The UK tax treatment of US pension plans has long been a complex area for internationally mobile individuals, particularly those who are UK resident but connected to the US tax system. In March 2025, HMRC published an updated opinion on the UK tax treatment of US pension lump sums, as well as its intention to use the US-drafted ‘savings clause’ to protect UK tax revenue.

This article sets out the background, what has changed, and why it matters.

Historically accepted treatment

US pension arrangements - such as 401(k) plans, IRAs, and Roth IRAs - do not map perfectly onto UK pension structures. This creates uncertainty when UK-resident individuals hold or receive income or lump sums from these plans.

Historically it has been accepted that Article 17(2) of the US/UK Double Tax Treaty operates in the UK to prevent UK taxation on a US pension lump sum.

Article 17

Pensions, social security, annuities, alimony, and child support

1.

(a) Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State.

(b) Notwithstanding sub-paragraph a) of this paragraph, the amount of any such pension or remuneration paid from a pension scheme established in the other Contracting State that would be exempt from taxation in that other State if the beneficial owner were a resident thereof shall be exempt from taxation in the first-mentioned State.

2.

Notwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment derived from a pension scheme established in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in the first-mentioned State.

However, HMRC’s updated guidance states that Article 1(4), an article which appears in every US double tax treaty and was originally introduced by the US draftsman, applies to over-write the treatment at Article 17(2). Despite this clause having an original purpose only for the US, HMRC have every legal right to use it and interpret it as they have decided to.

Article 1, paragraph 4

Notwithstanding any provision of this Convention except paragraph 5 of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if this Convention had not come into effect.

There is no exemption within paragraph 5 of Article 1 for pensions unfortunately.

Impact on US pension lump sums

All US pension lump sums can now be taxed in the UK. It is not clear whether this interpretation or use of the DTT will be applied retroactively. It is also not clear whether HMRC will seek to tax Roth IRA lump sums, which would previously have been exempt from UK tax under both Article 17(1)(b) and Article 17(2), as Roth distributions are tax free in the US.

Where UK tax is payable, it will still be possible to credit any US tax paid against that liability. For instance, by taking withdrawals from an IRA, you would suffer withholding tax (usually 30%) and this 30% withholding tax can be applied to reduce the UK tax payable. However, where no US tax was payable, for instance on drawdowns from a Roth IRA, taxpayers could be moving from a 0% tax position to a 45% tax position.

Definition of a lump sum

Tax planning may include consideration of what constitutes a lump sum if drawing down from within a Roth IRA. Annual or monthly payments could potentially be maximised and drawn down over a short period while still maintaining the character of ‘income’ from a UK tax perspective. HMRC provides some useful guidance on identifying lump sums at INTM163160.

Wider application

In theory, Article 1 paragraph 4 could be applied to many aspects of the UK/US DTT and it therefore creates considerable uncertainty over all other provisions of the agreement (save Article 1 paragraph 5). We will have to wait and see whether, in practice, HMRC decide the shake the tree any further.

For individuals with US pension interests who are resident in the UK, the key is careful, fact-specific analysis - particularly where the savings clause creates apparent conflicts.

How can CT help?

If you have questions about the US drafted ‘savings clause’, please get in touch with your usual CT contact or the team via personaltax@ct.me.