Britain stopped capping the pot and started capping the cash

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

For years Britain capped how large a pension pot could grow before an extra charge applied. That limit has gone.

What replaced it caps something different: how much tax free cash you can take. The pot itself can now grow without a ceiling.

For an American none of this changes the American answer, because the IRS has never recognised British tax free cash in the first place.

Key takeaways

• The lifetime allowance was abolished and two new limits replaced it.
• The lump sum allowance caps tax free cash taken in your lifetime.
• A separate, larger allowance covers lump sums paid on death.
• Pot growth itself is no longer capped at all.
• Older protections can give you a higher limit.
• America taxes the cash whatever Britain calls it.
• The treaty position on tax free cash is genuinely unsettled.
• Take advice before drawing anything large.

What is the lump sum allowance?

A cap on how much tax free cash you can take from pensions across your lifetime, set at £268,275 for most people. Per GOV.UK guidance on pension tax, anything beyond it comes out as income, taxed at your marginal rate. The figure is three quarters of the old lifetime allowance, which is where it comes from.

It applies across every pension you hold rather than to each scheme separately.

Once used, it does not refresh, so the first large withdrawal matters most.

What happened to the lifetime allowance?

The government abolished it, which removed the charge on large pots entirely. Somebody whose pension grew past the old limit no longer faces a penalty for building it. What survives is a cap on the tax free element rather than on the pot.

Our guide to the annual allowance taper covers the limit on getting money in.

Guidance written before the change now reads badly out of date on this point.

What is the death benefit allowance?

A second and larger cap covering lump sums paid out on death as well as in life, which sits at £1,073,100 for most people. It matters where a pension passes to beneficiaries rather than where you draw it. The two allowances interact, because lifetime cash uses up both.

Our guide to death in service benefits covers employer cover.

Families rarely discover this limit until the worst possible moment.

Can you have a higher limit?

Yes, if you hold one of the older protections from earlier rule changes. Those protections carried forward and can give a much higher figure. A transitional certificate route also exists for people who drew benefits on unusual terms before the change.

Checking whether a protection exists is worth doing before any withdrawal.

Losing a protection by making a contribution is a real risk, and an avoidable one.

A worked example

Take an illustrative example. An American in Surrey has British pensions worth £1.4 million and wants to take the maximum tax free cash.

Britain allows £268,275 free of UK income tax, and charges income tax on the rest.

Her American return treats the whole withdrawal as pension income, because the IRS ignores the British exemption.

So the most tax efficient British move produces an American charge with no British tax against it to credit.

Two allowances, one pension

Why does America tax the tax free cash?

Because the exemption is a British invention with no American counterpart. The IRS sees a pension distribution and taxes it, whatever Britain calls the first quarter. The treaty says plenty about pensions, but it leaves this particular payment unsettled.

Our guide to pension lump sums on a US return covers the charge in detail.

Advisers differ on this more than on almost any other question.

Is the treaty position really unsettled?

It is, and anybody telling you otherwise overstates their case. One argument says a sum exempt in Britain should be exempt in America under the relevant article. Another says the opposite. No ruling settles it for ordinary taxpayers.

Our guide to the US UK tax treaty covers the structure.

A disclosed position with reasoning behind it beats a silent one.

Should you disclose the position?

If you take a treaty position, yes, on the right form. Disclosure protects you from certain penalties and puts the argument in plain sight. Taking a bold position quietly is the combination that goes badly under examination.

Our guide to disclosing a treaty position covers the form.

Disclosure admits no weakness. It is simply procedure.

Does drawdown avoid the problem?

It spreads it rather than removing it. Taking income gradually keeps you in lower British bands and produces British tax you can credit in America. The large single payment creates the mismatch, so phasing withdrawals usually helps.

Our guide to retiring to the UK covers the drawdown order.

Periodic payments also sit more comfortably inside the treaty articles.

What if you are back in America?

The British allowance still applies to the British pension, but the credit position changes. A non-resident can face British tax on some payments and American tax on all of them, with the treaty providing relief. Timing a withdrawal around a move matters considerably.

Our guide to moving back to the US covers the departure year.

Drawing before you leave is a different transaction from drawing afterwards.

Does it affect transfers abroad?

Transfers out of the British system carry their own charge and their own allowance effects. Moving a pension overseas to simplify an American return rarely achieves what people hope. The transfer charge and the lost treaty protection usually outweigh the convenience.

Our guide to the overseas transfer charge covers transfers.

Most Americans are better served leaving a UK pension exactly where it is.

How does it apply to a final salary scheme?

The cash element counts against the same limit, though the calculation differs. A defined benefit scheme turns part of the pension into cash at a set rate, and that figure counts. Public sector schemes with generous cash terms can use the allowance faster than expected.

Our guide to teachers' pensions and US tax covers one scheme.

Ask the scheme for the figure rather than estimating it yourself.

What about several pensions?

The lump sum allowance is personal rather than per scheme, so everything counts towards one total. Somebody with four pots from four employers has one shared limit across all of them. Schemes do not know about each other, so the tracking is yours to do.

Keep a running total every time you take cash from any scheme.

Providers rely on what you tell them rather than checking.

Does an American pension count towards it?

No, because the lump sum allowance is a British rule covering British registered schemes. An individual retirement account or a workplace plan in America sits well outside it. That is one of the few places where having pensions in both countries actually helps.

Our guide to US retirement accounts in the UK covers the American side.

Two systems, two separate sets of limits to track.

What happens above the limit?

The excess simply comes out as income rather than attracting a separate penalty charge. That beats the old regime, which added a charge on top. Somebody exceeding it pays at their marginal rate and no more.

Our guide to Form 1116 and the foreign tax credit covers crediting that British tax.

Ironically, paying British tax on the excess helps the American position.

Is tax free cash still worth taking?

For a British taxpayer, almost always. For an American it is genuinely less obvious, because the British saving can create an uncredited American charge. The arithmetic turns on your other income and on which position you take.

Model it before drawing rather than assuming the British answer carries across.

This is one of the few places where the standard British advice can be wrong for you.

What records should you keep?

Statements showing each payment, the share treated as tax free, and any protection certificates. Those three establish how much allowance remains. Protection certificates in particular are near impossible to replace.

Keep them with your permanent papers rather than in a year file.

The question arises decades after the certificate was issued.

Who does the lump sum allowance actually affect?

Anybody whose pensions together exceed roughly a million pounds, which is a far wider group than it once was. Long serving public sector workers, senior professionals and anybody who consolidated several pots over a career all approach it. The limit has not moved with inflation, so more people meet it every year.

Somebody with a single modest pot will never come close to it.

The frozen figure is what pulls more people into scope each year.

When is the lump sum allowance tested?

At the point you take cash rather than at any particular age or on some annual review. Each payment uses part of the allowance, and the scheme reports what you have used. So the question arrives when you first approach a provider, which is often years before anybody has thought about the American consequences.

Our guide to registering for Self Assessment covers reporting the taxable part.

Raise it with both advisers before you fill in the provider's form.

Does the lump sum allowance change your UK filing?

Only where you exceed it, in which case the excess goes on your return as income. Payments within the allowance need no entry at all, which is partly why Americans forget them entirely. Nothing in the British process prompts you to think about a second tax system.

So a payment that generates no British paperwork still belongs on the American return.

That silence is exactly where the problem starts.

What if you already took cash years ago?

Those earlier payments count against the lump sum allowance, and the transitional rules set out how to measure them. The default calculation assumes you took the standard quarter, which can understate or overstate what you actually used. A transitional certificate corrects it where the standard assumption is wrong.

Applying for that certificate has its own deadline, so check it early.

Americans who drew cash before moving here are the usual candidates.

Is the lump sum allowance likely to change again?

Pension limits have moved in nearly every recent Budget, so planning on permanence would be optimistic. The lifetime allowance was reduced repeatedly, then abolished, and replaced within two years. Anybody planning a withdrawal several years ahead should model it without assuming today's figure survives.

In our practice the clients who drew early rarely regret it.

Those who waited for a better rule generally waited for nothing.

Does it affect how you choose a provider?

Less than people expect, because the limit is statutory and applies whoever holds the money. What does vary is how helpfully a provider reports what you have used and how willing they are to deal with somebody living abroad. Those practical differences matter more day to day than any difference in the rules.

Ask any new provider whether they accept instructions from an overseas address.

Several will not, which becomes a problem precisely when you want to draw.

How does it interact with inheritance tax?

Pensions have historically sat outside the estate, which made them an efficient thing to leave untouched. That treatment has been under review, and changes announced in recent Budgets alter the calculation for people planning to pass a pot on. Anybody relying on the old position should check it rather than assume.

Our guide to long-term residence and inheritance tax covers the British exposure.

An American estate faces its own charge regardless of what Britain decides.

What should you ask your adviser?

Three things, and none of them is about the British limit. Ask what the American treatment of the payment will be, ask whether a treaty position is being taken, and ask whether phasing the withdrawal changes the total. A British adviser will answer the first question honestly by saying it is not their field.

That answer is the point at which you need somebody who handles both systems.

Nobody optimising for one country alone can give you the real number.

Does anything change if you hold dual nationality?

Not for this, because the American filing duty follows citizenship whether or not you also hold a British passport. A dual national drawing a British pension faces exactly the same questions as somebody holding only the American one. What dual nationality does help with is the practical side, from bank accounts to travel.

The tax answer turns on citizenship and residence rather than on how many passports you carry.

Plenty of people discover that distinction at precisely this point in their lives.

How to plan around the allowance

1. Check whether you hold any older protection giving a higher limit.
2. Add up the lump sum allowance already used across every scheme.
3. Ask each scheme for its own calculation of the cash element.
4. Model the American charge on any planned withdrawal.
5. Decide whether to take cash at all, or to draw income instead.
6. Consider phasing withdrawals across several tax years.
7. Disclose any treaty position you intend to rely on.
8. Keep the certificates and statements permanently.

Mistakes and penalties we see with the lump sum allowance

The first is assuming tax free in Britain means tax free everywhere, which it does not.

The second is losing an older protection by making a contribution nobody checked.

The third is taking the maximum cash in one year and creating an uncredited American charge.

The fourth is relying on a treaty argument without disclosing it anywhere on the return.

How US UK Tax Accountants helps

We model the withdrawal on both sides before anything is drawn, because this is one of the rare occasions where the standard British advice can leave an American worse off.

Then we take a position and disclose it properly. Our pensions service covers the wider retirement picture.

If you are approaching a decision about tax free cash, get in touch before you instruct the provider.

Last reviewed 25 October 2026. This article is general information and not personal tax advice, and the treaty position here is genuinely contested.