15 October 2026
If you have a US pension and a UK connection, whether you are living in the UK, based overseas, or moving between the two, the rules that govern how that pension is taxed shifted significantly in March 2025.
The change came in a guidance update published by HMRC on 12 March 2025, and it has significant financial consequences for a large and growing number of people straddling the US and UK tax systems.
The most obviously affected group is US citizens living in the UK who hold a 401k, a traditional IRA, or another taxable US pension plan. But the net spans even wider. British nationals who have spent part of their working life in the United States and built up a US pension before returning home are equally affected. A third group is British nationals who have inherited US pension assets from an American spouse or partner.
A fourth group worth mentioning is British nationals living abroad, including in Dubai, who are genuinely non-UK residents under the Statutory Residence Test. For them, the March 2025 change does not apply, as the UK can only tax its own residents. But residence status is not always as clear-cut as people assume, and anyone who is not certain they have made a clean break from UK residence should take advice before drawing on US pension assets. In all cases, how and when those assets are drawn down has just become considerably more important and considerably more complex.
Unlike the UK, which taxes people on the basis of residence, the United States taxes its citizens on their worldwide income regardless of where they live. This means that a US citizen living in the UK is simultaneously a UK taxpayer by residence and a US taxpayer by citizenship.
The US provides several mechanisms to prevent its citizens being taxed twice on the same income. The Foreign Earned Income Exclusion allows qualifying Americans abroad to exclude a portion of their foreign earned income from US tax entirely. The Foreign Tax Credit gives a credit for taxes already paid to another country, reducing the US liability dollar for dollar. And the UK-US Double Taxation Agreement, in force since 2003, allocates taxing rights between the two countries across different categories of income, including pensions. In practice, these mechanisms work alongside each other, and understanding which applies to which income type is central to managing the overall tax position. Pension income is governed by Article 17 of the treaty, and it is here that the March 2025 change has had its most significant impact.
For more than twenty years, the widely understood position was that lump sum distributions from taxable US pension plans, including 401ks and traditional IRAs, paid to a UK resident were taxable only in the United States under Article 17(2) of the UK-US double tax treaty, and therefore exempt from UK income tax. Many advisers, accountants, and pension administrators have been operating on that basis since the treaty came into force.
On 12 March 2025, HMRC updated its guidance at INTM163160 of the International Manual, asserting that Article 1(4) of the treaty, known as the saving clause, overrides the previous exemption on lump sum withdrawals. The saving clause allows each country to tax its own residents as though the treaty did not exist. HMRC now takes the position that the UK can therefore tax lump sum withdrawals from US pension plans received by UK residents, with a credit available for any US tax already paid on the same amount. The practical effect is significant. The US effective tax rate on pension distributions is often lower than the UK additional rate of 45%, meaning UK residents may still face an additional UK tax bill even after the US tax credit is applied. High-earning UK residents receiving US pension lump sums could face an additional tax uplift of around 8 to 11% on their overall global tax position as a result of this change.
Consider a British national, UK resident, whose late American spouse built up a substantial 401k over a long career in the United States. They are UK resident, have no US connections of their own, and have been advised that the pension assets they inherited are sheltered from UK tax under the treaty. Under the position that prevailed for over twenty years, that advice would have been correct. Under HMRC’s updated stance, a lump sum distribution from those inherited assets is now also subject to UK income tax, with only a partial credit available for any US tax paid.
The March 2025 change applies specifically to lump sum distributions. Periodic distributions, regular and consistent drawdowns from a US pension, are treated differently under Article 17(1) and remain taxable only in the country of residence. HMRC’s own guidance at INTM163160 is clear that what constitutes a lump sum depends on the facts and circumstances, including the regularity and size of payments relative to the total fund. A payment representing less than 20% of the fund, made regularly alongside other consistent payments, is more likely to be treated as a periodic payment than a lump sum.
This matters considerably from a planning perspective. Taking smaller, regular distributions rather than a single large lump sum may preserve the more favourable treaty treatment and significantly reduce UK tax exposure. Timing of drawdowns, the size of each distribution relative to the total fund, and the pattern of payments over time all have material consequences that are worth exploring before a decision is made. This is also where 401k to Roth IRA conversions become relevant. A Roth IRA is funded with money that has already been taxed in the US, meaning withdrawals are tax-free in America. This treatment is protected under the treaty, meaning the March 2025 change does not affect it. Qualifying Roth IRA withdrawals therefore remain exempt from UK tax even under HMRC’s updated position. For someone with the option to convert 401k funds into a Roth IRA before becoming UK resident, or before making any drawdowns, this can represent a significant long-term tax saving. However, converting a 401k into a Roth IRA triggers a US tax charge in the year it is done, and the timing relative to UK residence matters significantly. This is an area where specialist advice is essential before any decision is made.
HMRC’s new interpretation is not without controversy. The saving clause has historically been seen as a US-centric mechanism, and HMRC’s application of it to UK residents represents a significant departure from over twenty years of settled practice. The guidance does not expressly confirm whether HMRC intends to apply this treatment retrospectively to lump sums already taken under the old understanding, or prospectively from March 2025 onwards. That question remains open, and the position continues to develop. Anyone who has already received a US pension lump sum and treated it as exempt from UK tax should take advice on whether their position needs to be reviewed. Anyone planning future distributions should not proceed without specialist advice first, given how materially the landscape has shifted. At Hodgens Global we keep a close watch on developments in international tax guidance and treaty interpretation, and their real consequences for clients with cross-border financial interests.
Not sure whether these rules apply to your situation? Get in touch, and we will give you a clear picture of where you stand.