This guide is for US taxpayers — US citizens, green-card holders and others who file a Form 1040 — who hold a UK registered pension. UK law still allows a quarter of a pension fund to be paid free of UK income tax, now limited by the lump sum allowance of £268,275 rather than the old lifetime allowance. What the United States does with that payment is genuinely unsettled: both revenue authorities read the treaty’s saving clause as overriding the one paragraph that would make the payment taxable only in the UK, and no regulation or published ruling decides it. It is a position to settle with advice before money moves.
Is the UK’s 25% tax-free pension lump sum taxable in the United States?
There is no settled answer. UK law exempts the payment up to the lump sum allowance, and the treaty appears on its face to give the UK the exclusive right to tax a lump sum from a UK scheme. The saving clause then appears to take that right back, because the paragraph containing the lump-sum rule is not one of those the treaty shields from it. Both revenue authorities read it that way, against the taxpayer, no court has decided the question, and the IRS has never addressed it in a regulation, a revenue ruling or a revenue procedure.
The IRS states the general principle on its page about foreign pensions: “If there is no exception to the saving clause for the relevant Pension/Annuity article and paragraph, then as a U.S. citizen or resident your distribution would be taxable by the United States”[7]. What makes that expensive is the arithmetic of relief: a credit relieves foreign tax actually imposed, so if the UK charges nothing there is nothing to credit and a US charge stands in full[22]. This article sets out what each authority says; it does not tell you which reading is right, because nobody can. It is general information, not personal advice, and the position is one to settle with a US preparer first.
How is the tax-free lump sum worked out?
A pension commencement lump sum is capped at the “permitted maximum”, the lowest of three figures: the applicable amount, the available lump sum allowance and the available lump sum and death benefit allowance[12]. The member must also become actually entitled to a relevant pension, with the cash payable up to six months before that entitlement arises or twelve months after it, so the scheme’s minimum pension age governs when cash can be taken[11]; our guide to the minimum pension age covers that timetable.
The applicable amount is one third of the sums and assets designated to drawdown or applied to buy an annuity; for defined benefits it is (A + (B x C) − D) / 4, where A is the lump sum, B the relevant valuation factor of 20, C the annual pension payable in the next 12 months and D a disqualifying pension credit adjustment[13]. The alternative shape is an uncrystallised funds pension lump sum, or UFPLS: 25% free of UK tax, 75% taxed as pension income, with the tax-free quarter counting against the allowance[14] — which matters here because it creates UK tax inside the same payment.
What are the lump sum allowances in 2026/27, and what happens above them?
They are £268,275 and £1,073,100, both unchanged for 2026/27[8]. They are personal allowances, not per-scheme limits, and apply across all of a member’s registered schemes[9][10].
| Allowance | 2026/27 | What counts against it |
|---|---|---|
| Lump sum allowance (LSA) | £268,275 | Commencement lump sums, the tax-free quarter of a UFPLS, stand-alone lump sums[9] |
| Lump sum and death benefit allowance (LSDBA) | £1,073,100 | Those, plus serious ill-health and authorised lump sum death benefits[10] |
Above an available allowance the excess is taxed as the recipient’s income at their marginal rate, and there is no 55% charge because the lifetime allowance was abolished for payments on or after 6 April 2024[9][10]. For a US taxpayer that runs against intuition: the excess bears real UK tax, which is what a credit works on, while the exempt quarter bears none. That describes the structure; it is not a reason to arrange a payment above an allowance. Contributions and reporting are covered in UK pensions for US persons.
How do lump sums taken before 6 April 2024 cut my allowance, and when does a certificate help?
Under the standard transitional calculation, 25% of the member’s lifetime allowance previously-used amount is deducted from £268,275: HMRC’s illustration is £100,000 previously used, giving a £25,000 deduction and leaving £243,275 available[15]. The calculation assumes a quarter of everything crystallised before 6 April 2024 was taken as cash, so it over-states the deduction for anyone who took less[15].
The remedy is a transitional tax-free amount certificate, substituting the cash actually taken for the assumed figure. The mechanics are strict: the application goes to a certification administrator and must be made before the individual “has become entitled to a relevant lump sum”; complete evidence of lifetime allowance usage is required, and “it is for the certification administrator to decide if the evidence provided is sufficient”, insufficient evidence being the only ground for refusal; and the decision comes within three months[16].
A certificate is not a free option: someone who historically took more than a quarter can end up worse off, and a certificate must be cancelled if it turns out not to reflect the amounts actually taken[16]. For a US taxpayer there is a twist, because it decides how much of the payment is free of UK tax, and therefore how little UK tax exists to set against any US charge. A certificate that raises the UK-exempt amount can raise the unrelieved US exposure, so the two calculations belong together.
Can I still take more than 25% tax free?
Sometimes, through a protection that predates the current rules. Scheme-specific lump sum protection applies where, at 5 April 2006, a member’s uncrystallised lump sum rights under a scheme exceeded 25% of their total uncrystallised rights under it. It is automatic, and is tested against the lump sum and death benefit allowance rather than the £268,275: above that allowance, “the excess is taxed at the individual’s marginal rate”[17].
| Protection | Lump sum allowance | Lump sum and death benefit allowance |
|---|---|---|
| Fixed protection 2012 | £450,000 | £1,800,000[18] |
| Fixed protection 2014 | £375,000 | £1,500,000[18] |
| Fixed protection 2016 | £312,500 | £1,250,000[18] |
| Enhanced protection | £375,000 | Value of uncrystallised rights at 5 April 2024[19] |
Protections can be lost. Fixed and enhanced protection depend on conditions being kept, including on further benefit accrual. Someone who spent part of a career in the United States and later resumed UK pension saving may have broken one unawares.
What does the treaty say about pension lump sums, and what does the saving clause do to it?
Article 17(2) allocates the taxing right over a lump sum to the country where the scheme is established, in exclusive language. Article 1(4) then lets each country tax its own residents and citizens as though the treaty did not exist, except where Article 1(5) says otherwise — and Article 1(5) does not mention Article 17(2). From the Convention signed at London on 24 July 2001[1]:
- Article 17(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.”
- Article 1(4), the saving clause: “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.”
- Article 1(5)(a), in the version in force since the 2002 protocol: paragraph 4 shall not affect “the benefits conferred … under paragraph 2 of Article 9 …, sub-paragraph b) of paragraph 1 and paragraphs 3 and 5 of Article 17 …, paragraphs 1 and 5 of Article 18 (Pension Schemes) and Articles 24 …, 25 …, and 26 …”[29].
| Provision | Effect | Shielded? |
|---|---|---|
| Article 17(1)(b) | Residence state exempts what the source state exempts | Yes |
| Article 17(2) | Lump sum taxable only where the scheme is | No |
| Article 17(3) | Social security taxable only where resident | Yes |
| Article 18(1) | Growth inside a scheme taxed when paid | Yes |
| Article 18(5) | UK contributions deductible for a US citizen in UK employment | Yes |
Has the IRS or HMRC ever ruled on this?
Neither has ruled on it in anything that binds them. There is no US regulation, revenue ruling, revenue procedure or published ruling on the UK lump sum. On the US side there are three pieces of non-precedential material:
- AM2008-009, a Chief Counsel memorandum dated 21 August 2008, which says: “There are a number of exceptions to the saving clause in Article 1(5), but there is no exception for the benefits conferred by Article 17(2)”[3].
- CCA 201231010, dated 24 April 2012, which explains Article 17(2) as directed at double non-taxation — a UK resident escaping US withholding on a lump sum the UK did not tax either — and reads Article 18(1) as protecting no more than a qualifying rollover[4].
- INFO 2008-0024, an information letter dated 31 March 2008, which concludes that the saving clause permits the United States to tax lump sums from UK schemes[5].
Status matters as much as content: a Chief Counsel memorandum and an information letter are written for the facts in front of the author and cannot be used or cited as precedent. They say what the IRS thinks; they bind neither it nor a court.
HMRC’s position points the same way. Its International Manual states that “although paragraph 2 of Article 17 gives exclusive taxation rights over lump sum payments to the State in which the payment arises, this is in effect overridden by paragraph 4 of Article 1”, and that the treaty “will not prevent either State from taxing its own residents unless the provision is specifically listed in paragraph 5 of Article 1”[6]. Each reads the clause in the direction that preserves its own taxing right.
A return relying on Article 17(2) to exclude a lump sum takes a treaty-based return position, disclosed on Form 8833 under section 6114; the form warns that failure to disclose “may result in a penalty of $1,000 ($10,000 in the case of a C corporation)”[24].
What are the competing readings, and how strong is each?
Four readings circulate, plus a parallel dispute running the other way, set out with their weaknesses, not ranked.
The saving clause governs, and the US may tax. Article 17(2) opens “Notwithstanding the provisions of paragraph 1”, lifting lump sums into the one paragraph of Article 17 that Article 1(5)(a) does not shield[1]. It is the reading of the three IRS documents[3][4][5], the mirror of HMRC’s[6], and the view of practitioners including Phil Hodgen, who concludes the United States “will include the payment in gross income of the recipient”[25], and Golding & Golding[26]. Its weakness is that it reduces an exclusive allocation rule to nothing for those most likely to rely on it.
Article 17(2) is decisive, and only the UK may tax. The paragraph allocates the whole taxing right to the UK, which then exempts the payment up to the allowance; the treaty’s object of avoiding double taxation, and the choice of exclusive wording, should not be hollowed out by a general clause. Harrison Brook USA takes this view while stating that the answer is uncertain, that reasonable advisers disagree and that no formal IRS ruling exists[27]. Its weakness is that the saving clause is treaty text too, and Article 1(5) shows the negotiators knew how to protect particular paragraphs from it — doing so for three paragraphs of Article 17 but not paragraph 2.
The Article 17(1)(b) route. That sub-paragraph requires the residence state to exempt what the source state exempts, and it is shielded[1]. A lump sum is exempt in the UK, so the argument runs the United States must exempt it too, helped by the Exchange of Notes understanding that a payment under a treaty-defined pension scheme is treated as a pension under paragraph 1[2]. Against it: “notwithstanding the provisions of paragraph 1” removes a lump sum from paragraph 1 altogether; the UK exempts only a proportion, and only up to the allowance, so the “would be exempt” condition fails[26]; and the argument undermines itself, since getting into paragraph 1 requires showing the payment is not a lump sum, while HMRC defines one for treaty purposes as “any non-periodic, irregular or abnormal payment of a pension”[6].
Is a pension commencement lump sum even a “lump-sum payment”? The treaty does not define the term[1]. Hodgen flags the uncertainty expressly[25], and Golding & Golding note that “lump sum” is often taken to mean a complete disposition of the pension, which a 25% payment is not[26]. Whether cash taken in slices is a series of lump sums, periodic payments or neither has no verified answer[6].
If the UK does not tax my lump sum, can a foreign tax credit rescue me?
Not by itself. A credit relieves foreign tax that has actually been imposed, and on a lump sum within the allowance the UK imposes none. Article 24 gives each country a credit for the other’s tax, with special rules for US citizens in the UK: Article 24(6)(b) limits the UK credit on US-source income to “the amount of tax, if any, that the United States may impose … on a resident of the United Kingdom who is not a United States citizen”[1]. Tax can therefore be left unrelieved in either direction: on a UK lump sum inside the allowance there is no UK tax for the United States to credit, and on a lump sum the United States charges first the UK credit is limited to what the United States could impose on a UK resident who is not a US citizen — nil, on Article 17(2) read on its own terms[22].
Three mechanics matter: a credit reduces US tax only on foreign-source income[22]; the limitation is computed by category of income rather than item by item[23]; and unused credits carry back one year and forward ten within the same category[22]. Because it works by category, UK tax on the taxable 75% of a withdrawal sits in the same general category as any US tax on the exempt quarter, so a UFPLS, or a lump sum taken alongside taxable drawdown, generates UK tax that may absorb US tax a bare lump sum could never relieve. Whether the UK tax paid exceeds the US tax relieved depends on the whole year; in the example below it exceeds it several times over. That is analysis to confirm with a US preparer, not a conclusion.
Timing matters too. The UK tax year runs from 6 April 2026 to 5 April 2027[20] while a US individual’s tax year is the calendar year, so a payment made between 1 January and 5 April can have its UK tax paid in a different US tax year from the one in which the income is included, and a credit claimed on the paid basis can land in the wrong year. Form 1116 allows foreign taxes to be taken on the accrual basis instead, using “the average exchange rate for the tax year to which the taxes relate”[23]. Our guide to cross-border tax reporting covers record keeping; once the cash is paid, the year is fixed.
Does the same problem run the other way — can the UK tax a lump sum from my 401(k) or IRA?
HMRC says it can, on reasoning that mirrors the US reasoning: Article 17(2) gives the United States exclusive rights over a lump sum from a US scheme, but because Article 17(2) is not listed in Article 1(5), “although the State in which the pension lump sum arises will be able to tax that payment under Article 17, the State in which the recipient is resident will also be able to tax the payment under Article 1”[6]. That guidance page was published on 9 April 2016 and last updated on 15 September 2026; practitioners date the US and UK lump-sum content to March 2025[6][28]. That stance is itself contested: practitioners point out that HMRC previously accepted such a lump sum was not taxable in the UK, and that the change came through manual guidance rather than legislation or an agreed interpretation[28]. The criticism is recorded here, not adjudicated. The UK charge sits in section 574A ITEPA 2003, from 6 April 2017, which starts from the whole lump sum and allows step deductions including for the value of the rights immediately before that date[21]. Our guide to 401(k)s, IRAs and Roth IRAs as a UK resident covers the UK treatment of US accounts.
Worked example: one payment, two calculations, two possible US answers (illustrative)
Fictional household, for illustration only. Ray Beresford is 58, a dual US and UK citizen in Surrey who files a Form 1040 and a UK self assessment return. His SIPP holds £900,000, all uncrystallised, to be designated to drawdown. In 2019 he designated £200,000 and took no cash, so his previously-used amount is £200,000. He has no protections; his other UK income is £18,000, treated here as non-savings income; and the payment falls in UK tax year 2026/27 and US tax year 2026. The US figures apply a single illustrative rate of 24% to the whole payment, with no US basis in the SIPP and no state tax; real US tax is progressive and depends on the whole return. All the figures here are our own arithmetic on published 2026/27 rates and HMRC guidance[8][20], illustrative only, not a forecast or a prediction of any liability and not personal advice; results are not guaranteed and the rules can change.
| Step | Standard calculation | With a certificate |
|---|---|---|
| Applicable amount: a quarter of £900,000 | £225,000 | £225,000 |
| Available lump sum allowance | £218,275 (less 25% of £200,000) | £268,275 (cash taken: nil) |
| Taxed as UK pension income, and the UK tax on it | £6,725; about £1,345 | Nil |
| Illustrative US charge at 24%, less UK tax credited | about £54,000 less £1,345 | about £54,000 less nil |
| Both systems together: that reading, then the UK-only one | about £54,000; about £1,345 | about £54,000; nil |
On the UK side the certificate replaces the assumed £50,000 deduction with Ray’s actual nil and removes the £6,725 otherwise taxed as pension income — worth about £1,345[15][16]. On the US side, the unresolved question bites. On the reading both revenue authorities take, the whole £225,000 is includible whatever the UK does, and the UK tax the certificate saves is the only UK tax creditable against the US charge, so the two effects cancel almost exactly: the certificate changes the UK bill, not the combined bill. On the other reading it saves £1,345 outright and there is no US charge. The same paperwork is worth either nothing or £1,345, depending on an unresolved question of treaty interpretation; whether the UK tax is creditable also depends on Ray’s whole Form 1116 position[22][23].
Hunting for UK tax to manufacture credits does not help. A £300,000 UFPLS instead — £75,000 free of UK tax, £225,000 taxed[14] — would take his UK taxable income to £243,000 and add about £94,500 of UK tax at 2026/27 rates[20]: several times the roughly £18,000 US charge on the tax-free £75,000 at 24%.
The point is narrow: the UK answer and the US answer are two calculations on one payment, and the best UK answer is not automatically the best combined answer. This is not a recommendation to take tax-free cash, to defer it, or to choose any shape of payment.
How the Edale Wealth Hub helps
Edale’s cashflow planner models a lump sum in the year it is taken. It tests the payment against the lump sum allowance and carries the result through the plan, so the effect on later income and the estate is visible rather than assumed.
For a US taxpayer it models UK income tax and US federal tax in the same year, with foreign tax credits between them, so the cost of the payment can be shown under each of the competing readings rather than guessed at: the year with a US charge on the exempt quarter, and the same year without.
Scenarios can be set side by side on the same assumptions — a certificate against the standard calculation, a lump sum against a UFPLS, this tax year against the next. The planner does not resolve the treaty question, and Edale does not prepare US tax returns or IRS forms; its tax outputs are summaries for your own preparer. Arrange a conversation or read about the planner.
Frequently asked questions
Is the UK’s 25% tax-free lump sum taxable in the United States?
There is no settled answer. UK law exempts it up to the lump sum allowance, and Article 17(2) says a lump sum is taxable only where the scheme is established. But the IRS, in non-precedential memoranda, and HMRC, in its manual, both read the saving clause as overriding that paragraph, and no ruling decides it.
What is the lump sum allowance for 2026/27?
£268,275, alongside a lump sum and death benefit allowance of £1,073,100. Both replaced the lifetime allowance for payments made on or after 6 April 2024 and are unchanged for 2026/27. They are personal allowances across all registered schemes, and pre-2024 benefits or a protection can change what applies.
Can a foreign tax credit cover US tax on UK tax-free cash?
Not on its own. A credit relieves foreign tax actually imposed, and the UK imposes none on a lump sum within the allowance, so there is nothing to credit. Credits are computed by category and carry back one year and forward ten, so UK tax on other income may matter.
Do I have to tell the IRS if I rely on the treaty?
A position relying on a treaty provision to reduce or exclude income is a treaty-based return position, disclosed on Form 8833 under section 6114. The form states that failure to disclose may result in a penalty of $1,000, or $10,000 for a C corporation. Ask your US preparer.
Can I take more than 25% of my pension tax free?
Only with a protection. Scheme-specific lump sum protection applies where lump sum rights in a scheme at 5 April 2006 exceeded 25% of the rights in it. Fixed protection 2012, 2014 and 2016 give allowances of £450,000, £375,000 and £312,500, and enhanced protection generally £375,000.
Can HMRC tax a lump sum from my 401(k) or IRA?
HMRC’s International Manual says it can. The reasoning mirrors the US reading: Article 17(2) gives exclusive rights to the United States, but Article 1(4) means the treaty does not stop a state taxing its own residents unless the provision is listed in Article 1(5), and 17(2) is not. The charge sits in section 574A ITEPA 2003.
Sources
- US Department of the Treasury — Convention between the United States of America and the United Kingdom for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains, signed at London 24 July 2001 (accessed October 2026)
- US Department of the Treasury — Exchange of Notes accompanying the Convention, London, 24 July 2001 (accessed October 2026)
- Internal Revenue Service, Office of Chief Counsel — Memorandum AM2008-009, Rollover of distributions from U.K. pension schemes (21 August 2008) (accessed October 2026)
- Internal Revenue Service, Office of Chief Counsel — Chief Counsel Advice 201231010 (memorandum dated 24 April 2012, released 3 August 2012) (accessed October 2026)
- Internal Revenue Service — Information Letter INFO 2008-0024 (GENIN-111967-08), 31 March 2008 (accessed October 2026)
- HMRC — International Manual INTM163160, UK residents with foreign income or gains: double taxation relief: pensions – lump sums (accessed October 2026)
- IRS — The taxation of foreign pension and annuity distributions (accessed October 2026)
- GOV.UK (HMRC) — Rates and allowances: pension schemes (accessed October 2026)
- HMRC — Pensions Tax Manual PTM171000, Lump sum allowance (accessed October 2026)
- HMRC — Pensions Tax Manual PTM172000, Lump sum and death benefit allowance (accessed October 2026)
- HMRC — Pensions Tax Manual PTM063220, Pension commencement lump sum: conditions and entitlement (accessed October 2026)
- HMRC — Pensions Tax Manual PTM063230, Pension commencement lump sum: general limits information (accessed October 2026)
- HMRC — Pensions Tax Manual PTM063240, Pension commencement lump sum: applicable amount (accessed October 2026)
- HMRC — Pensions Tax Manual PTM063300, Uncrystallised funds pension lump sum (UFPLS) (accessed October 2026)
- HMRC — Pensions Tax Manual PTM174100, Transitional rules for 2024-25: lump sum allowance availability (accessed October 2026)
- HMRC — Pensions Tax Manual PTM174300, Transitional tax-free amount certificates (accessed October 2026)
- HMRC — Pensions Tax Manual PTM063130, Protection of pre-6 April 2006 lump sum rights: scheme-specific lump sum protection (accessed October 2026)
- HMRC — Pensions Tax Manual PTM174700, Fixed protection (accessed October 2026)
- HMRC — Pensions Tax Manual PTM174400, Enhanced protection (accessed October 2026)
- GOV.UK — Income Tax rates and Personal Allowances (accessed October 2026)
- HMRC — Employment Income Manual EIM75550, The taxation of pension income: lump sums from foreign pension schemes (accessed October 2026)
- IRS — Publication 514, Foreign Tax Credit for Individuals (accessed October 2026)
- IRS — Instructions for Form 1116, Foreign Tax Credit (Individual, Estate, or Trust) (accessed October 2026)
- IRS — Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b) (accessed October 2026)
- Phil Hodgen, HodgenLaw PC — Treaty treatment of the 25% tax-free distribution from a U.K. SIPP (6 February 2026) (accessed October 2026)
- Golding & Golding — Is a 25% UK tax-free lump sum pension payment taxable in the U.S.? (accessed October 2026)
- Harrison Brook USA — UK pensions 25% tax-free cash and the US tax treaty: what Articles 17 and 18 do, and do not, protect (24 July 2026) (accessed October 2026)
- US Tax & Financial Services — Significant change in HMRC stance on US pension lump sum distributions (31 March 2025) (accessed October 2026)
- HM Revenue & Customs — 2001 UK–USA Double Taxation Convention as amended by the 2002 protocol, in force (Article 1(5) as amended) (accessed October 2026)