UK Pension Drawdown and US Tax: How Americans Report It

UK pension drawdown US tax rules depend on where you live when you take the money. If you live in the UK, HMRC taxes each drawdown payment under PAYE and the IRS taxes it again as ordinary pension income, with a Form 1116 foreign tax credit removing most double tax. If you live in the US, Article 17 of the UK-US treaty generally gives the US the sole right to tax.

Flexi-access drawdown has become the default way to take income from a defined contribution pension or Self-Invested Personal Pension (SIPP). It lets you take as much or as little as you want, whenever you want. For an American, however, that flexibility creates two tax calendars, two sets of rules and a real risk of paying twice. This guide covers one narrow question: what happens to each drawdown payment, not the tax-free lump sum or the transfer of the pot.

How HMRC taxes UK pension drawdown

Drawdown income is taxable pension income in the UK. Your provider deducts Income Tax through PAYE, just like a salary. For the 2026/27 tax year, the Personal Allowance is £12,570, and income above it is taxed at 20%, 40% and 45% in England (GOV.UK, 2026/27). You can normally access a pension from age 55, rising to 57 from 6 April 2028.

Emergency tax on the first payment

The first drawdown payment is often taxed on an emergency "Month 1" basis, because the provider has no tax code for you yet. That assumes you will receive the same amount every month, so a single large withdrawal can be heavily over-taxed. You can reclaim the excess from HMRC. Use form P55 if you have taken part of a pot, P50Z if you have emptied it and stopped work, or P53Z if you have emptied it and have other income. HMRC explains the process on its P55 repayment guidance.

The Money Purchase Annual Allowance

Taking taxable drawdown income triggers the Money Purchase Annual Allowance (MPAA). From that point, tax-relieved contributions to defined contribution pensions are capped at £10,000 a year, a limit in force since 6 April 2023 (HMRC). Taking only tax-free cash does not trigger it. This matters if you are still working and contributing.

How the IRS taxes UK pension drawdown

The IRS sees a drawdown payment as a distribution from a foreign pension plan. You report it on Form 1040, lines 5a and 5b, as pension income. It is ordinary income, taxed at your normal US rates. It does not qualify for the Foreign Earned Income Exclusion under Internal Revenue Code section 911, because pension income is not earned income.

Your US basis in the pension

You only pay US tax on the part of each payment that exceeds your US "investment in the contract". Basis arises where contributions were already taxed in the US. For example, contributions made before Article 18 treaty relief applied, or contributions above treaty limits, may have been included in your US income. Growth inside the pension, and contributions that received treaty relief, carry no basis. Good records matter here. Without them, the IRS treats the whole payment as taxable.

Currency conversion

Convert each payment into US dollars at the exchange rate on the date you received it, or use the IRS yearly average rate consistently. The IRS yearly average currency exchange rates page publishes the annual rate. Convert the UK tax withheld in the same way.

Where you live decides which country taxes first

The UK-US Income Tax Treaty of 2001 sets the rules. Article 17(1)(a) says a pension beneficially owned by a resident of one country is taxable only in that country. However, the saving clause in Article 1(4) lets the US tax its own citizens as if the treaty did not exist. As a result, the outcome turns on residence and citizenship together. Our UK-US tax treaty page explains the saving clause in detail.

Living in the US: stop UK tax at source

If you have moved back to the US, the treaty gives the US the sole taxing right. Nevertheless, your UK provider will keep deducting PAYE until HMRC tells it otherwise. You apply using form DT-Individual, with IRS Form 6166 certifying US residence. HMRC then issues an "NT" (no tax) code to your provider. Tax already deducted can be reclaimed.

Claiming the foreign tax credit on Form 1116

If you live in the UK, the UK tax on drawdown is usually higher than the US tax on the same income. Consequently, a correctly prepared Form 1116 often eliminates the US tax on the payment. Pension income attributable to past employment is generally general category income. Excess credits can be carried back one year or forward ten years under section 904(c).

The tax year mismatch

The UK tax year runs from 6 April to 5 April, but the US uses the calendar year. A drawdown taken in February 2027 falls in UK tax year 2026/27 but US tax year 2027. You must match each payment, and the UK tax on it, to the correct US year. Mistakes here are the most common cause of lost credits we see in pension files.

An illustrative example

Consider an illustrative US citizen living in Bristol with a £400,000 SIPP and a small UK salary. They take £30,000 of taxable drawdown in the 2026/27 tax year. The figures are illustrative. HMRC taxes the drawdown through PAYE, and the first payment is over-taxed on the Month 1 basis, so they file a P55. On their US return, they report the dollar value of each payment on Form 1040, subtract any documented basis, and claim the UK tax actually paid on Form 1116. Timing drawdowns to fill the UK basic rate band each year often produces the lowest combined UK and US tax.

Reporting the pension itself

Drawdown does not end your information reporting. A UK pension is generally a foreign financial account for FBAR purposes and a specified foreign financial asset for Form 8938. Our guide to reporting a SIPP on the FBAR and Form 8938 covers the detail. For the 25% tax-free element, see our separate guide to the UK pension lump sum and US tax.

If you are planning drawdown from a UK pension as a US citizen, book a consultation with our US-UK pensions team. We model the UK and US tax on each withdrawal before you take it.

Frequently Asked Questions

Is UK pension drawdown taxable in the US?

Yes, for US citizens and US residents. The IRS treats UK pension drawdown as ordinary pension income, reported on Form 1040 lines 5a and 5b. Only the part exceeding your documented US basis is taxable, and UK tax paid can usually be credited on Form 1116.

Do I pay UK tax on pension drawdown if I live in the US?

Generally no. Article 17(1)(a) of the UK-US tax treaty gives the country of residence the sole right to tax a private pension. You must apply to HMRC on form DT-Individual, with IRS Form 6166 proving US residence, so HMRC issues an NT code to your pension provider.

Can I use the Foreign Earned Income Exclusion on UK pension income?

No. The Foreign Earned Income Exclusion under Internal Revenue Code section 911 applies only to earned income such as salary or self-employment profit. Pension drawdown is unearned income, so double tax relief comes from the foreign tax credit on Form 1116 instead.

How do I get back emergency tax on my first UK pension drawdown?

Claim it from HMRC. Use form P55 if you have taken part of your pension and will not take more that tax year, P50Z if you have emptied the pot and stopped work, or P53Z if you have emptied the pot and have other income. HMRC can also refund it automatically at the end of the tax year.

Does UK pension drawdown affect how much I can pay into a pension?

Yes. Taking taxable drawdown income triggers the Money Purchase Annual Allowance, which caps tax-relieved defined contribution pension savings at £10,000 a year (HMRC, since 6 April 2023). Taking only the tax-free lump sum does not trigger it.

What exchange rate should I use for UK pension drawdown on a US return?

Use the spot rate on the date of each payment, or apply the IRS yearly average exchange rate consistently. Convert the UK tax withheld on the same basis, so the income and the foreign tax credit on Form 1116 match.