US Insights

Pension Planning for US/UK Taxpayers Ahead of Possible Tax Changes

As the end of 2025 approaches, UK taxpayers aged over 55 have been actively reviewing their pension options amid speculation around changes to income and inheritance tax rules. For those who are also US taxpayers, these developments bring additional complexity, particularly around how distributions and potential UK reforms interact with the US tax system.

What’s Already Changed?

In March 2025, HMRC published updated guidance confirming that lump-sum distributions from US pension plans to UK residents are now subject to UK tax. A foreign tax credit (FTC) may be available for any US tax paid on the same distribution.

This marks a significant shift from the long-held understanding that such lump-sum withdrawals were exempt from UK tax under the US-UK tax treaty. As a result, many individuals who had planned to draw on their US pensions tax-free in the UK now face an additional UK tax cost.

What’s Next?

From April 2027, unspent UK pension pots may be brought within the UK inheritance tax (IHT) regime for the first time. This would represent a major policy change, potentially altering long-term financial and estate-planning strategies for many.

With the UK Autumn Budget scheduled for 26 November 2025, speculation continues about further changes, particularly around the 25% “tax-free” lump sum, which has been a key feature of UK pensions for decades. The possibility of reform means that timing and coordination between UK and US tax systems will become even more critical.

Why This Matters

For years, the US-UK tax treaty provided a degree of stability for cross-border retirement planning. The recent developments have shaken that foundation.

For US/UK taxpayers, the impact is twofold:

• Certain UK exemptions or treaty protections may no longer apply
• Timing mismatches between UK and US tax years can lead to double taxation unless carefully managed

As a result, individuals should review both their income and estate plans in light of these evolving rules to ensure that pension withdrawals – and any pre-budget planning – remain tax-efficient in both jurisdictions.

Who Should Take Action?

US/UK taxpayers aged 55 and above should consider reviewing their pension arrangements now. Specifically:

Assess lump-sum options: Evaluate whether taking the 25% tax-free amount (or part of it) remains beneficial before any potential UK changes

Coordinate tax timing: Ensure that UK taxes on any withdrawals are paid before 31 December, where possible, to allow a foreign tax credit on your US return for the 2025 tax year

Review estate and succession planning: Those with substantial unspent pension pots should consider the potential IHT exposure from April 2027 and how withdrawals fit into broader wealth-transfer goals

Engage both UK and US advisers: Cross-border coordination is essential to align treatment and avoid double taxation pitfalls

Next Steps

If you are affected by these changes or considering making pension withdrawals ahead of the Autumn Budget, now is the time to seek advice. Early action can help you navigate the evolving tax environment, protect your retirement savings, and ensure your plans remain tax-efficient on both sides of the Atlantic.

Reach out to our US/UK Private Client team to see how we can help you.