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HMRC internal manual

Pensions Tax Manual

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HM Revenue & Customs
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Protection from the lifetime allowance charge: lifetime allowance enhancement factors: Non-residence factor: basic principles

Glossary PTM000001
   

 

Basic principle - non-residence after 5 April 2006
Active membership period
Who is a relevant overseas individual?
Who is not a relevant overseas individual?

Basic principle - non-residence after 5 April 2006

Sections 221-223 Finance Act 2004

Generally speaking, where an individual is working abroad they will not receive UK tax relief on contributions to, or the accrual of benefits under, a registered pension scheme. Yet the resulting benefits may count as benefit crystallisation events. For this reason, there is a provision to add the value of those rights to the member’s lifetime allowance (so the value of those benefits does not fall subject to the lifetime allowance charge). This is done by sections 221-223 Finance Act 2004, which broadly provide for an individual’s lifetime allowance to be enhanced for such a period of overseas service after 5 April 2006. The enhancement is achieved with a non-residence factor that is then used to adjust the lifetime allowance figure.

To qualify for a non-residence lifetime allowance enhancement factor a registered pension scheme member has to be a relevant overseas individual during any part of an Active membership period.

The non-residence factor is calculated by dividing the amount of contributions to, or accrual under, the individual’s pension arrangement during that part-period by the standard lifetime allowance for the tax year in which that part-period ends.

It is possible to be a relevant overseas individual during more than one part of an active membership period relating to the same pension arrangement. For example, an individual could work overseas for 5 years, return to the UK for a year and then work overseas for another 5 years. That individual’s lifetime allowance will be enhanced by the aggregate of the non-residence factors calculated separately for each of those part-periods under that arrangement.

The non-residence factor is calculated in one of a number of different ways depending on whether the individual’s arrangement under the registered pension scheme is:

  • a cash balance arrangement,
  • an other money purchase arrangement,
  • a defined benefits arrangement, or
  • a hybrid arrangement.

Normally there will be only one type of arrangement in a registered pension scheme. If that is the case the basis of calculation of the individual’s non-residence factor will be determined by which of the above types of arrangement it is. However, an individual could be accruing benefits under different types of arrangement within a single scheme. For example, a member of a defined benefits scheme could have two types of arrangement if they were paying additional voluntary contributions, one being a defined benefit arrangement and the other a money purchase arrangement. If that is the case separate non-residence factors will need to be calculated for each of the types of arrangement under which the individual is accruing benefits.

PTM095320 to PTM095350 explain how the non-residence factor is calculated for each type of pension arrangement

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Active membership period

Section 221(4) Finance Act 2004

An active membership period relates to an individual’s membership of an arrangement under a registered pension scheme. It begins on the later of the following dates:

  • the date when benefits first began to accrue to or in respect of an individual under the pension arrangement, and
  • 6 April 2006.

It ends on the earlier of the following dates:

  • immediately before the benefit crystallisation event, and
  • the date when benefits ceased to accrue to or in respect of the individual under the pension arrangement.

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Who is a relevant overseas individual?

Section 221(3) Finance Act 2004

A relevant overseas individual is someone who either:

  • is not a relevant UK individual under section 189 Finance Act 2004 - meaning they don’t meet the definition in PTM044100 or
  • is a relevant UK individual in only the following specified circumstance:

    • they are only a relevant UK individual because of the five year rule in section 189(1)(c) Finance Act 2004, that is the third bullet point in the definition of a relevant UK individual linked above, and
    • they are not employed by a UK tax resident employer.

An individual who falls into this specified category will be eligible for UK tax relief on member contributions up to £3,600, for up to five years’ overseas service, if they are a member of a registered pension scheme that operates relief at source. But if they are working abroad for an overseas tax resident company its (employer) contributions will not attract UK tax relief.

An individual may be seconded overseas to work for another employer but their legal contract of employment will remain with an employer in the UK. HMRC is likely to accept that the individual is ‘not employed by a person resident in the UK’ if the arrangements are such that all the employment costs of the individual (particularly pension costs) are being borne overseas. This would be the case if the costs were paid by the UK person but then recharged to the overseas employer. This is because the enhancement factor is intended to carve out periods of active membership of the scheme that have not benefitted from UK tax relief. In this context, tax relief is both that available to the member (ignoring the basic £3600) and that available to the employer.

The scenario described above is to be distinguished from the situation where an individual is sent overseas by the UK employer to perform duties for the UK employer. Any recharge here will be a charge for work done by the UK employer for the overseas entity. The individual will be considered to be employed by a person resident in the UK so an enhancement factor will not be appropriate.

It is possible to be a relevant overseas individual during more than one part of an active membership period relating to the same pension arrangement. For example, an individual could work overseas for 5 years, return to the UK for a year and then work overseas for another 5 years. That individual’s lifetime allowance will be enhanced by the aggregate of the non-residence factors calculated separately for each of those part-periods under that arrangement.

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Who is not a relevant overseas individual?

An individual will not be a relevant overseas individual for any tax year in which they are a relevant UK individual (apart from the specified circumstance above). So where someone who is resident and working in the UK goes to work overseas on 25 November 2006 they will not be a relevant overseas individual for the 2006-2007 tax year, even if they become non-resident at the time they leave the UK. They will have had relevant UK earnings chargeable to UK income tax up to that date and so will be a relevant UK individual in the 2006-2007 tax year. For a similar reason if they return to work in the UK on 25 May 2009 they will not be a relevant overseas individual in the 2009-2010 tax year.

In these circumstances enhancement by a non-residence factor would not be appropriate in respect of the 2006-2007 and 2009-2010 tax years. That is because the individual is eligible to receive UK tax relief under section 188 Finance Act 2004 on their contributions to a registered pension scheme during those years.