How Pension Taxes Differ Between UK and US

When planning for retirement, understanding how pension taxes work in different countries is essential—especially if you’re comparing the UK and the US. While both countries tax retirement income, the rules, thresholds, and benefits can vary significantly.

In this guide, we’ll explore the key differences between pension taxation in the UK and the US to help you make informed financial decisions.

Tax Treatment of Pension Contributions

United States

In the US, contributions to traditional retirement accounts (like 401(k)s or traditional IRAs) are often tax-deductible. You don’t pay tax on the money when you contribute, but you will pay taxes when you withdraw it in retirement. Contributions to Roth IRAs, on the other hand, are made with after-tax money, but qualified withdrawals are tax-free.

United Kingdom

In the UK, pension contributions to schemes such as personal or workplace pensions receive tax relief at your marginal income tax rate. That means for every £100 you contribute, it could only cost you £80 (or less, depending on your tax band). However, like in the US, most withdrawals are taxed.

If you’re still unsure about how tax applies to your contributions, check out planning for taxes in retirement for more insight.

Tax on Withdrawals

US Pension Withdrawals

When you begin withdrawing from a traditional pension or retirement account, the withdrawals are taxed as ordinary income. The amount of tax you pay depends on your total income and filing status.

A portion of Social Security benefits may also be taxable, depending on how much other income you have. You can learn more in our post on Social Security benefits and taxes.

UK Pension Withdrawals

In the UK, you can typically take 25% of your pension pot tax-free. The remaining 75% is treated as income and taxed based on your current income tax rate. This flexibility allows some retirees to draw their pension in a way that keeps them in a lower tax band.

State vs National Taxation

US: Federal and State Taxes

In addition to federal taxes, many US states also tax pension income—though a few states, like Florida and Texas, do not. Some states offer partial exemptions or credits for retirement income.

To get a more accurate idea of your tax liability, you can use tools like our pension tax calculator.

UK: National Tax Only

The UK has no separate state-level taxation. All pension income is taxed based on the national income tax system. This makes retirement tax planning a bit simpler compared to the US system.

Inheritance and Estate Taxes

In the US

The US imposes estate taxes on high-value estates, including retirement accounts. Beneficiaries of traditional retirement accounts typically pay income tax on inherited distributions, though there are different rules for spouses.

In the UK

In the UK, pensions can be passed on tax-free if the account holder dies before age 75. After 75, the recipient pays tax on the income as they withdraw it. However, pensions are usually outside of the deceased’s estate for inheritance tax purposes, which can be an advantage.

Cross-Border Taxation and Agreements

If you’re a citizen of one country and living or retiring in another, tax treaties may affect how your pension is taxed. The UK and US have a tax treaty to avoid double taxation and clarify which country has taxing rights over specific pension income.

More details on this can be found in the UK/US tax treaty document from HMRC.

Final Thoughts

While both the UK and US tax pension income, their systems have clear differences in how contributions, withdrawals, and inheritance are treated. Understanding these variations can help you make smarter retirement decisions, especially if you’re living abroad or have international income sources.

If you’re wondering how much you should withhold from your pension to avoid unexpected bills, our article on how much should you withhold from retirement income may help you plan ahead.