UK pensions and US tax: what Americans in the UK need to know

A UK pension is the asset most likely to be mishandled on an American's US return. UK law defers tax on contributions and growth until retirement; US domestic law does not do the same for foreign plans. The treaty bridges the gap, but only when it is actually applied and disclosed.

The problem under US domestic law

Without the treaty, a UK pension could be taxed in the US as it accrues: employer contributions as compensation when made, growth each year, and distributions again later with messy basis tracking. Some schemes could even be characterised as foreign grantor trusts with Form 3520 reporting.

What the treaty does

Articles 17 and 18 of the US–UK convention allow a US person who participates in a UK pension scheme to:

• treat contributions (employee and employer) to a qualifying scheme favourably for US purposes, broadly mirroring the UK relief, within limits that look to the US qualified-plan rules;
• defer US tax on growth inside the scheme until benefits are paid;
• have pension payments taxed under the treaty's pension article, which generally gives the country of residence the taxing right for periodic payments, with specific rules for lump sums.

The position is claimed on the return and usually disclosed on Form 8833. The penalty for failing to file Form 8833 when required is US$1,000 for an individual. Many returns prepared without specialist input omit it; the Streamlined procedures can correct that alongside anything else that was missed.

Most HMRC-registered occupational schemes, personal pensions and SIPPs qualify as pension schemes for the treaty. We confirm it scheme by scheme rather than assuming.

Reporting the pension

FBAR. A SIPP or defined contribution pot you can direct is generally reportable, using its highest value in the year. Defined benefit entitlements and the state pension are different in character; we state the treatment taken.

Form 8938. UK pensions are generally within the Form 8938 value test. Rev. Proc. 2020-17 exempts certain tax-favoured foreign retirement trusts from Forms 3520 and 3520-A, which is the more important relief; it does not remove Form 8938 reporting.

Form 8621. Funds held inside a pension that qualifies for treaty treatment are generally not subject to annual PFIC reporting while they remain inside the scheme; funds held in an ISA or general account are.

The 25% lump sum

The UK pension commencement lump sum is tax-free in the UK up to the lump sum allowance (£268,275). It is not automatically tax-free in the US. The outcome depends on the treaty analysis of lump sums, your residence when it is paid, and how contributions were treated on earlier US returns. It should be planned before the payment is requested, not reported afterwards.

The state pension

Under the treaty's social security provisions, UK state pension paid to a UK resident is taxable only in the UK. For a US resident, it is included in US income with the treaty governing the position.

Employer contributions and limits

The US treaty relief for contributions is capped by reference to the US qualified-plan limits (the section 415 limit was US$70,000 for 2025), which is above the UK annual allowance of £60,000 for most people. High earners with tapered UK allowances or large employer contributions should check the interaction each year.

SIPPs and fund choice

Inside a treaty-protected SIPP the PFIC problem is largely neutralised, but many US investors still hold US-listed ETFs to keep the position simple if the scheme is ever transferred or treaty treatment is questioned. See our SIPP article.

Action points

• Claim the treaty position deliberately and file Form 8833 where required.
• Report the pension on the FBAR and, when thresholds are met, Form 8938.
• Plan lump sums and retirement drawdown before taking them.
• If earlier returns ignored the pension, use Streamlined or amended returns to correct the record.