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Posted by Nick Day on 22 May 2014

Tax on Lump Sum Payments from Foreign Pensions

The tax legislation regarding the UK tax treatment of payments of lump sums from overseas pension schemes relating to foreign service changed from 6 April 2011.

Foreign Pensions Tax Prior to 6th April 2011

Although lump sum payments from foreign pensions were taxable, Extra Statutory Concession (ESC) A10 allowed an unapproved foreign pension scheme to pay a lump sum free of UK income tax to an employee who has worked outside the UK, where their non-UK service up to 5 April 2011 is 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.

Under these rules you could still get 100% tax relief on lump sum payments, even if your non-UK duties were less than 100% of your foreign service. This is no longer the case.

Foreign Pensions Tax From 6th April 2011

From 6 April 2011, if you are UK tax resident then Part 7A Income Tax (Earnings & Pension) Act 2003 (ITEPA 2003), often known as the “disguised remuneration” rules, will apply to such payments. Under this legislation, a third party (including a foreign pension scheme) making a payment of lump sum relevant benefits will be taking a “relevant step” and so the value of that relevant step will be treated as employment income for you in the tax year that the relevant step occurs.

The value of the relevant step is subject to various deductions. These include a deduction “on a just and reasonable basis” for periods where you were non-UK tax resident and your employment duties were performed outside the UK. This means that you can no longer get 100% tax relief if your non-UK duties were less than 100% of your foreign service, which could result in a significant income tax charge.

Despite the withdrawal of ESC A10 from 6 April 2011, its application to amounts accrued up to that date has been “grandfathered”. The concession continues to apply to lump sums paid on or after 6 April 2011, but only to the extent that the rights to receive that lump sum accrued before 6 April 2011.

Specialist Overseas Pension Tax Advice

If you think that this change in the treatment of lump sum payments from foreign pensions will affect you, Tax Innovations can help to arrange your tax affairs in order to minimise the resulting income tax charge.

Contact Tax Innovations

If you would like any advice regarding tax on lump sum payments from foreign pensions 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.


See also…

Changes to the Taxation of QNUPS


Inheritance Tax and QNUPS

Overseas Pension Changes from 6 April 2017

Offshore Retirement Funds

Retirement Planning

HMRC Targets Foreign Property Owners

Finance Act 2018 Enacted

Expatriate Tax Services

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