US Tax on a UK Pension Lump Sum: The 25% Question

US tax on a UK pension lump sum is not switched off by the UK's 25% tax-free rule. The US taxes its citizens and residents on worldwide income, the treaty paragraph on lump sums is overridden by the saving clause, and the one paragraph that might exempt the payment, Article 17(1)(b), is disputed. Treat the lump sum as potentially taxable in the US until your own position has been analysed. This guide sets out the treaty wording, the two competing readings, and what each means for four kinds of taxpayer.

The wider picture is in how UK pensions are taxed on a US return and our guide for retirees with pensions in both countries. This post stays on one question: the tax-free cash.

Is the UK 25% tax-free lump sum tax free in the US?

Not reliably. Under UK rules the lump sum is tax free. Under US domestic law it is a taxable distribution from a foreign pension. Whether the US/UK treaty changes that US result is unsettled.

GOV.UK says you can usually take up to 25% of the amount built up in any pension as a tax-free lump sum, and that the most you can take is the lump sum allowance of £268,275, the figure in force for 2026/27. The formal name for the payment taken when you start drawing a pension is a pension commencement lump sum (PCLS).

On the US side, the IRS's page on foreign pension and annuity distributions says the taxable amount "generally is the Gross Distribution minus the Cost (investment in the contract)". There is no carve-out for a quarter of the pot. If your contributions and growth were never taxed on a US return, typically because you relied on the treaty to defer them, your cost is low or nil, and the whole lump sum is ordinary income (taxed at the normal US rates) unless the treaty takes it out.

What does the treaty say about a UK pension lump sum?

Three provisions of the 2001 US/UK Double Taxation Convention decide this.

• Article 17(1)(b) says that the amount of any pension "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". If the scheme's country would not tax it, the other country does not either.
• Article 17(2) says that, "notwithstanding the provisions of paragraph 1", a lump-sum payment from a pension scheme in one country, beneficially owned by a resident of the other, "shall be taxable only in the first-mentioned State". For a UK scheme, that is the UK.
• Article 1(4), the saving clause, lets each country tax its residents, and the US its citizens, "as if this Convention had not come into effect", except for the provisions listed in Article 1(5). That list includes "sub-paragraph b) of paragraph 1 and paragraphs 3 and 5 of Article 17". It does not include paragraph 2.

So Article 17(1)(b) survives the saving clause for US citizens and residents, and Article 17(2) does not. Our guide to the saving clause explains the mechanism. Everything turns on which paragraph a tax-free lump sum belongs to.

The two readings of US tax on a UK pension lump sum

Reading one: the lump sum is exempt under Article 17(1)(b)

The Treasury's Technical Explanation of the treaty accepts that "the term 'pension' generally would include both periodic and lump-sum payments". A PCLS is an amount paid from a UK pension scheme that is exempt in the UK for a UK resident. Article 17(1)(b) therefore exempts it in the US, and the saving clause cannot take that away. Supporters also point to a sentence in the Technical Explanation: "a U.S. citizen who receives a distribution from a pension scheme established in the United Kingdom will be taxable on only the portion of the pension distribution that is taxable in the United Kingdom."

Reading two: the lump sum falls under Article 17(2), and the saving clause removes it

The same document also says paragraph 2 "provides specific rules to deal with lump-sum payments, so they are not subject to the general rule of paragraph 1". On that view a lump sum never enters paragraph 1, including sub-paragraph (b). Paragraph 2 is subject to the saving clause, and the Technical Explanation says so: "a U.S. citizen who is a resident of the United Kingdom will be subject to U.S. tax on a lump-sum distribution from a pension scheme".

Two other official documents lean the same way. IRS Chief Counsel memorandum AM2008-009, written about transfers from UK schemes, notes that "the saving clause would permit the United States to tax a lump-sum distribution to a U.S. resident from a U.K. scheme" and that there is no exception for Article 17(2). The memorandum may not be cited as precedent and was not about the tax-free cash specifically. HMRC's INTM163160 says a lump sum taken on commencement of a pension "will clearly be identifiable as a lump sum" under the UK's treaties, and that under the US treaty the residence country "will also be able to tax the payment under Article 1".

Where that leaves the question

Both readings can be built from the treaty and the Technical Explanation, and we have found no published IRS ruling that addresses the UK pension commencement lump sum by name. The balance of the official material favours reading two. Reading one is a position some advisers take and disclose; it is not a settled exemption. It is also weaker for Americans living in Britain: Article 17(1)(b) is written for a resident of one country receiving a pension from a scheme in the other, which fits a US resident with a UK pension better than a UK resident with one.

Who are you? Lump sum treatment by taxpayer type

The table assumes a pension commencement lump sum within the UK lump sum allowance.

Who you are	UK treatment	US treatment
US citizen living in the UK	Tax free within the lump sum allowance	Taxable under US domestic law, less any basis; the Technical Explanation says so for a US citizen resident in the UK. An Article 17(1)(b) claim fits least well here. No UK tax to credit.
US citizen living in the US	Tax free; the UK does not tax the PCLS	Taxable on the cautious reading, because the saving clause overrides Article 17(2). Article 17(1)(b) is the competing position and fits the wording best here. Unsettled; disclose if claimed.
UK national resident in the US (not a citizen)	Tax free; the UK does not tax the PCLS	Same as a US citizen living in the US: the saving clause covers residents as well as citizens.
Green card holder	Tax free within the lump sum allowance	Living in the US: as the row above. Living in the UK: taxed like a citizen, unless you claim UK residence under the treaty tie-breaker, when Article 17(2) leaves the lump sum to the UK alone. That claim has serious side effects.

The green card point comes from the Technical Explanation: for the saving clause, residence is decided under Article 4, so a green card holder who is treaty-resident in the UK "would be subject to U.S. tax only to the extent permitted by the Convention". Making that claim means filing Form 1040-NR with Form 8833, and the Form 8833 instructions warn that a long-term resident who does so is deemed to have terminated US residency and may face the expatriation tax. Read our guide for green card holders living abroad before going near it.

Why does the foreign tax credit not solve it?

The foreign tax credit works when both countries tax the same income. On a tax-free lump sum the UK charges nothing, so there is no UK tax on that income to credit. The IRS's foreign tax credit page says you can claim a credit "only for foreign taxes that are imposed on you". Ordinary drawdown by a UK resident is different, because the UK income tax on it usually covers the US liability.

There is one partial answer. The credit limit is worked out by category of income on Form 1116, not payment by payment, and IRS Publication 514 allows "a 1-year carryback and then a 10-year carryover of the unused foreign taxes". A US citizen who has paid UK tax at higher rates than the US would have charged may hold unused credits. If the lump sum falls in the same category as the income that produced them, those carryovers can absorb some or all of the US tax. That is a calculation, not an assumption. Our guide to double taxation relief between the US and UK explains how the credit is limited.

Form 8833: disclosing a treaty position on the lump sum

If you leave the lump sum off your US return because of Article 17(1)(b), you are taking a treaty-based return position. Regulations section 301.6114-1(c) waives disclosure for many positions on an individual's pension income, but the Form 8833 instructions add that "careful review of the regulations is advised". With a position this contested, we would file Form 8833 regardless: name Article 17(1)(b), state the amount, and explain the reasoning. The form itself warns that failure to disclose "may result in a penalty of $1,000" for an individual.

Disclosure does not make the position right. It shows the IRS what you did and why; if the IRS disagrees, the tax and interest are still due. Our guide to Form 8833 treaty position disclosure covers how the form is completed.

Should you take the lump sum before moving to the US, or after?

For a UK national with no US status yet, before is usually better. A person who is not a US citizen and not yet US resident is a non-resident alien, and the US does not tax a non-resident alien on a UK pension payment. The IRS says that under the substantial presence test the residency starting date "is generally the first day you are present in the United States during that calendar year".

1. Find your likely US residency starting date. Earlier visits in the same calendar year can pull it forward.
2. Have the lump sum paid before that date. A request in progress is not a payment, and providers can take weeks.
3. Check the elections you plan to make. Choosing to be treated as a US resident for the whole year, which some couples do in order to file jointly, would bring an earlier payment back into the US return.
4. Leave the rest of the pot alone unless you need it. Regular income taken later as a US resident is generally taxable only in the US under Article 17(1)(a).

For a US citizen none of this works: citizenship-based taxation applies wherever you live. The levers for a citizen are the amount taken in any one year, credit carryovers, basis from contributions that were taxed on earlier US returns, and the choice between tax-free cash and taxable income that carries UK tax and therefore credits. The contribution side is in our guide to UK workplace pensions for US citizens.

Uncrystallised funds pension lump sums (UFPLS)

An UFPLS is a way of taking money straight from a pension pot that has not been put into drawdown. HMRC's Pensions Tax Manual at PTM063300 says that of each payment "25% is not liable to tax" and "75% is taxed as pension income", and that the member must have reached normal minimum pension age, currently 55 and rising to 57 from 6 April 2028.

For a US citizen living in the UK, the UK tax on the 75% creates foreign tax credits in the same year as the untaxed 25%, which may cover the US tax on the whole payment. The numbers decide it.

For a US resident, the form of the withdrawal changes which country taxes it. HMRC's INTM163160 defines a lump sum for treaty purposes as "any non-periodic, irregular or abnormal payment of a pension", and says a payment of 20% or more of the fund is likely to be one. A one-off UFPLS is therefore likely to sit under Article 17(2), so the UK keeps its right to tax the 75%, the US taxes it too under the saving clause, and relief comes through the credit. Regular drawdown of similar amounts is periodic and taxable only in the US. HMRC's own example: someone who usually draws £20,000 a year and takes £50,000 one year has taken a £30,000 lump sum. The reporting side is in our SIPP US tax reporting guide.

Illustrative example: a US citizen living in Leeds, aged 60, has a £400,000 SIPP. She has always deferred US tax on it under the treaty, so she has no US basis. She takes a £100,000 pension commencement lump sum. UK tax: nil, because £100,000 is inside the £268,275 lump sum allowance. US position on the cautious reading: the dollar value of £100,000 is ordinary income on her Form 1040, with no UK tax on it to credit; what she pays depends on her other income and any credit carryovers. On the Article 17(1)(b) reading: she excludes it, files Form 8833, and accepts the risk that the IRS disagrees. Had she been a British national taking the same lump sum a month before moving to Texas, the US would not have taxed it at all. This is illustrative only; the right course depends on the individual's full circumstances.

What people get wrong about the 25% lump sum

• Assuming UK tax free means tax free everywhere. The UK exemption is a rule of UK law. The US applies its own.
• Quoting Article 17(2) as protection. It gives the UK the sole taxing right, then the saving clause hands the US its right back for citizens and residents.
• Treating Article 17(1)(b) as settled. It is a position with support and with official statements against it.
• Thinking a green card or visa status is safer than citizenship. The saving clause applies to US residents of any nationality.

The bottom line

The UK 25% tax-free lump sum has no automatic US equivalent. The treaty paragraph written for lump sums does not protect US citizens or residents, the paragraph that might is disputed, and the UK's zero tax leaves nothing to credit. The outcome depends on who you are, where you live when the money is paid, and your basis and credit carryovers. Settle it before the withdrawal, not after.

US/UK Cross Border Tax — US CPAs and UK tax advisers working as one team; London, Manchester, New York, San Francisco. Our UK pension tax treaty (US) planning service models the lump sum in both countries before you take it, and our treaty relief service handles the claim and disclosure. We act for retirees and pensioners and for British nationals moving to the US. If a lump sum is on your horizon, talk to us before you sign the provider's form.