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

Hello and welcome to another Friday Edition. Phil Hodgen here, and it’s an unofficial day off: the day after Thanksgiving aka Black Friday.

To celebrate, you get to read this newsletter and I will run the Rose Bowl loop (YouTube) yet again: today is day 89 in a row of 5k runs. I started because the anon hustlebros I follow on X were all yapping about “We’re locking in for the winter arc! September through December! WooOOOooo!” So I locked in on running.

But first . . .

Here’s what’s coming up:

January 22-23, 2026: Miami. The Miami International Tax Conference. I’m on stage talking about “Outbound Updates.” We will have a “food and drinks are on me” event at a restaurant a block or two from the hotel. If you’re in Miami (attending the conference or not) please join us. The First Rule of Life is “Never turn down free food.”
February 24, 2026: New York. This is the ½ day New York Summit. So far we have a foreign retirement plan presentation, and I’m working on a speaker for a mini-multinational presentation—some flavor of Form 5471/CFC excitement. This is in-person at the NYCPA offices at 200 Madison Avenue, as will be broadcast live on the web. Members of the International Tax Pro community attend free, others pay the normal rates that NYCPA charges for its educational programs. Also, we will follow tradition and go around the corner to the Irish bar and have bar food and beverages after the event. Again, free food. You don’t have to come to the event—just join us afterwards at the bar. More information soon.
June 26, 2026: London. Repeating last year’s event, a full day of international tax presentations in London at the ICAEW headquarters building. Members of the International Tax Pro community get discounted tickets. There will be a pub meet-up, with food/beverages on me. (Do you detect a pattern?)
You might want to join the International Tax Pro community.

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.

Where an individual who is a resident of a Contracting State is a member or beneficiary of, or participant in, a pension scheme established in the other Contracting State, income earned by the pension scheme may be taxed as income of that individual only when, and, subject to paragraphs 1 and 2 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support) of this Convention, to the extent that, it is paid to, or for the benefit of, that individual from the pension scheme (and not transferred to another pension scheme.¹

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:

Where an individual who is a resident of ~~a Contracting State~~ [the United States] is a member or beneficiary of, or participant in, a pension scheme established in the ~~other Contracting State~~ [United Kingdom], income earned by the pension scheme may be taxed as income of that individual only when, and, subject to paragraphs 1 and 2 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support) of this Convention, to the extent that, it is paid to, or for the benefit of, that individual from the pension scheme (and not transferred to another pension scheme).²

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:

Where a citizen of the United States who is a resident of the United Kingdom exercises an employment in the United Kingdom the income from which is taxable in the United Kingdom and is borne by an employer who is a resident of the United Kingdom or by a permanent establishment situated in the United Kingdom, and the individual is a member or beneficiary of, or participant in, a pension scheme established in the United Kingdom . . . .³

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:

[A]ny benefits accrued under the pension scheme, or contributions made to the pension scheme by or on behalf of the individual’s employer, during that period, and that are attributable to the employment, shall not be treated as part of the employee’s taxable income in computing his taxable income in the United States.⁴

“Benefits accrued under the pension scheme” is fancy-pants diplomatspeak 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.

A shareholder who is a member or beneficiary of, or participant in, a plan, trust, scheme, or other arrangement that is treated as a foreign pension fund (or equivalent) under an income tax treaty to which the United States is a party and that owns, directly or indirectly, an interest in a PFIC is not required under section 1298(f) and these regulations to file Form 8621 (or successor form) with respect to the PFIC interest if, pursuant to the applicable income tax treaty, the income earned by the foreign pension fund may be taxed as the income of the shareholder only when and to the extent the income is paid to, or for the benefit of, the shareholder.⁵

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.

Article 18 (1). Emphasis added.
Article 18(1). The generic treaty language deleted is shown in strikethrough text, and the inserted specific words are in bold yellow highlighted text.
Article 18(5)(a). Emphasis added.
Article 18(5)(a)(ii). Emphasis added.
Reg. §1.1298-1(c)(4). Emphasis added.
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.