Field Guide to UK SIPPs - U.S. Taxation of SIPP Income

Preview of the Field Guide

This is the second draft installment of my Field Guide to U.S. Taxation of U.K. SIPPs. It will be free content inside the International Tax Pro community when it's finished, and available as a download for a modest price for nonmembers.

This time, we’re looking at earnings on balances inside a funded SIPP: who pays income tax on dividends, interest, and capital gain? This is by far the shortest and easiest part of the Field Guide to write.

FYI, the working outline for the Field Guide to U.S. Taxation of U.K. SIPPs is:

• Ch. 1. What Does the IRS Think a SIPP Is?
• Ch. 2. Use the Code or the Treaty?
• Ch. 3. Contributions to a SIPP (November 14, 2025 newsletter)
• Ch. 4. The SIPP's Earnings (today's topic)
• Ch. 5. Distributions and Rollovers from a SIPP
• Ch. 6. Paperwork

Is there anything else that you would like to see covered? Any topics that you think deserve a deep dive?

Chapter 2. U.S. Income Taxation of SIPP Earnings

Money has been contributed to the self-invested personal pension (“SIPP”) and has been invested in the normal type of investment assets: stocks, bonds, mutual funds, etc. These assets are generating capital gains, dividends, and interest.

From the U.S. income tax perspective, income is taxable to someone in the year it is realized, unless it is explicitly excluded. And the logical person to recognize that income is the employee who has the vested right to the balances in the SIPP.

If the SIPP member is a U.S. taxpayer (specifically a U.S. citizen), the rule to keep it out of the employee’s gross income exists in the UK/US income tax treaty.

U.S. Citizen Member / U.S. Resident

For a U.S. citizen who is living in the United States and is a member of a U.K. SIPP, the earnings on investments of the SIPP are not subject to current U.S. income taxation. (Think of someone who lived and worked in the U.K. for a while, then returned to the United States).

Article 18(1) of the Treaty says that income earned by the pension scheme (i.e., the SIPP) is taxed to the individual member only when there is a distribution.

We can ignore the “subject to paragraphs 1 and 2 of Article 17” nonsense because those paragraphs refer to distributions from the pension scheme. Similarly, we can ignore the “transferred to another pension scheme” language—that’s a “rollover” in U.S. tax lingo. Both topics will be dealt with later, when we talk about taxation of distributions and rollovers from SIPPs.

Rewritten to make it easier to understand, in the context of a U.S. member of a U.K. SIPP and living in the U.S, Article 18(1) says:

U.S. Citizen Member / U.K. Resident

For a U.S. citizen living in the United Kingdom, Article 18(5)(a) is where you look to find the rules protecting internal income accruals from U.S. income taxation. Here is the language showing that you’re in the right place for a U.S. citizen in the United Kingdom:

It isn’t enough that the U.S. citizen is simply a U.K. resident. Here is a list of all of the conditions that the individual must meet these conditions in order to apply Article 18(5)(a) and prevent the SIPP’s income from being immediately treated as taxable income on the U.S. citizen’s Federal income tax return.

• The individual is a United States citizen.
• The individual is employed in the U.K.
• The individual’s employment income is subject to U.K. income tax.
• The employer is either resident in the U.K. or is a “permanent establishment” (a term of art defined by the treaty) of a non-U.K. employer.

Assuming that these conditions are satisfied, SIPP income is out of bounds for U.S. income taxation:

“Benefits accrued under the pension scheme" is fancy-pants diplomat speak for "income."

What About Income from PFICs?

If the SIPP has foreign mutual funds—PFICs—as assets, the U.S. citizen member has two potential problems:

• Will income from the PFICs inside the SIPP create unpleasant income tax consequences as a result of IRC §1291-1297?
• Will Form 8621 be required for the U.S. citizen member’s income tax return?

The UK/US income tax treaty protects all SIPP income from current taxation for Federal income tax purposes. There is no exception in the treaty for PFICs.

Form 8621 will not be required. The treaty is silent, but the Treasury Regulations cover exactly this scenario.

The UK/US income tax treaty indeed says that income is only taxable to the member upon distribution.​[6]​

Therefore, if the U.S. citizen it taking a treaty-based reporting position for the SIPP, Form 8621 will not be required for mutual funds owned by the SIPP.

​[1]​ Article 18(1). Emphasis added.

​[2]​ Article 18(1). The generic treaty language deleted is shown in strikethrough text, and the inserted specific words are in bold yellow highlighted text.

​[3]​ Article 18(5)(a). Emphasis added.

​[4]​ Article 18(5)(a)(ii). Emphasis added.

​[5]​ Reg. §1.1298-1(c)(4). Emphasis added.

​[6]​ Article 18(1) for U.S. citizens resident in the United States. Article 18(5)(a)(ii) for U.S. citizens resident in the United Kingdom.