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Is the UK 25% PCLS tax free in the US?

Is UK Pension Plan Income Taxable in US?

Is the UK 25% PCLS tax free in the US?

When pension benefits are built up in the UK, HMRC allow you to take 25% of the value as a tax free lump sum when you reach retirement. The current pension access age is 55.

The tax free element is limited to 25% of your lifetime allowance, which is £1,073,100 for the 2021/22 tax year. Each time you crystallise some of your pension, 25% of it will be tax free (up to the LTA limit). The remaining 75% moves into an uncrystallised fund – any drawdowns from this element are taxable at your marginal rate.

This is useful as it allows you to phase your drawdown whilst remaining invested.

What if I take my 25% PCLS in the USA?

Unfortunately, the 25% PCLS is not tax free in the US. The IRS simply view it as a pension payment and it is taxed according to your marginal income tax rate.

The UK offer these pension benefits to help ease reliance on state provisions in retirement – from a US perspective, the pension wasn’t built up there so they don’t want to provide any tax relief on it.

Generally therefore, it’s not the most tax efficient way to draw down your UK pension income. An alternative solution (and the one we tend to recommend) is applying for your Nil Tax (NT) code to have the income paid out gross.

How does the Nil Tax (NT) code work?

In the United Kingdom, pension income is taxed through PAYE (your tax code). The amount of tax you pay each month depends on the tax code you have in place (based on your income level). If you have an NT code in place, it essentially instructs your pension scheme to pay out any income free of UK tax.

You can apply for the NT code if you are a non-UK resident. You then just need to declare the income in your country of residence.

How can you apply for a Nil Tax (NT) code?

Firstly, you would need to create a government gateway account online through the gov.uk website. Once this is created, you will be able to complete the P85 form online.

Alternatively, you can do the form by post however this does usually take longer.

Get in touch

If you are wanting some further advice regarding your UK pension as a US resident, please do not hesitate to get in touch with our team to discuss your options.

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