The pension line on your payslip: what your US return has to say about it

Figures relate to tax year 2025 (US) · 2025-26 (UK)

Look at the pension line on your payslip. The company pays 8%, you pay 5%, and Britain asks nothing about either. Your American return needs a positive statement about those employer contributions, filed with the return, or the amounts can end up taxed.

The statement is short and the relief is real. But software does not produce either by default. So this guide covers how the claim is made, what to check on last year's return, and how salary sacrifice changes the figures.

Key takeaways

• The relief is claimed on your return with a short disclosure, not applied automatically.
• Check last year's return: were employer contributions added to your income?
• Software packages routinely tax foreign pension contributions by default.
• Salary sacrifice changes the wage figure that feeds every other calculation.
• Wrongly taxed years can often be amended inside the normal refund window.
• Missed reporting on the scheme is harder to fix than the tax itself.

How is the relief claimed?

Through a treaty-based position taken on the return, with a disclosure statement where the rules require one. It is not a box that software ticks by default. A return prepared without the claim can show contributions as taxable income, producing tax that was never due.

The disclosure names the article relied on and explains the position briefly. Filing it is straightforward when the facts are clear, and it protects you if questions arrive later.

Three things to check this year

Look at your last return. Find the wage figure. Then find the pension. If employer contributions were added to income, something went wrong.

Next, look for the disclosure. It is a short statement naming the treaty article. Many returns claim the relief without it.

Last, check the reporting forms. The pension may belong on one of them, even though no tax is due on it.

What does this cost in practice?

Nothing, when the claim is made. The treaty puts you where Britain already put you, so the pension grows untaxed until you draw it. The cost lands only when a return misses the point and taxes the contributions.

That cost can be large. A return that adds 8% of salary to income every year for a decade builds a bill out of nothing.

So the check is worth running once. Look at last year's return and see how the employer contributions were handled.

Salary sacrifice

Salary sacrifice turns your contribution into an employer contribution. You give up salary, and the employer pays the larger amount into the scheme. Britain likes this because it reduces National Insurance for both sides.

For an American the effect is more subtle. Your reported wage falls, which changes the figure that feeds the exclusion, the credit calculation and the threshold tests on other charges.

Lower reported pay is not always better. Someone relying on the exclusion may find a smaller figure helps, while someone using credits may prefer the higher one.

A worked example

The figures below are illustrative. Take an example: an American in Bristol on a £90,000 salary, with the employer paying 8% into a workplace pension and the employee paying 5% through salary sacrifice.

Britain reports pay after the sacrifice, so the P60 shows roughly £85,500. The employer's £7,200 never appears as income here at all.

With the treaty claim in place, the American return follows the same shape. Without it, the £7,200 joins her income, producing tax on money she cannot touch for thirty years.

What if earlier returns got it wrong?

Both directions happen. Some returns taxed employer contributions that the treaty protected, which usually means a refund claim within the normal window. Others ignored a pension entirely, including the reporting, which needs correcting properly rather than quietly.

Where several years of reporting went missing, a compliance route may fit. The tax position often comes out neutral, and the value lies in closing the reporting gap.

What about your own contributions?

Relief is available for those too, subject to limits. Britain already gives relief through net pay or relief at source, so your taxable pay here drops before the American calculation begins. The treaty then addresses what America does with the same amounts.

Limits matter here. The cap follows what a domestic plan would allow, so very large contributions may not get full cover.

Our guide to reading a P60 for a US return explains why the pay figure on that form already reflects some of this. Our guide to UK pensions on a US return covers the wider pension picture.

What the treaty does for employer contributions

It puts most people back where common sense would put them. The pensions article provides relief for contributions to a scheme established in the other country, so employer contributions to a qualifying British scheme are generally not taxed as they arise. According to the treaty documents published by the IRS, the relief covers both the contributions and, in most cases, the growth.

Conditions apply. The scheme must qualify under the treaty definitions. The relief carries limits tied to domestic plans. And the employment must fall within the article.

Most mainstream workplace schemes qualify. Unusual arrangements, older executive schemes and some international plans need checking individually.

Which schemes qualify?

According to HMRC guidance on workplace pensions, most ordinary workplace and personal schemes qualify. That covers automatic enrollment schemes, group personal pensions and the main public sector schemes. The treaty was written with these in mind, so the usual answer is yes.

Some arrangements sit outside. Unapproved schemes, certain offshore plans and bespoke executive arrangements need checking against the definitions before anyone claims relief.

Ask the scheme for its rules. One page of confirmation is worth more than an assumption repeated for a decade.

What if you change jobs?

Each scheme stands alone. You may end up with several pots, each needing the same treatment on your return. Employer contributions into the new scheme are protected on the same basis as the old ones.

Old pots keep growing quietly. Add them to the list you review each year, because dormant schemes still need the position taken and the reporting checked.

What is the default American position?

Unhelpful, and this surprises people. A foreign pension scheme is not automatically a qualified plan for American purposes. Without protection, contributions your employer makes can count as income to you in the year they go in, even though you cannot touch the money for decades.

The same logic reaches growth inside the fund. Left unprotected, the annual return on the investments could be taxable each year rather than at retirement.

Does the growth stay protected?

Generally yes, where the treaty applies. Investment growth inside a qualifying scheme is not taxed as it arises, which matters more every year the fund compounds. Without that protection, each year's return would need reporting and taxing.

This is also what keeps the fund reporting rules at bay. Investments inside a qualifying pension avoid the punitive treatment that the same funds attract in a taxable account.

Does the employer need to do anything?

No. The treaty position sits on your return, not on the payroll. Your employer pays into the scheme as usual and reports nothing to America. So the responsibility falls entirely on you and your adviser.

A payslip breakdown helps, though. Ask payroll to confirm the split between employer contributions, employee contributions and any sacrifice arrangement.

What about pension withdrawals later?

Those follow the pension rules rather than the contribution rules. Britain taxes the pension when it is paid, and America taxes it too, with credit for the British tax. The lump sum position is more complicated and deserves its own advice.

Plan that stage before you draw anything. Decisions made at retirement are far harder to reverse than decisions made while contributing.

How to handle it on the return

Start from the scheme documents and the payslips, then take the position explicitly. The steps below cover the common workplace case.

1. Confirm the scheme type and that it qualifies under the treaty definitions.
2. Separate employer contributions, employee contributions and any salary sacrifice.
3. Check the payslip treatment, because sacrifice changes the gross figure.
4. Take the treaty position on the return rather than relying on software defaults.
5. File the disclosure statement where the rules require it.
6. Check whether the scheme needs reporting on foreign asset forms.
7. Keep the scheme rules and annual statements with your tax papers.

Does the pension need reporting elsewhere?

Often, yes, and the answer differs between forms. Some pensions need listing on foreign asset reporting, and the position on foreign account reporting depends on the scheme's structure. Protection from tax does not mean exemption from disclosure.

Practice varies among advisers, particularly on account reporting for pensions. In our practice we disclose, because the cost of listing a scheme is nothing and the cost of omitting one can be significant.

What if you are self-employed?

Then there are no employer contributions to protect, only your own. A personal pension still attracts relief in Britain, and the treaty addresses what America does with the same payments, within the usual limits.

The self-employment charge is the bigger question in that case. A certificate of coverage often saves far more than any pension position, and it deserves checking first.

Mistakes and penalties we see with pensions

• Assuming software applied the treaty automatically, when it taxed the contributions instead.
• Taking the treaty position without filing the disclosure the rules require.
• Missing that salary sacrifice changed the wage figure feeding every other calculation.
• Treating a non-qualifying arrangement as though it were a workplace pension.
• Leaving the scheme off foreign asset reporting because no tax was due.
• Never checking whether an old executive scheme qualifies at all.

The tax cost of getting this wrong is usually recoverable within the normal window. The reporting cost is not, because information return penalties apply whether or not tax was due.

So treat the pension as part of the return, not as background. One paragraph of checking each year keeps it clean.

How US UK Tax Accountants helps

We check the scheme, take the treaty position properly, and file the disclosure with the return each year. Where earlier returns taxed contributions unnecessarily, we look at recovering it. If your payslip shows employer contributions and you file in America, get in touch and we will review it alongside your US federal returns.

Last reviewed 24 September 2026. This article is general information and not personal tax advice. Treaty positions depend on the scheme and the facts, so take advice on your own arrangement before filing.