK taxes it, and the US can also tax you as a citizen, with foreign tax credits for UK tax.

Check SSA's rules on payments abroad before you retire, and keep your SSA online account active.

Your reporting checklist

Pensions are a common topic in our community group for Americans in the UK, but the answers depend on your exact situation. A cross-border tax preparer who handles both US and UK returns is worth the fee here.

Sources

1. Convention between the United States and the United Kingdom for the avoidance of double taxation (2001), schedule to the UK order, legislation.gov.uk
2. INTM163160: Pensions, lump sums, HMRC International Manual
3. Workplace pensions: what you, your employer and the government pay, GOV.UK
4. Tax on your private pension contributions: annual allowance, GOV.UK
5. Tax when you get a pension: what's tax-free, GOV.UK
6. The new State Pension: what you'll get, GOV.UK
7. Agreement between the United States and the United Kingdom, SSA
8. Comparison of Form 8938 and FBAR requirements, IRS
9. Explanation of proposed income tax treaty between the United States and the United Kingdom, Joint Committee on Taxation, via GovInfo

Keep reading

• ISAs and US tax: why they don't work for Americans
• Getting a National Insurance number
• Tax treaties and totalization agreements
• 401(k) and IRA when you live abroad