401k UK Tax Treatment: Contributions, Growth and Withdrawals for UK Residents

The 401k UK tax treatment has three stages. Money going in gets US tax relief but usually no UK relief; money growing inside the plan is not taxed by the UK until it comes out; and money coming out is taxed by the UK as foreign pension income, in full, with the US/UK treaty deciding how much US tax sits alongside it. Whether you are an American who has moved to Britain or a Brit who spent a few years working in the States, those three stages are where the questions, and the mistakes, cluster.

This guide follows the money through each stage, covers the treaty articles that matter, explains the US withholding and penalty rules that keep applying in the UK, and shows where a 401(k) goes on a UK Self Assessment return. It sits alongside our guides to SIPPs on a US return and how both countries tax retirement income, and our US/UK pension planning service.

What is a 401(k), in UK terms?

A 401(k) is an employer-sponsored, defined contribution retirement plan. You choose to defer part of your salary into it before US tax, your employer may match some of it, and the investments grow without US tax until you take distributions. The nearest UK comparison is a workplace defined contribution pension, but the two are not the same legal animal: a 401(k) is a US trust arrangement governed by the Internal Revenue Code, and it is not a UK registered pension scheme. That distinction drives most of the UK treatment below.

The IRS sets the contribution limits each year. For 2026 the employee elective deferral limit is $24,500, with a catch-up of $8,000 from age 50 and a higher $11,250 catch-up for those aged 60 to 63. The combined employer and employee limit is $72,000, or up to $83,250 including the enhanced catch-up. These figures change annually; the IRS limits page is the reference.

Stage one: contributions while you live in the UK

You can only contribute to a 401(k) through a US employer that sponsors one. A UK employer, including the UK subsidiary of a US group, cannot run a 401(k) for you, so most people who move to the UK stop contributing when they change payroll. Where you remain on a US payroll while UK resident, for example on a secondment, the US relief continues but the UK position is different: the UK taxes you on your worldwide employment income, and a salary deferral into a US plan is not automatically deductible against UK tax.

Article 18 of the US/UK treaty is the relief provision. It allows contributions to a pension scheme in one country by someone working in the other to be deductible in the country of work, within limits and subject to conditions, notably that you were already a member of the scheme before you started working in the new country and that the scheme is accepted as corresponding to a local one. It is a genuine relief but a conditional one, and HMRC expects the position to be evidenced on the return rather than assumed. Our treaty relief service deals with these claims.

Stage two: how does the UK treat growth inside a 401(k)?

This is the stage that worries people most and, in practice, causes the least trouble. Without a treaty, a UK resident who is absolutely entitled to a fund of US mutual funds might be taxed on the income and gains as they arise. The treaty stops that. Article 18(1) provides that income earned by a pension scheme established in one country is taxed as the member's income in the other country only when, and to the extent that, it is paid to or for the benefit of the member.

Two features make this reliable. First, a 401(k) plainly falls within the treaty's definition of a pension scheme. Second, Article 18 is one of the provisions listed in Article 1(5) as an exception to the saving clause, which means the protection also holds for US citizens, who are otherwise taxed by the US as if the treaty did not exist. We explain that mechanism in our guide to the saving clause. The upshot: while the money stays in the 401(k), neither country taxes the growth.

There is also no UK equivalent of the FBAR or Form 8938 for a US plan. A 401(k) is a US account, so it is not a "foreign" account for US reporting, and the UK has no annual account disclosure for individuals. An untouched 401(k) simply does not appear on either return.

Stage three: withdrawals. What 401k tax does HMRC actually charge?

Everything changes when money comes out, and the UK treatment depends on the form of the payment.

Regular pension payments

Periodic distributions to a UK resident are foreign pension income. Under Article 17(1)(a) of the treaty, pensions beneficially owned by a UK resident are taxable only in the UK. Since 6 April 2017, GOV.UK confirms that "the whole foreign pension or annuity payable to a UK resident will be chargeable to tax", replacing the old rule that taxed only 90%. The payment is charged at your UK marginal rate, 20%, 40% or 45%, after the personal allowance, and reported on the Foreign pages (SA106) in the "Overseas pensions, social security benefits and royalties" section.

For a British or other non-US-citizen resident, Article 17(1)(a) means the US should not tax those regular payments. The way to secure that in practice is to give the plan administrator Form W-8BEN claiming treaty benefits; otherwise IRS Publication 575 explains that payments to a non-resident alien are subject to 30% flat-rate withholding. For a US citizen the saving clause overrides Article 17(1)(a), so the US taxes the distribution as ordinary income too, and the UK, as the country of residence, gives credit for the US tax under the treaty's relief article.

Lump sums

Lump sums are governed by Article 17(2): a lump-sum payment from a pension scheme established in one country and beneficially owned by a resident of the other "shall be taxable only in the first-mentioned State", that is, the country of the scheme. Read on its own, that makes a 401(k) lump sum taxable only in the US and free of UK tax, and for many years that is how advisers treated it.

HMRC's published position is now different. Its International Manual at INTM163160 states that although Article 17(2) gives exclusive taxing rights to the source state, that is "in effect overridden by paragraph 4 of Article 1", the saving clause, so "the State in which the recipient is resident will also be able to tax the payment", with relief from double taxation available in the usual way. Practitioners date the shift to 2025, and it applies to UK residents regardless of nationality. A UK resident cashing out a 401(k) should therefore plan for US tax under Article 17(2) and a UK charge, with a credit for the US tax against the UK liability.

On the UK side, the charge on a lump sum from a foreign pension scheme falls under rules introduced from 6 April 2017. HMRC's manual at EIM75550 sets the starting point at 100% of the payment, then allows deductions in three steps, the most useful of which is the value immediately before 6 April 2017 of rights specifically to receive lump sum benefits. For someone with a large 401(k) built up before 2017, that deduction can be substantial, so historic statements matter.

Treaty articles at a glance

Payment	Treaty article	US position	UK position for a UK resident
Growth inside the plan	Article 18(1) (saving clause exception)	Deferred until paid	Not taxed until paid
Regular withdrawals	Article 17(1)(a)	Taxable if US citizen; treaty exemption for non-US persons via W-8BEN	Taxable in full as foreign pension income
Roth 401(k) qualified distributions	Article 17(1)(b) (saving clause exception)	Tax free	Exempt, because it would be exempt in the US
Lump sum	Article 17(2), read with Article 1(4)	Taxable in the US	Also taxable per HMRC, with credit for US tax

The US rules that follow you to Britain

Living in the UK does not switch off the Internal Revenue Code. Three rules bite regardless of where you live.

• The 10% additional tax before 59½. The IRS treats withdrawals before age 59½ as early distributions and adds a 10% tax on top of the income tax, unless an exception applies. The exceptions include leaving your employer in or after the year you turn 55, total and permanent disability, a series of substantially equal periodic payments and unreimbursed medical expenses above 7.5% of adjusted gross income.
• Mandatory 20% withholding on cash-outs. If an eligible rollover distribution is paid to you rather than transferred directly to an IRA or another plan, Publication 575 says 20% will generally be withheld for US income tax. You have 60 days to complete a rollover yourself, but the withheld amount has to be made up from other money. A direct rollover avoids the withholding entirely.
• Required minimum distributions from 73. RMDs generally begin at age 73. For a 401(k), the first one is due by 1 April following the later of the year you reach 73 or the year you retire. The excise tax on a missed RMD is 25%, reduced to 10% if corrected within two years.

Should you roll a 401(k) into an IRA before or after moving?

A direct rollover to a traditional IRA is a common tidy-up step. It is not a taxable event in the US, and because Article 18 keeps the growth untaxed in the UK either way, it is not normally a UK taxable event either. The practical obstacles are administrative: many US custodians will not open or maintain an IRA for someone with a UK address, so the rollover is easier to arrange while you still have a US address. Converting to a Roth is a different matter entirely; it triggers US tax on the converted amount and needs UK-side modelling too. Our retirees and pensioners page covers those decisions.

New to the UK? The four-year FIG regime

Since 6 April 2025, someone who becomes UK resident after at least ten consecutive tax years of non-residence is a "qualifying new resident" for their first four years and can claim relief from UK tax on qualifying foreign income and gains. HS266 confirms that foreign pension income is eligible. For a recent arriver drawing a 401(k), that can mean four years of UK-tax-free distributions.

Two cautions. The claim is not automatic: it has to be made on the SA109 pages (box 28 for foreign income) by the anniversary of the 31 January filing date, and it must specify the income being relieved. And claiming costs you the personal allowance and the capital gains annual exempt amount for that year. If you also have UK employment income, giving up the allowance can cost more than the relief saves. Run both scenarios before ticking the box. Our guide to UK pensions on a US return covers the mirror-image problem for people heading the other way.

How to report a 401(k) on a UK tax return

1. Register for Self Assessment if you have not already; foreign pension income almost always requires a return.
2. Convert each distribution to sterling at the rate on the payment date, or a reasonable average for the year, and keep the workings.
3. Enter regular payments and any lump sums taxable as pension income in the "Overseas pensions, social security benefits and royalties" section of the SA106 Foreign pages, columns A to F.
4. If US tax was paid and the treaty allows the US to tax the payment, claim Foreign Tax Credit Relief in the same section. The SA106 notes warn that many treaties give the residence country exclusive rights, so check Article 17 before claiming.
5. If you are relying on a treaty exemption for a payment, describe the payer, the payment and the treaty article in the "Any other information" box.
6. If you qualify for the FIG regime and want relief, complete the SA109 claim boxes and list the 401(k) income being relieved.

Illustrative example: a British engineer returns to Manchester after eight years in Texas with a $400,000 401(k). She leaves it invested, files Form W-8BEN with the plan, and from age 60 draws $30,000 a year. The US does not withhold on the regular payments because of Article 17(1)(a); the UK taxes the sterling value of each payment in full as foreign pension income. Had she instead cashed out the whole plan on arrival, the US would have taxed the lump sum under Article 17(2) and HMRC would also have charged it, less the value of her pre-April 2017 lump sum rights, with credit for the US tax. This is illustrative only; the right course depends on the individual's full circumstances.

Common mistakes with a 401(k) in the UK

• Treating a lump sum as UK tax free on the strength of Article 17(2) alone, without checking HMRC's current guidance.
• Reporting only 90% of the pension because that was the rule before April 2017.
• Forgetting W-8BEN and suffering 30% US withholding on payments the treaty reserves to the UK.
• Cashing out before 59½ to fund a UK house purchase and paying the 10% penalty plus income tax in both countries.
• Missing an RMD after 73 because the plan's letters go to an old US address.
• Claiming FIG relief without noticing it removes the personal allowance on UK salary.

The bottom line

A 401(k) held by a UK resident is well protected while it stays invested and well taxed when it pays out. The treaty keeps growth out of both tax nets until distribution, regular withdrawals are UK-taxable in full, and lump sums now face both a US charge and, on HMRC's reading, a UK one. The decisions that change the outcome, direct rollover or not, regular payments or a lump sum, W-8BEN, FIG relief, are all made before the first withdrawal. That is when to get the advice. If you want the US and UK sides worked through together, get in touch.