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Whereas any amount withdrawn in set, periodic, frequent intervals (e.g. weekly, monthly, annually etc.)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