Why the UK taxes your 401(k)
As a UK resident you normally pay UK tax on your worldwide income, including overseas pensions. The UK-US double tax treaty then decides which country taxes what. Article 17(1) gives taxing rights over pensions to the state where you live, so regular payments from a 401(k) or traditional IRA are taxed in the UK at your marginal rate. The treaty also has a mirror rule: HMRC guidance confirms a US IRA distribution to a UK resident is exempt from UK tax to the same extent it would be exempt from US tax. That is why a qualified Roth IRA distribution is generally tax-free in the UK. Our guide to US retirement accounts and UK tax covers each account type.
What about lump sums?
Lump sums are different. Article 17(2) makes a lump sum taxable only in the state where the pension scheme is established, and HMRC's Double Taxation Relief Manual confirms that reading. The complication is the saving clause in Article 1(4), which lets each state tax its own residents as if the treaty did not exist; Article 17(2) is not among the protected provisions. HMRC's view on lump sums has shifted in recent years, so take advice before drawing one. The UK's 25% tax-free lump sum does not apply; it is a feature of UK-registered schemes only. Separately, the IRS charges an additional 10% tax on most withdrawals before age 59 and a half unless an exception applies; the treaty does not remove it. Our UK-US tax treaty guide explains how the saving clause works.
Reporting the withdrawal
Taxable withdrawals are reported on the foreign pages of your UK Self Assessment return, converted to sterling, with foreign tax credit relief claimed for any US tax properly due. US citizens and green-card holders keep a parallel US filing obligation on the same income, handled by our US partners (Enrolled Agents and CPAs), whom we coordinate for you. Keep your 1099-R forms and note whether each payment was periodic or a lump sum, because the treatment differs.