Field Guide for U.K. SIPPs: Employer Contributions

Foreign retirement plans are a PITA

U.S. taxation of foreign retirement accounts is a giant PITA. Retirement plans are complicated and have country-by-country idiosyncrasies. There’s not always a huge amount of money at stake, but the money is intensely important to the employee: it represents safety in old age.

It’s an expensive intellectual problem to solve (many hours), but there’s not enough money at stake to justify paying people like me a lot of money to fix problems. And the taxpayer is supremely emotionally invested in keeping as much of the retirement benefit as possible.

General rule: employer contributions are included in the employee’s gross income

Gross income is defined as “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion. Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).

When an employer puts money into a SIPP for an employee, the contribution is immediately vested—the employer cannot pull the money back. The employee is richer, and except for the timing constraint for distributions (“wait until retirement”), has control over the funds.

So the employer’s contribution to a SIPP is gross income for the U.S. taxpayer-employee when made.

U.S. tax law says that employer contributions to a qualified plan are excluded from gross income of the employee. All of you who participate in a 401(k) plan know how this works.

A U.K. SIPP cannot be a qualified for a variety of reasons. The obvious one is that a qualified plan is defined as a “domestic trust” in IRC §401(a). A U.K. SIPP self-evidently is not a trust organized under U.S. law. So normal U.S. retirement plan tax law won’t work to exclude the employer’s contribution to a U.K. SIPP from a U.S. employee’s taxable income.

Because a U.K. SIPP is a retirement plan, it is an “employees’ trust” as that term is used in the Internal Revenue Code. Because it is not a qualified plan, a U.K. SIPP will therefore be classified as a nonqualified employees’ trust, subject to the tax rules in IRC §402(b).

Employer contributions to a section 402(b) employees’ trust are included in the gross income of the employee in the year of contribution. IRC §402(b)(1).

Thus, by general principles of U.S. tax law and specific rules in IRC §402(b), employer contributions to U.K. SIPPs will be included in gross income of the employee.

Exception: the income tax treaty excludes the employer contribution

The U.S./U.K. income tax treaty overrides the Internal Revenue Code and allows exclusion of the employer’s contribution from a U.S. citizen’s gross income. Article 18(5)(a)(i) says (emphasis added):

You will use this in preparing the U.S. taxpayer-employee’s Form 1040.

Note that this clause applies to U.S. citizens. It does not apply to U.S. residents (e.g., green card holders). The employer contribution will be included in the green card holder’s gross income for U.S. purposes under the general principles outlined above as a contribution to an employees' benefit trust under IRC §402(b)(1).

All U.S. income tax treaties contain a “saving clause” that allows the United States to tax its citizens and residents as if the treaty did not exist. The U.K./U.S. income tax treaty contains such a clause at Article 1(4) of the treaty:

The saving clause carves out Article 18(5), thereby allowing U.S. citizens to use treaty provisions. Article 1(5)(a) says (emphasis added):

Thus, the saving clause does not apply, and a U.S. citizen employed in the U.K. can use Article 18(5)(a)(i) to make the employer contributions not be included in the gross income.

Limitation on the amount of exclusion of income

You cannot exclude infinite amounts of employer contributions from the employee's gross income. There are two limits on the amount of the employer’s contribution that may be excluded from the U.S. gross income of the U.S. taxpayer-employee. One limit is based on U.K. law, and one limit is based on U.S. law.

U.K. limitation

The amount of employer contributions that a U.S. taxpayer-employee can exclude from gross income is limited to the amount of contributions that “qualify for tax relief in the United Kingdom.” Article 18(5)(a), flush left text, says:

Look at the employer contribution amount. Did the employee, for U.K. income tax purposes, exclude the employer contribution from the employee’s taxable income? If yes, what is the amount excluded? That’s your first limitation.

U.S. limitations

U.S. law also limits how much of an employer’s contribution can be excluded from a U.S. taxpayer-employee’s U.S. gross income.

Article 18(5)(b) states:

What type of “pension scheme” in the United States “generally corresponds” to the U.K. SIPP? Answer: a qualified plan under IRC §401(a), such as a 401(k) plan.

The types of U.S. pension schemes that the U.K. and U.S. agree are “generally corresponding” to U.K. pension schemes are listed in diplomatic notes between the two countries:

The only type of U.S. retirement plan that generally corresponds to the U.K. SIPP is a qualified plan under IRC §401(a).

U.S. contribution limits for qualified plans

The limit on contributions to qualified plans are found in IRC §415(c). The limit is the smaller of:

• $70,000 (for 2025); or
• 100% of compensation.

The $70,000 dollar limit is combined employer and employee contributions. Therefore, you have to back out the employee contributions to the SIPP in order to see the maximum amount of excludable employer contributions.

The dollar value limitation is set at IRC §415(c)(1)(A) at $40,000. It is required to be adjusted for inflation annually. IRC §415(d)(1)(C). The value given is the inflation adjusted amount for 2025. Notice 2024-80.

Overall limitation: lowest of the three

Thus, the maximum amount of excludable employer contributions is the smallest number from these three:

• The U.K. limitation (how much of the employer contribution was excluded from the employee's income for U.K. income tax purposes?);
• $70,000 (for 2025) minus employee contributions; or
• 100% of compensation.

Employer contributions above the limitation will be included in the employee's gross income as a contribution to a section 402(b) employees' trust. IRC §402(b)(1).

Paperwork

You do not need to file Form 8833 to exclude the employer contribution amount from the employee's gross income.

Ordinarily, disclosure is required for a treaty-based return position that is different from what the Internal Revenue Code requires. IRC §6114(a). Disclosure is made on Form 8833.

But the Regulations waive the disclosure requirement for situations like this. Reg. §1.6114-1(c)(1)(iv) states (emphasis added):

An employer contribution to a retirement plan is income derived from personal services provided by the employer—“dependent personal services” in tax lingo. That’s why the exception in the Regulations will apply to excuse you from having to report the exclusion of the employer contribution from the U.S. employee’s gross income.

Conclusion

U.S. citizens living and working in the U.K. may exclude employer contributions made on their behalf to a U.K. SIPP from their individual gross income. U.S. green card holders cannot exclude employer contributions from their gross income for U.S. income tax purposes.

The exclusion allowed is limited to the lowest of three numbers:

• the amount of the employer contribution that is excluded from the employee’s U.K. income;
• $70,000 (for tax year 2025) minus the employee contributions to the U.K. SIPP; or
• the employee’s actual compensation.

This is a treaty-based reporting position that overrides the default Internal Revenue Code rules, but Form 8833 is not required to disclose the treaty-based reporting position.