Posted by Nick Day on 07 Feb 2017

Overseas Pension Changes from 6 April 2017

HMRC have announced that the tax legislation regarding the UK tax treatment of overseas pension schemes is changing from 6 April 2017, removing the tax-free treatment for payments of lump sums relating to “foreign service”, as well as aligning the UK tax treatment of foreign pension income with that of UK pension income.

Foreign Pensions Tax Prior to 6th April 2017

Although lump sum payments from non-UK registered foreign pension schemes are fully taxable when received by a UK resident taxpayer, in broad terms a deduction is given for periods where they were non-UK tax resident and their employment duties were performed outside the UK. For pension rights accrued prior to 6 April 2011, there are further concessions which can give 100% relief from UK tax on pension lump sums for foreign service, even where there was some UK employment service. These rules can be found in more detail in our earlier tax lump sum payments for foreign pensions article.

In addition, 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 is currently chargeable to UK income tax, giving an effective 10% tax reduction for foreign pension income.

Foreign Pensions Tax From 6th April 2017

The government has announced that it intends to align the UK taxation of foreign pension income with that of UK registered pensions, i.e. the 10% tax reduction for foreign pension income will be removed so that 100% of the pension income is taxable.

Lump sum payments from overseas pension schemes will continue to be taxable, but the government has announced that the currently available “foreign service” reductions and exemptions will be removed for lump sums paid on or after 6 April 2017.

Many taxpayers who have had a period of overseas employment have overseas pension fund entitlements that only relate to that period, meaning that a lump sum payment would currently be tax free. From 6 April 2017 onwards, based on the Government’s current plans, that lump sum will be fully taxable.

Where a foreign pension is registered with HMRC, members will be able to receive a tax-free lump sum of up to 25% of the fund value, in the same way as a UK registered pension. A 25% tax-free lump sum is also available for overseas pensions where the contributions have received UK tax relief, but other foreign pensions do not appear to receive this tax-free lump sum; in this respect, the Government’s aim of aligning the pension treatments appears to have been missed in their favour.

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 are able to access your foreign pension benefits as a lump sum prior to 6 April 2017 then you may be able to avoid a UK income tax charge of up to 45% on such lump sums.

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 customerservice@taxinnovations.com