The UK Pension Allowance allows for tax-efficient retirement savings, with tax relief on contributions up to the £60,000 annual allowance. However, high earners with an adjusted income over £260,000 face a tapered allowance, reducing their tax-free contributions.
Although the Lifetime Allowance (LTA) has been abolished, tax rules on pension withdrawals remain. International taxpayers and US expats must consider how UK pension contributions interact with US tax laws, including potential double taxation.
Key Takeaways
The standard pension allowance is £60,000 per year.
High earners with an income over £260,000 may face a tapered allowance, reduced to £10,000.
Unused allowances from the previous three years can be carried forward.
The Lifetime Allowance (LTA) is abolished, but withdrawals may still be taxable.
US expats face unique tax challenges—some UK pensions may be taxable in the US and require additional reporting.
Strategic planning helps maximize pension contributions and minimize tax liabilities in both the UK and the US.
Annual Pension Allowance in 2025
The UK pension annual allowance is the maximum amount you can contribute to a pension scheme while still benefiting from tax relief.
Standard Annual Allowance: £60,000 (for the 2024/25 tax year).
Who qualifies? All contributions made by you, your employer, and third parties count toward this limit.
What if you exceed it? Contributions beyond your allowance may trigger extra tax charges.
Tapered Annual Allowance for High Earners
If your adjusted income exceeds £260,000, your pension allowance is reduced by £1 for every £2 over the limit.
Minimum allowance: £10,000 (for those earning £360,000 or more).
Includes both employee and employer contributions.
Carry Forward Rule – Maximizing Pension Contributions
If you haven’t used your full allowance in the past three tax years, you can carry it forward to offset excess contributions.
Example: If you contributed £40,000 last year (instead of £60,000), you can carry forward £20,000 to use in a future tax year.
US Tax Considerations for UK Pension Allowance
No Automatic US Tax Deferral
The UK Pension Allowance does not guarantee tax relief in the US.
US tax law may not recognize UK pensions as tax-deferred. Contributions could be taxable in the US the year they are made.
Foreign Grantor Trust Rules for Some Pensions
SIPPs and certain workplace pensions may be treated as foreign grantor trusts under US tax law.
This could lead to additional US tax and reporting requirements.
Mandatory US Reporting (FBAR & FATCA)
If the total value of foreign accounts (including pensions) exceeds $10,000, US expats must file an FBAR (FinCEN Form 114).
FATCA (Form 8938) applies if total foreign financial assets exceed certain thresholds.
Risk of Double Taxation & US-UK Tax Treaty Relief
UK pension withdrawals may be taxed in both the UK and the US.
The US-UK Tax Treaty helps prevent double taxation, but the right tax elections must be made in advance.
How the US Treats the Lifetime Allowance Abolition
While the UK removed the Lifetime Allowance, the US tax treatment remains unchanged.
Large pension withdrawals could still be taxed at US ordinary income rates.
US Expats & UK Pensions: Planning is essential to avoid unexpected tax liabilities!
Case Study: Pension Allowance Strategy for a High-Earning US Expat
The High Earner’s Pension Dilemma
Income: £300,000 (Adjusted UK Income)
Standard UK Pension Allowance: £60,000
Tapered Allowance: Reduced to £10,000 (due to income over £260,000)
UK Perspective
Due to their income exceeding £260,000, this individual’s pension allowance is reduced to just £10,000.
Any pension contributions above £10,000 could be subject to UK tax charges.
They have unused allowances from previous years, which could be carried forward to offset excess contributions.
US Tax Considerations
No Automatic US Tax Deferral: Unlike UK rules, pension contributions may not be tax-deductible in the US, meaning this individual could be taxed immediately in the US on their pension contributions.
Foreign Grantor Trust Issues: If their pension scheme is a SIPP, it could be classified as a foreign grantor trust under US tax law, requiring additional reporting and potential tax liability.
US Taxation on Employer Contributions: Any employer pension contributions might also be treated as taxable income in the US, even if tax-free in the UK.
FBAR & FATCA Reporting: Since this high earner’s total UK pension value exceeds $10,000, they must report it on their FBAR (FinCEN Form 114) and potentially Form 8938 under FATCA.
Tax Treaty Considerations: Under the US-UK Tax Treaty, the individual may be able to mitigate double taxation, but proper tax elections must be made.
Solution: Using Carry Forward to Maximize Contributions While Managing US Tax Risks
This individual has unused allowances from previous years:
2021-22: £36,000 unused
2022-23: £21,000 unused
2023-24: £10,000 limit exceeded by £12,000
To reduce UK tax penalties, they can carry forward past allowances to cover their excess contributions.
UK Tax Impact: No additional tax charge since excess contributions are covered by carry-forward rules.
US Tax Impact: Since pension contributions may not be tax-deferred in the US, they must report and potentially pay US tax on them for the year they were made.
Strategy: Work with a US-UK tax expert to mitigate double taxation, correctly report foreign pension contributions, and maximize tax efficiency in both jurisdictions.
Lifetime Allowance Abolition: What It Means for You
The Lifetime Allowance (LTA) of £1,073,100 was abolished on April 6, 2024.
You can now save unlimited amounts in a pension without facing LTA tax charges.
However, withdrawals exceeding certain limits are still taxed at your income tax rate.
For US expats, this change does NOT affect US tax treatment—large pension withdrawals may still be taxable in the US.
UK Pension Allowance Calculator
Use our UK Pension Allowance calculator to help estimate your entitlements for carryover and annual allowance
The calculation provided is an example, in many circumstances there are more variables to consider when calculating the full amount you can contribute
FAQ: UK Pension Allowance & US Tax Considerations
1. What is the UK Pension Allowance in 2025?
The UK Pension Allowance is the maximum amount you can contribute to your pension each tax year while still benefiting from UK tax relief. In the 2024/25 tax year, the standard annual allowance is £60,000.
2. How does the UK’s Tapered Pension Allowance work?
If your adjusted income exceeds £260,000, your pension allowance is reduced by £1 for every £2 above this threshold. The minimum allowance is £10,000 for individuals earning £360,000 or more.
3. Can I carry forward unused pension allowances?
Yes. You can carry forward unused allowances from the past three tax years, as long as you were a member of a UK-registered pension scheme during those years.
4. Has the Lifetime Allowance (LTA) been abolished?
Yes. The Lifetime Allowance (LTA) was removed on April 6, 2024. There is no longer a limit on pension savings, but withdrawals may still be subject to UK income tax at your marginal rate.
5. How does the US tax UK pension contributions?
Unlike in the UK, where pension contributions receive immediate tax relief, the US may tax contributions in the year they are made. Some UK pensions may also be classified as foreign grantor trusts, leading to additional US tax reporting requirements.
6. Can UK employer pension contributions be taxed in the US?
The UK Pension Allowance allows for tax-efficient retirement savings, with tax relief on contributions up to the £60,000 annual allowance. However, high earners with an adjusted income over £260,000 face a tapered allowance, reducing their tax-free contributions.
Although the Lifetime Allowance (LTA) has been abolished, tax rules on pension withdrawals remain. International taxpayers and US expats must consider how UK pension contributions interact with US tax laws, including potential double taxation.
Yes. While UK employer pension contributions are usually tax-free in the UK, the US may treat them as taxable income in the year they are made.
7. Do UK pensions need to be reported to the IRS?
Yes. US expats with UK pensions may need to file:
✅ FBAR (FinCEN Form 114) – If total foreign financial accounts exceed $10,000 at any time in the year.
✅ FATCA (Form 8938) – If total foreign financial assets exceed the FATCA thresholds.
8. Does the US-UK Tax Treaty protect UK pensions from US tax?
The US-UK Tax Treaty helps reduce double taxation, but proper tax elections must be made. UK pensions are not automatically tax-exempt under US law.
9. What happens when I withdraw from my UK pension as a US taxpayer?
UK pension withdrawals are taxed in the UK at your marginal rate. In the US, they may also be subject to ordinary income tax, but tax treaty provisions may allow for credits to reduce double taxation.
10. How can I optimize my pension allowance while minimizing US tax liability?
🔹 Plan contributions carefully to avoid unexpected US taxation.
🔹 Consider carry-forward allowances to optimize tax relief.
🔹 Work with a cross-border tax specialist to navigate IRS reporting & treaty elections.
🔹 Ensure proper FBAR & FATCA compliance to avoid penalties.
Conclusion: Making Sense of Your UK Pension Allowance
Understanding how the UK Pension Allowance fits into your overall tax position—especially if you have international tax obligations—can be challenging. The rules around tapered allowances, carry forward, and cross-border taxation require careful planning to avoid unnecessary tax liabilities.
At Bambridge Accountants, we specialize in UK and US tax matters, including the nuances of pension taxation for international taxpayers. If you’re unsure about how much you can contribute, whether you have unused allowances, or how your UK pension is treated in the US, we’re here to help.
If you’d like tailored advice on your pension contributions and tax position, feel free to reach out.