INTM343110 - DT applications and claims - Types of income: Pensions and Annuities
Pensions paid for service carried on outside the UK
Some pensioners receive occupational pensions paid from the UK, but will have spent all of their working years, or a substantial period of service, performing duties outside theUK.
Strictly, ITEPA03 charges all pensions paid from the UK to income tax. However the PAYE regulations set out special provisions that exempt the pension from PAYE where the pension arises from employment wholly carried on abroad. The instruction at PAYE81750 applies only to non-resident pensioners.
When an employee has been non-resident and worked outside the UK for complete tax years, then the pension is exempt from the operation of PAYE.
An employment is regarded as having been carried on abroad if
- 1 the last ten years service in respect of which the pension is paid was abroad
or
- 2 the service that was carried out abroad amounted to half of the total service in respect of which the pension is paid
and
- 3 covered at least ten of the last twenty years.
UK duties
Any year where an individual performs duties in the UK cannot be a year when the employment was carried on abroad. Years of service refer to fiscal years. So any tax year in which an individual performs any duties in the UK, other than merely incidental duties, cannot be counted as a year of foreign service.
Example 1 – last ten years of service performed abroad
An employee commenced employment with a UK supermarket chain in 1986 in the UK. In 1988 the employee moves to Paris and worked in France until retiring in 2000. The employee has remained not resident in the UK and is now receiving a pension.
Result
The employee has performed all of his duties for the last 12 years of employment outside the UK. As the last ten years of service have been performed outside the UK then PAYE will not apply to the occupational pension whilst the pensioner remains not resident in the UK.
- Example 2 – total length and location of service
An oil engineer has worked in the UK and overseas for the same UK company as detailed in the table below. The employee retired in 2000, remained not resident and has started to receive an occupational pension for the employment.
Whilst working abroad no duties were performed in the UK.
| Date | Location | Length of service |
|---|---|---|
| Jan 1975 – Dec 1977 | UK | 3 years |
| Jan 1978 – Dec 1980 | Saudi Arabia | 3 years |
| Jan 1981 – Dec 1985 | Brazil | 5 years |
| Jan 1986 – Dec 1993 | UK | 8 years |
| Jan 1994 – Dec 1996 | Singapore | 3 years |
| Jan 1997 – Dec 2000 | Australia | 4 years |
| Total length of service | - | 26 years |
| Total years worked UK | - | 11 years |
| Total years worked abroad | - | 15 years |
Result
This employee has not spent the last ten years of service abroad. He only spent 7 years in Singapore and Australia following UK departure in December 1993. Therefore you should consider the second test that PAYE81750 provides - was half the total length of service performed abroad?
To determine this you should take the total of years worked abroad as a fraction of the total length of service and multiply this figure by 100. Using the above example that gives 15 divided by 26 (0.577) X 100 = 57.7%.
You then need to also consider if at least ten of the last twenty years service was performed abroad?
Between January 1981 and December 2000 this employee worked for 12 years abroad. Therefore
- Over half of the total service has been performed abroad.
- At least ten of the last twenty years service has been performed abroad.
In this case the employment is regarded as carried on abroad, and PAYE would not be applied to the occupational pension whilst the pensioner remains not resident in the UK.
Pension paid for same employment
Importantly, you should note that the pension must be paid for employment with the same employer. In other words a pensioner cannot combine the length of overseas service performed with a number of different employers.
Successive employments
Periods of employment with different members of the same group of companies should be treated as a single employment.
Length of service
You must consider the length of service to the employer outside the UK, and not the length of time spent outside the UK. A pensioner may well have retired a few years before their occupational pension commences.
Outcome
When you identify a case where an occupational pension is paid for overseas service then you should inform the tax office that is responsible for the payroll of the company that is paying the pension that PAYE81750 applies. There is no need to consider exempting the pension under the terms of a Double Taxation Agreement (DTA).
Entire employment was carried out abroad
In these cases the length of service for which the pension is paid is not relevant.When someone has worked entirely outside the UK (for a UK employer) for the whole period of their employment PAYE81750 applies so that the pension is outside the scope of the PAYE regulations.
Example a non-resident of the UK is recruited by a UK company to work for it in another country. The person is employed for 8 years and, at retirement age, becomes entitled to be paid a pension by the UK employer.
Result
As the person spent the entire period of their employment outside the UK then PAYE will not apply to the pension whilst the pensioner remains not resident in the UK.