SIPPs, UK Workplace Pensions and the 25% Lump Sum: US Tax Treatment for Americans (2026)

A workplace scheme is a non-exempt employees' trust under Section 402(b). Employer contributions are taxable when they vest. Growth is taxable to the employee each year under Section 402(b)(4) if the plan discriminates in favour of highly compensated employees, which almost every UK scheme does by the US test because it does not follow US nondiscrimination rules. For anyone earning above the highly compensated threshold, $160,000 in 2026, the domestic answer is annual tax on the scheme's earnings. A SIPP is worse. You funded it, you control it, and you can direct the investments, so the IRS treats it as a grantor trust that you own. Every dividend, every bond coupon and every fund distribution inside it is your income the year it arises, and every UK fund inside it is a PFIC with its own Form 8621. Nothing in the Code defers a SIPP.

Article 18(1) says that income earned by a pension scheme may be taxed to the member only when it is distributed, and not when it is transferred to another scheme. It is in the Article 1(5)(a) list of saving clause exceptions, so a US citizen can use it. The Treasury Technical Explanation gives the example of a US citizen resident in the UK in a UK scheme and confirms the US will not tax the earnings until paid out. IRS Chief Counsel memorandum AM2008-009 accepts that reading for schemes that meet the Article 3(1)(o) definition, which includes SIPPs. Our position is that Article 18(1) defers US tax on growth inside a workplace scheme or SIPP only when it is claimed on Form 8833 for the year. A treaty benefit is not self-executing. If you have been filing US returns for years without a Form 8833 for your pension, you have not claimed the deferral, and the domestic rules above are technically the law of your return. The fix is to start filing Form 8833 now and, if the years are still open, amend to add it. Cite Article 18(1), the scheme, and Sections 61, 402(b) and 671 to 679 as the provisions overridden.

Most SIPPs hold UK OEICs, investment trusts or UCITS ETFs, all of which are PFICs. The question is whether the pension wrapper protects them. Treasury Regulation 1.1298-1(c)(4) says a shareholder who holds PFIC stock through a foreign pension fund does not have to file Form 8621 if, under an income tax treaty, income earned by the fund is taxable only when distributed. That regulation was written for exactly this case. So where Article 18(1) applies and is claimed, the funds inside a SIPP or workplace scheme are not reported on Form 8621 and are not taxed under Section 1291. When the money eventually comes out it is taxed as a pension distribution under Article 17, not as a PFIC excess distribution. The position is contested at the edges. Some practitioners argue the regulation only lifts the filing duty and not the tax, and file protective Forms 8621 anyway. Others question whether a SIPP funded outside employment is a pension scheme "established in" the UK for treaty purposes, though the exchange of notes answers that. The practical rule is simple: claim Article 18(1) on Form 8833 every year, and the PFIC problem inside the pension goes away. Do not claim it, and you own every PFIC inside the SIPP personally. Hold US-listed ETFs inside the SIPP where the platform allows it and the question does not arise at all.

Article 17(1)(a) makes pensions taxable only in your country of residence. It is not a saving clause exception, so for a US citizen it settles the UK side but never the US side. - US citizen living in the UK. The UK taxes your workplace pension, SIPP drawdown or annuity through PAYE and Self Assessment. The US taxes it too, on Form 1040 lines 5a and 5b, fully taxable because you had no US basis in the contributions if you claimed 18(5). You credit the UK tax on Form 1116 in the general basket, and because UK rates on pension income are usually at or above US rates the credit normally removes the US tax. Pension income is not net investment income, so the 3.8% NIIT does not apply. - US resident drawing a UK pension. Article 17(1)(a) binds the UK, which is not taxing you by citizenship, so the UK must exempt the payment. Submit form US-Individual 2002 to HMRC through the IRS to get a no tax (NT) code. Until the NT code arrives the scheme applies emergency tax on a month 1 basis, which can take 40% or more of the first payment. Reclaim it on form P55, P53Z or P50Z. On the US side you pay ordinary income tax with no credit, because there is no UK tax. - Non-US spouse living in the UK drawing an inherited UK pension. The UK taxes it, the US does not, and no US filing is needed.

The Pension Commencement Lump Sum, 25% of the pot up to the lump sum allowance of £268,275, is tax free in the UK. Whether it is tax free in the US is the most argued point in UK expat tax, and our answer is no in both directions. Article 17(2) says a lump-sum payment from a scheme in one country to a resident of the other is taxable only in the country where the scheme is established. That paragraph is not in Article 1(5), so the saving clause overrides it. The IRS set out this reading in a 2008 information letter, GENIN-111967-08, and has not moved. On this view the PCLS paid to a US citizen or US resident is a taxable pension distribution on Form 1040 in full. US citizen living in the UK. There is no argument at all. Article 17(1)(b), the paragraph that survives the saving clause, only exempts a pension paid from a scheme in the other country from where you live. Your scheme is in your country of residence. The 25% is US taxable at ordinary rates, and because HMRC charges nothing there is no Foreign Tax Credit to offset it. The only mitigation is timing: take it in a year with large excess foreign tax credit carryforwards in the general basket, which can absorb the US tax on the lump sum. US resident taking a lump sum from a UK scheme. Here the scheme is in the other country, so 17(1)(b) is at least available. The argument runs that a 25% partial withdrawal is not a "lump-sum payment" within 17(2), so it falls back into paragraph 1, and under 17(1)(b) an amount that would be exempt in the UK if you lived there is exempt in the US. The treaty does not define lump sum, the Technical Explanation is not decisive, and the position has been taken on many returns. It must be disclosed on Form 8833, which flags it for review, and the IRS has never conceded it. We model the exempt position against simply taking the pension as periodic income, and we tell clients to expect an audit if they claim it. If you claim it, take the PCLS as a single, separately documented payment and keep the scheme's paperwork showing it was the tax-free element. HMRC's March 2025 mirror rule. On March 12, 2025 HMRC published guidance applying the UK half of the saving clause in Article 1(4) to UK residents receiving lump sums from US plans. A full 401(k) or IRA cash-out paid to a UK resident, once treated as taxable only in the US under 17(2), is now taxable in the UK with credit for the US tax. Both countries now read 17(2) the same way: it protects the other country's residents, not their own. For a US citizen in the UK with both a UK pension and a US 401(k), this means neither lump sum is tax free anywhere. Uncrystallised funds pension lump sums, where each withdrawal is 25% tax free and 75% taxable in the UK, are treated the same way: the 75% is taxed in both countries with a credit, the 25% is taxed in the US with no credit for a UK resident.