US pension and UK Tax

I have a US 401K pension having spent time in the USA. UK and US have a double taxation treaty on pensions. Please confirm that the following self-assessment action will be correct for tax year 2024/24:- 1) If convert the whole 401K pension into a single lump sum and it is taxed in the US and I transfer it to my UK bank account, it will not be taxed again in the UK. 2) Specifically, I should not declare it as foreign income on my self-assessment (SA)t form, but leave a simple note in "further information" on the SA form confirming that US tax has been taken. I have yet to do this but want a clear understanding of how to proceed. Thanks

Hi GeoffD69,
There is no legislative definition of a Lump Sum but HMRC regards these as being any non-periodic payment of a pension - That is, any non-regular payment that decreases the value of the remaining pension pot after such payment is made.
For example, the first (IRA) withdrawal is taken in year 1, the next withdrawal was made in year 5, and another withdrawal in year 7; such payments will not be regarded as periodic and will be treated as Lump Sum’s under the UK/USA DTA.
Whereas any amount withdrawn in set, periodic, frequent intervals (e.g. weekly, monthly, annually etc.) would not be a Lump Sum, but rather periodic payments.   
Article 17(2) of the UK/USA DTA provides the US with the right to tax any Lump Sum payment which is made from a US sourced pension scheme (including IRAs).
However, the UK is also permitted to tax the same lump sum payment(s), which is in accordance with Article 1(4) of the DTA – Both Article 17(2) and Article 1(4) are outlined below and, when read from the perspective of a UK resident, state:                                                                                                                                                                  
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 [USA]and beneficially owned by a resident of the other Contracting State [UK]shall be taxable only in the first-mentioned State [USA].   
Article 1(4) - Notwithstanding any provision of this Convention except paragraph 5 of this Article, a Contracting State [UK and/or USA]may tax its residents, and by reason of citizenship may tax its citizens, as if this Convention had not come into effect. 
A UK resident, Article 1(4) above permits the UK to tax any US sourced Lump Sum payment received, as if Article 17(2) of the DTA was not in force or applicable – Article 1(4) effectively ‘overrides’ the provision at Article 17(2), and the consequence is that both the UK and USA can tax any Lump Sum payment received from a US sourced pension scheme.  
In these situations, double taxation will occur since both the UK and the USA can tax the same income. However, that double taxation will be eliminated in accordance with Article 24(4)(a) of the DTA which requires the UK (as the country of residence) to provide FTCR to offset the US tax correctly paid against the UK tax charged on the same the IRA withdrawal.  
Thank you.
 

Many thanks, I am in danger of understanding it ! So, in simple terms: 1) If my USA pension lump sum is taxed in the USA at say 30% and my UK marginal rate is 40% then HMRC will tax the original amount at 10 % due to Article 24(4)(a) 2) What proportion of the original USA lump sum is used to determine whether I fall into the 45% tax bracket? 3) Is the HMRC self-assessment tax form smart enough to handle this tax situation - if so please tell me how to fill it in to avoid over/under paying tax? Many thanks

Hi,

HMRC will tax the pension lump sum at 40% and you claim a credit for 30% paid in the USA. This credit is set against the tax chargeable in the UK, reducing the amount payable.

Thank you.

To paraphrase for anyone else who has the same questions about the online self-assessment form and how a UK national resident in the UK receiving a 401K lump sum pension from the USA is taxed by HMRC: 1) HMRC treats the whole USA pension lump sum as income and adds it to whatever else you receive in the UK - this means you can get pushed into a higher tax band. 2) The online self-assessment form is smart enough to record the total foreign income (before tax) and the tax paid in the USA and to properly deduct that USA tax from your total tax. 3) At the very end of all the inputting, the online form works out the tax for the total income before tax (including the USA income) then it deducts the tax paid in the USA from that total income tax bill. Many thanks

Can I please confirm my understanding of this, as looking through the previous posts I am still a little confused. A US citizen who has been living, working and paying tax in the UK for the last 30 years wishes to make a withdrawal from their 401K. This will be taxed in the USA at 30% at the point of withdrawal. The whole sum withdrawn will be treated by HMRC as taxable income and must be accounted for on their UK tax return, which will push this person into the 40% rate tax bracket If I quote the posting by HMRC Admin 19: HMRC will tax the pension lump sum at 40% and you claim a credit for 30% paid in the USA. This credit is set against the tax chargeable in the UK, reducing the amount payable. Therefore on the UK tax return 40% tax will be charged, but 30% will be offset against this leaving just the additional 10% to pay. If however, the UK tax was to be less than the 30% already charged by the IRS a refund could be claimed by submitting a form 1040NR – Foreign tax credit relief to the IRS. Could you please confirm that my understanding is correct? How would we demonstrate on the UK tax return that the 30% interest has been charged? Thank you for your help on this.

Hi,
That is correct. you would claim foreign tax credit relief on the foreign page of the return and you can attach evidence of this by inlcuding a scanned copy as a PDF document1.
Thankyou.

My situation is similar to GeoffD69. I have a 401k from past US employment and am now a UK resident and citizen. If I were to take a 25% lump sum from my 401k I understand that the US would tax this. My question is whether the UK would tax this, or can I take 25% tax free in the same way as I can for a UK pension. Thanks

I believe I understand the treatment of lump sum payments from US on 401k/IRA lump sum payments. But what if I am taking monthly payments from an annuity? Do the same rules apply?

Hi James

Yes. the tx free part refers to the whole pension pot so you would still be liable to tax on 75% of what you take as a lump sum. This applies to UK pensions also.

Thanks

Hi! I'm an Indian citizen, living and working in the UK on the Graduate Route Visa. I've been enrolled into a pension scheme and have some pension from my previous employer. Would I be able to access my pension at the appropriate age from India? If so, what are the methods of doing that? Or, can I opt out of a pension scheme entirely? I'm still within that one month window of pension scheme sign up.

Thanks for the response. To clarify, if I take just 25% of my 401k pension pot now as a lump sum would this 25% be free of UK tax. I believe this is the case with a UK pension. I understand that if I then take the remaining 75% as a lump sum at a later date this would all be subject to UK tax. Or is it that whatever fraction of the pot that I take now as a lump sum 75% of this fraction will always be UK taxed. Thanks

Hi dmbante,
Yes, they do.
Tax on foreign income
Thank you.

Hi
HMRC cannot comment on future events as legislation and/or plans may change. We also cannot advise you on opting out and you will need to discuss this with the pension company/employer.

Hi James
It is whatever fraction you take, only 25% will be tax free with the balance taxed.

UK national now resident in UK has US 401K pension wishes to access, Please can you confirm Lump sum or regulars taxed the same under UK US double taxation? Is 25% tax free under UK taxation if accessing full pot? If you access US401K in full do you trigger MPAA rules for pension contributions? Is it possible to transfer from a US401 into an International Sipp?

Hello, I'm new to this forum and find the content above of interest and informative. However I'm not sure i can determine an answer to my particlar query relating to the UK tax liability on bringing funds from a USA Roth IRA into the UK. Background is that I am a UK citizen and full time resident, now retired after working in the USA from 2002 to 2018.During that time I invested in a company supported 401K. When I returned to the UK, this fund was transferred into an ordinary IRA. In addition, I also opened a small Roth IRA account at that time. My query is - can I transfer funds from the ordinary IRA account into the Roth IRA and then pay the US tax due at that stage direct to the IRS ? Next, can I then transfer funds from the Roth IRA without additional tax being due to HMRC ? Assuming that I can do the above, how would declare this on my self assessment ? I look forward to your guidance. Rob

Hi
HMRC cannot comment on the tax position on the US when you arrange an inter transfer and you will need to contact the IRS for details.  Tax in the UK when you withdraw the pension depends on whether it is a lump sum or periodic payments. 

Hello, thank you for your reply. I fully understand that you cannot advise on US taxation questions. Let me pose the question differently. On the basis that I pay tax direct to the IRS on any tax due on funds transferred from a Roth IRA, would HMRC then levy any additional tax in the UK based on the 2 scenarios: a) An annual lump sum transfer from the USA to the UK b) A regular monthly transfer from the USA to the UK Thank you [personal details removed by admin]

As a UK citizen and resident can you please advise where on the self assessment form I would declare my lump sum payment from my traditional IRA? Thank you.