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HMRC internal manual

International Manual

HM Revenue & Customs
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UK residents with foreign income or gains: income arising abroad: Definition of government remuneration

It may be accepted that the earnings or pension of an individual who is, or was, directly employed in central, regional or local government service is paid to him by the other state for services rendered to that state. Members of armed forces or teachers employed by a local authority (or by the board of governors of a public sector school) are also regarded as paid by the state for services rendered to that state. A pension paid by a government etc to the widow or dependants of an individual who rendered services to that government etc is similarly regarded as being paid to the pensioner by the other state for services rendered to that state.

Employment with a statutory body set up by a state etc. is not usually regarded as involving payment by, or the rendering of services to, that state etc., even if the body is set up and funded by the state etc. Employees in nationalised industries are also not regarded as coming within the government services Article, nor are employees of privatised industries.

If in any case there is doubt as to whether earnings or a pension is exempt from UK tax under the provisions of this Article, refer to CTIAA Business International, Tax Treaty team, with the file. If the individual receives earnings or a pension from a body which he claims is actively controlled by a foreign government, it will normally be necessary, in order to enable Business International to make a preliminary review, to call for a copy of the foreign law setting up the body and a copy of the constitution of that body before referring there.

In some agreements it is a condition of the exemption of a pension that, immediately before the cessation of the services to which the pension relates, the earnings for such services was exempt. This condition would not, strictly, be fulfilled in the case of an individual who returns to the UK on final leave pending retirement, with the intention of taking up residence here and so becomes resident and ordinarily resident here. In these particular agreements the fact that the individual becomes ordinarily resident in the UK does not prevent his exemption from UK tax on his pension. In practice, his final leave pay may be treated for this purpose as if it were pension. If such a pensioner was exempt from UK tax on his earnings before coming to the UK, both his leave pay and his pension will be exempted from UK tax.

The foreign tax on a foreign governmental pension which is available for credit is not restricted because the individual is entitled to the one-tenth deduction under ITEPA03/S575.

Where, exceptionally, an agreement provides that government earnings or pensions can be taxed in both countries, then, if the individual receiving such earnings or pension is resident in the UK, he will be entitled to credit for the foreign tax paid against the UK tax on the earnings or pension. The credit will be the lesser of the foreign tax or the UK tax on the pension at the marginal rate (see INTM165040 onwards).

As regards

  1. certain pensions paid in respect of certain Colonial Service pensions, see INTM163200,
  2. cases where HMRC is asked to comment on the residence status under an agreement of a diplomat, consul, etc. see INTM154060.