UK tax on US pension lump sums

[Mairi S]

I have a small US pension as a legacy of working there for a few years once upon a time. I was intending to take this as a lump sum, primarily to not have to deal with Fidelity or the IRS more than just this once. plus the non-resident tax would be a bit lower in the US anyway. I understood from the HMRC forum (now shut down ?) that this would not be taxed in the UK as well. However, I have just read in some recent online posts that HMRC has said it will also tax this after all. My question is: –has the UK actually started doing this for real, given that precedent says it never has, even if the US/UK tax treaty technically says UK may do (because the Americans insist on the “savings clause” in its treaties).

[DavidTreitel]

You will file a US return calculating the US tax payable on the distribution. You will separately report the distribution to HMRC, claiming a credit in the UK for whatever US tax you have calculated is payable on the distribution.

[Mairi S]

Thank you. My question was really seeking to find out (if anyone knows yet) whether the UK is actually doing this, given the break in precedent it would represent? As I understand it, the clause isnt something that UK has ever used, or even has in other treaties. Moreover the recent development is described as “guidance”, so what force does that carry?

[Bill67]

I have a very similar query as this original post, only I already took my lump sum 401(k) a year ago. I had much the same motivation, namely to not ever have to deal with IRS again, given the amount was modest and not worth the admin hassle of spreading out over time (plan administrator insisted on withholding, despite my W8-BEN, so I’d have to file US return every time I withdrew in instalments).

I’m in the process of filling in my 24/25 UK tax return right now and have come across the same recent HMRC “guidance” dated March 2025. This maybe implies a change in HMRC’s long-held stance, but doesn’t actually say anything has changed, although that’s just my personal read of it. After all, the tax treaty remains the same, so I can’t see anything has changed legally. All HMRC has done is to explicitly re-state what has always been the case. The UK has always been able to tax residents on US lump sum pensions (even if it hasn’t done so in practice). The fact that the UK may tax its residents doesn’t mean that it will.

If I claim treaty exemption and say that no UK tax is due (which is what precedent says was the case at the time I exercised my payout), surely the worst that can happen is HMRC disagree and I end up having to pay a bit more in total tax than I would have previously. Besides, does hMRC have any other track record of retrospective taxation that breaks with a long-standing precedent? That would seem very un-British !