Posted by Nick Day on 07 Sep 2018
Overseas Pension Changes from 6 April 2017
The tax legislation regarding the UK tax treatment of overseas pension schemes changed for payments received on or after 6 April 2017, limiting the tax-free treatment for payments of lump sums relating to “foreign service”, as well as more closely aligning the UK tax treatment of foreign pension income with that of UK pension income.
Previously only 90% of pension income (i.e. not lump sums) received from a foreign pension by UK resident taxpayers filing tax returns on the arising basis was chargeable to UK income tax, giving an effective 10% tax reduction for foreign pension income. This 10% tax reduction for foreign pension income was removed for payments received on or after 6 April 2017 so that 100% of the pension income received by UK resident taxpayers is subject to UK income tax.
Foreign Pensions Tax on Lump Sums from 6th April 2017
Although lump sum payments from non-UK registered foreign pension schemes are fully taxable when received by a UK resident taxpayer, a deduction was historically given for periods of foreign service. In broad terms, ‘foreign service’ for these purposes is where the taxpayer was non-UK tax resident and performing their employment duties outside the UK.
This ‘foreign service relief’ is no longer available for pension rights accruing on or after 6 April 2017, meaning that lump sums paid in relation to pension rights accruing from 6 April 2017 onwards will potentially be taxable in full.
Effectively the fund is split into 2 parts: the amount of the fund relating to pre-6 April 2017 pension rights (i.e. the contributions paid into the scheme prior to 6 April 2017, plus the growth on those contributions) and the fund relating to post 5 April 2017 pension rights.
Relief is given for lump sums relating to the pre 6 April 2017 rights based on the proportion of the recipient’s employment prior to 6 April 2017 that was foreign service. However, 100% relief is available for the lump sum relating to the pre 6 April 2017 rights, even where there was some UK employment service, if their foreign service represents either:
a) 75% or more of the employee’s total service in that employment.
b) All of the last ten years of the employee’s service in that employment, where their total service exceeds ten years.
c) Not less than 50% of the employee’s total service in that employment, including any ten of the last 20 years, where that total service exceeds 20 years.
It should be noted that where the overseas pension is not employment related (e.g. a QNUPS is usually an overseas personal pension, with no links to employment) then any lump sum relating to the pre-6 April 2017 pension rights is still completely tax free.
No such tax relief or foreign service relief is available in relation to any lump sum representing post 5 April 2017 pension rights. The remaining taxable element of lumps sums received from overseas pension schemes is broadly taxable in line with UK registered pension schemes.
Although an overseas pension that has not received UK tax relief does not use up the recipient’s pension lifetime allowance (LTA), the availability of their LTA will affect the UK tax position of the remaining taxable lump sum:
- If the beneficiary has no remaining LTA then all of the remaining lump sum after the pre 6 April 2017 relief is subject to UK income tax in full.
- If the beneficiary has any remaining LTA then 25% of the remaining lump sum will be tax free, for taxable lump sums up to the maximum LTA in force at the time of the lump sum payment. Any excess lump sum over the LTA will be taxable in full.
It should also be noted that where these lump sum payments from overseas pensions are taxable then, depending on the circumstances, there may also be a liability for National Insurance Contributions (NICs) on the payments, and the tax liabilities on the payments may also need to be reported and paid to HMRC under the PAYE system.
Specialist Overseas Pension Tax Advice
If you believe that this change in the treatment of payments from foreign pensions will affect you, Tax Innovations can review the position in order to minimise the resulting income tax charge, where possible.
Contact Tax Innovations
If you would like any advice regarding the above article or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or email@example.com
- The Import One-Stop Shop (IOSS) for EU VAT
- Car Subscription Services and the Company Car Charge
- Top 10 Expat Tax Tips for Individuals Moving to the UK
- Residential Properties Owned by Companies
- Changes to IR35 for office-holders