UK pensions and US tax: what the treaty actually protects

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

For most cross-border questions, the answer is that the two systems disagree and the taxpayer absorbs the friction. Pensions are the exception. The US-UK treaty contains a genuinely useful pensions article, and understanding what it covers is the difference between a retirement plan that works and one that quietly leaks tax for thirty years.

Growth inside the wrapper is protected

The treaty allows a US person to defer US tax on income and gains accruing inside a UK pension scheme until distribution — mirroring how the US treats its own qualified plans. Without it, the IRS would tax the pension's internal growth annually, and the funds inside would face the full PFIC regime.

That protection is why pension contributions are unusually attractive for Americans in the UK: it is one of the few wrappers that works on both sides of the Atlantic at once. Compare it to an ISA, where the UK's tax freedom means nothing to the IRS and the funds inside are penalised.

For an American in the UK, a pension is usually the best-treated investment wrapper available. An ISA is usually the worst.

Employer contributions and the deduction question

The treaty also addresses contributions: broadly, contributions to a qualifying UK scheme by or on behalf of a US person working in the UK can receive treatment comparable to a domestic plan, which prevents employer contributions being taxed as current income.

The mechanics depend on the scheme and the facts, and they are claimed rather than automatic. This is one of those positions worth establishing once, documenting properly, and applying consistently every year rather than re-deciding annually.

The 25% lump sum: the contested question

UK pensions typically allow a quarter of the pot to be taken tax-free. Whether the US respects that is the single most-asked question we get, and the honest answer is that it is not settled beyond argument.

There are respectable treaty arguments that a lump sum exempt in the UK should not be taxed by the US, and there is a real risk that the IRS views it as a taxable distribution. Practitioners differ. What is not in doubt is that taking a large lump sum without deciding the position in advance — and without modelling the tax if the answer goes against you — is how people get surprised.

SIPPs, drawdown and the long view

• SIPPs generally receive the same treaty treatment as workplace schemes where they qualify as pension schemes under the treaty's definitions.
• Drawdown income is taxable in the country of residence, with credits preventing double taxation on the same payments.
• Pensions are still reportable — on the FBAR, and generally on Form 8938 — even while the treaty shelters the tax.
• Transfers between schemes need checking before they happen; a transfer that is routine in the UK can be a taxable event to the US.

The theme throughout: reporting and taxation are separate questions. The treaty handles the tax. The disclosure forms still want to know the pension exists.