UK pension taxation for US expats
Understanding how a UK pension is taxed once you live in – or return to – the United States can feel like navigating two different languages at once. The rules changed again after the lifetime allowance was scrapped in April 2024, new lump-sum limits kicked in for 2025, and the US-UK tax treaty still overlays everything.
To make matters trickier, UK pensions are taxable income for US citizens unless a treaty article, credit, or exemption says otherwise. This guide breaks down 2025’s rules so you can see the tax implications, avoid costly reporting errors, and keep more of your retirement money.
Also read. Tax guide for Americans in the UK
US-UK tax treaty: Key implications for pension income
For expats with UK pensions, the US–UK tax treaty offers valuable protections – but it also introduces complexity. Understanding key provisions can help you avoid double taxation while staying compliant with US reporting rules.
How the treaty affects US tax obligations
The US-UK tax treaty aims to avoid double taxation – but for expats, it’s a maze of default rules, exceptions, and strategic filings.
- Dual taxation rights: Article 17 allows both the US and UK to tax pension income, with the US typically offering a foreign tax credit to offset UK tax.
- Savings clause: The treaty lets the US override treaty benefits for its citizens, meaning you must still report UK pensions on your US return.
- Foreign tax credit mechanism: Most expats use Form 1116 to claim a credit rather than seeking a full exemption.
- Article 18 exceptions: Certain public pensions or government service schemes may be exempt under treaty terms.
- Tie-breaker rules: If you’re a dual resident, treaty rules prioritize home, centre of vital interests, habitual abode, and nationality to determine taxing rights.
NOTE! The treaty does not shield you from trust reporting under US law. Even if tax is credited or exempted, you may still owe filing duties like Forms 3520 or FBAR for UK pension schemes treated as foreign trusts.
Tax credit or tax exemption?
The treaty gives withdrawal-phase relief mainly through the foreign tax credit, not an exemption – meaning you usually report the pension on Form 1040 and then offset UK tax with Form 1116. Only government-service pensions or specific diplomatic cases qualify for outright exemption.
Treaty tie-breaker rules and residency
If you hold dual residency (say, you spend significant time in the UK), the tie-breaker rules look at permanent home, centre of vital interests, habitual abode, and nationality. Winning UK resident status can shift primary taxation there, but the US will still tax you as a citizen and require the credit mechanism. Keep documentation – HMRC certificates of residence, US Form 8802 – to prove which country gets first rights.
UK pension types and their US tax treatment
The UK offers several types of pensions, each with its own structure and unique US tax treatment. Knowing how the IRS views each type helps you avoid misreporting and plan smarter withdrawals.
State pension
The UK state pension may feel like Social Security, but the IRS treats it differently. Here's what you need to know when reporting it:
- The full state pension for 2025/26 pays £230.25 per week.
- The IRS considers all payments as ordinary income; none of it qualifies as Social Security for US tax purposes.
- Report the gross amount on Form 1040 lines 5a/5b (ordinary income).
- If the UK deducted PAYE tax, you can claim a foreign tax credit on Form 1116 to avoid double taxation.
Personal and stakeholder pensions
Take, for example, a US citizen who contributed to a UK stakeholder pension while working for the NHS. Most personal or stakeholder plans are classified as foreign pension trusts under Section 402(b), and contributions generally aren’t deductible in the US, while employer matches are immediately taxable.
Although growth is tax-deferred in the UK, it’s taxable annually in the US unless a treaty election under Article 18(5) applies for government-sponsored schemes. Any withdrawals made at all or even a lump-sum withdrawal are fully taxable on the US return.
Workplace pensions
Auto-enrolment defined-contribution schemes (e.g., Nest, Aviva) and defined-benefit schemes must be disclosed on Form 8938 if the aggregate value of all foreign financial assets exceeds the reporting threshold. Employer contributions are treated as employee income when vested. Annual growth is taxable unless the plan meets foreign exempt pension criteria – which most UK schemes do not.
UK pensions and the IRS foreign trust rules
Some UK pensions may trigger US foreign trust reporting. Whether you need to file depends on the pension type, your activity, and how the IRS views your control. Here's what to watch for:
- Contract-based vs. trust-based pensions: UK personal pensions are contract-based, while many occupational schemes are trust-based. The IRS still labels it either a foreign trust if participants have deferred rights.
- Are there exceptions to foreign trust reporting? If the plan is employer-sponsored and you had no contributions or withdrawals in the tax year, Notice 97-34 lets you skip Form 3520. Yet the IRS has signalled heightened foreign trust scrutiny since 2024, so most practitioners still file protectively.
- Do I need to file Forms 3520 and 3520-A? You file Form 3520 if you transfer assets into, receive a distribution from, or are deemed the owner of a foreign trust. The trust itself (often the UK plan administrator) should file Form 3520-A; if it doesn’t, you file a substitute with your return due by March 15 (extensions available). Penalties run to the greater of $10,000 or 35% of the gross distribution.
The 25% tax-free UK lump sum: Is it tax-free in the US too?
Since April 2024, the lifetime allowance has vanished, replaced by a £268,275 Lump Sum Allowance and a £1,073,100 Lump Sum & Death Benefit Allowance. Taking the standard 25% lump sum from your UK pension is still tax-free in Britain, but the IRS sees that payment as fully taxable unless you can apply treaty Article 17(1)(b) – which rarely exempts it.
Plan to pay US tax or offset it with credits if UK tax was unexpectedly withheld. Lump-sum withdrawal timing matters: spreading withdrawals over multiple years can keep you out of higher US brackets.
NOTE! You can normally tap a UK pension from age 55; this rises to age 57 for benefits taken on or after 6 April 2028 (unless your scheme’s rules lock in a protected lower age).
What IRS forms are required to report UK pensions?
Reporting your UK pension correctly to the IRS is crucial to staying compliant and avoiding penalties. Below is a breakdown of which forms typically apply and what each one covers.
| Form | Purpose | When it's required |
|---|---|---|
| Form 1040 | Report all taxable income, including UK pension income. | Every US taxpayer must file this annually. |
| Schedule B | Detail interest/dividends from foreign pensions or foreign accounts. | If your pension generates income or you meet FBAR thresholds. |
| Form 8938 | Report specified foreign financial assets, including pensions. | $200k single / $400k joint on 31 Dec (or $300k / $600k max during year) for expats. |
| FBAR (FinCEN 114) | Disclose foreign accounts exceeding $10,000 aggregate. | If any account linked to your pension crosses $10k at any point in the calendar year. |
| Form 8833 | Declare treaty positions (e.g., lump-sum exemption under US-UK tax treaty). | If claiming treaty benefits (e.g., under Article 17). |
| Form 3520 | Report transactions with a foreign trust or large gifts. | If your pension is trust-based and you've made contributions or received distributions. |
| Form 3520-A | Annual info return for foreign trusts with a US owner. | Required if your pension trust does not file directly – you must file a substitute. |
Reporting UK pensions: Expat mistakes to watch out for
You’ve just taken a tax-free lump sum from your UK pension, thinking you’ve outsmarted the system – until the IRS comes knocking. Many US expats unknowingly misreport UK pensions, triggering audits, penalties, or double taxation. Avoid these common mistakes:
- Treating the 25% lump sum as US tax-free.
- Omitting employer contributions from taxable income.
- Forgetting that withdrawal-phase growth inside a plan is currently taxable in the US.
- Filing Form 2555 and trying to exclude pension income – FEIE covers earned income only.
Help with US tax on UK pensions is here: Talk to us
Even seasoned accountants stumble over the US-UK tax treaty, FBAR thresholds, and trust filings.
At Taxes for Expats, we specialize in helping American retirees living in the UK navigate complex pension reporting, model lump-sum withdrawal scenarios, and prepare every required IRS form. Schedule a no-obligation consultation today and meet compliance with confidence.
FAQ
Yes – report the gross state pension in USD on Form 1040; claim a credit for any UK PAYE.
No. FEIE applies only to earned income, not pensions.
Generally, yes; the IRS treats the lump sum as ordinary income.
Yes, if the account balance pushed your combined foreign assets over reporting thresholds on any day of the year.
Only if you itemise deductions and those expenses exceed 7.5% of your adjusted gross income, the source of funds (even a UK pension withdrawal) doesn’t change the medical-expense rules.
