Field Guide for U.K. SIPPs: Employer Contributions
Happy Friday from rainy Southern California. I’m Phil Hodgen, and I have run 5 km or more for 74 days in a row. A bit of rain won’t break the streak today.
I also like international tax.
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.
One small step . . . a Field Guide
I’m preparing a Field Guide for U.K. SIPPs to help tax pros advise U.S. taxpayers living and working in the U.K. A SIPP is a Self-Invested Personal Pension. The Field Guide looks at the U.S tax rules for contributions to, investment earnings in, and distributions from this common type of U.K. retirement plan. Full coverage of the paperwork requirements, too, of course.
This is my first draft of the “Employer Contributions” section of the Field Guide.
Please—send me corrections or comments so I can make this better. Hit “reply” and start typing.
Upcoming
But first, let’s pay the bills.
- This month’s International Tax Lunch is presented by Debra Rudd, CPA. Her topic is Pre-Expatriation Tax Planning to Minimize Exit Tax. Debra has worked on hundreds of exit tax projects, ranging from solving one-off problems to the complete event: from pre-planning to preparing the final U.S. income tax afterwards. Registration information for this month’s tax lunch will be sent out shortly. Mark your calendars (November 21, 2025, 9am Pacific Time) and keep your eyes peeled for that. As always, there will be a free option and a pay-to-receive-CPE option.
- Save the date: 2/24/2026 – New York Summit. Another half-day international tax conference at the New York State Society of CPAs offices in Manhattan. Attend in person or online.
- Save the date: 6/26/2026 – London Summit. We return to Chartered Accountants Hall in London for a full-day international tax conference. In person only. And as usual, there will be a pub meet-up. Food and drinks are on me.
- I am speaking at the Miami International Tax Conference, January 22-23, 2026. My topic will be “Outbound Update (Except OBBBA)”. Like last year, I will be hosting an event Thursday night at a restaurant near the Conference — the drinks are on me. This is an extremely well-done conference and if you practice international tax, you really should attend.
- You might want to join the International Tax Pros.
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):
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,
(i) contributions paid by or on behalf of that individual to the pension scheme during the period that he exercises the employment in the United Kingdom, and that are attributable to the employment, shall be deductible (or excludable) in computing his taxable income in the United States[.]
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:
Notwithstanding any provision of this Convention except paragraph 5 of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if this Convention had not come into effect.
The saving clause carves out Article 18(5), thereby allowing U.S. citizens to use treaty provisions. Article 1(5)(a) says (emphasis added):
The provisions of paragraph 4 of this Article shall not affect:
a) the benefits conferred by a Contracting State under paragraph 2 of Article 9 (Associated Enterprises), sub-paragraph b) of paragraph 1 and paragraphs 3 and 5 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support), paragraphs 1 and 5 of Article 18 (Pension Schemes) and Articles 24 (Relief From Double Taxation), 25 (Non-discrimination), and 26 (Mutual Agreement Procedure) of this Convention[.]
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:
This paragraph [Article 18(5)] shall apply only to the extent that the contributions or benefits qualify for tax relief in the United Kingdom.
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:
The reliefs available under this paragraph shall not exceed the reliefs that would be allowed by the United States to its residents for contributions to, or benefits accrued under, a generally corresponding pension scheme established in the United 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:
With reference to sub-paragraph o) of paragraph 1 of Article 3 (General Definitions):
it is understood that pension schemes shall include the following and any identical or substantially similar schemes which are established pursuant to legislation introduced after the date of signature of the Convention:
a) under the law of the United Kingdom, employment-related arrangements (other than a social security scheme) approved as retirement benefit schemes for the purposes of Chapter I of Part XIV of the Income and Corporation Taxes Act 1988, and personal pension schemes approved under Chapter IV of Part XIV of that Act; and
b) under the law of the United States, qualified plans under section 401(a) of the Internal Revenue Code, individual retirement plans (including individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k), individual retirement accounts, individual retirement annuities, section 408(p) accounts, and Roth IRAs under section 408A), section 403(a) qualified annuity plans, and section 403(b) plans.
The only type of U.S. retirement plan that generally corresponds to the U.K. SIPP is a qualified plan under IRC §401(a).
| Type of U.S. Retirement Plan | Authority | Comment |
|---|---|---|
| Qualified plans | 401(a) | This is the only U.S. retirement scheme that generally corresponds to a SIPP. |
| Individual retirement plans | ||
| – Individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k) | 408(k) | Cannot be generally corresponding to a SIPP. A SEP is an IRA concept with statutory employer contribution mechanics imposed by statute. A SIPP is a registered pension scheme with contributions constrained by U.K. annual allowance rules. |
| – Individual retirement plans that are individual retirement accounts | 408(a) | Cannot be generally corresponding to a SIPP. Among other things, employers cannot make contributions to IRAs—only the taxpayer does. Contribution limits are a function of the taxpayer’s personal income for an IRA, unlike a SIPP. There are other reasons. |
| – Individual retirement plans that are individual retirement annuities | 408(b) | Cannot be generally corresponding to a SIPP, for the same reasons that an individual retirement account cannot be generally corresponding to a SIPP. |
| – Individual retirement plans that are section 408(p) accounts (i.e., SIMPLE IRAs) | 408(p) | Cannot be generally corresponding to a SIPP. Structurally a SIPP is a registered pension scheme rather than a personal retirement savings account with employer contribution rules imposed by statute. |
| – Individual retirement plans that are Roth IRAs under section 408A | 408A | Cannot be generally corresponding to a SIPP. A Roth IRA takes after-tax contributions, exempts earnings, and exempts distributions. A SIPP exempts contributions, exempts earnings, and taxes distributions. |
| section 403(a) qualified annuity plans | 403(a) | Cannot be generally corresponding to a SIPP. This is a type of qualified plan, and a SIPP cannot be a qualified plan. |
| section 403(b) plans | 403(b) | Cannot be generally corresponding to a SIPP. This is a ty |
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):
Pursuant to the authority contained in section 6114 (b), reporting is waived under this section with respect to any of the following return positions taken by the taxpayer:
(iv) That a treaty reduces or modifies the taxation of income derived from dependent personal services, pensions, annuities, social security and other public pensions, or income derived by artistes, athletes, students, trainees or teachers[.]
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.