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HMRC internal manual

Pensions Tax Manual

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HM Revenue & Customs
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International: double taxation relief

Glossary PTM000001
   

 

Tax relief for individuals
Tax relief for employers
Content of double taxation agreements

The UK has negotiated double taxation agreements (DTAs) with many other countries. A DTA may serve a number of purposes including moderating taxation, so for example tax is not paid twice (only once in each country).

Where a person comes from overseas to work in the UK, some DTAs provide relief from UK income tax for pension contributions (relating to that person) paid to a pension scheme that is tax-recognised in the other country. DTAs may also provide for employers to claim a deduction for contributions made to an overseas pension scheme in respect of eligible employees.

Where tax relief has been given under a DTA the individual member can be liable to UK tax charges in respect of pension savings made under the scheme and payments made by the scheme. These tax charges are:

  • the annual allowance charge - see PTM113300,
  • the lifetime allowance charge - see PTM113400,
  • the member payment charges - see PTM113200.

Tax relief for individuals

Sections 188, 190 and 195 Finance Act 2004

If the conditions for UK tax relief specified in a particular DTA are met, a member of an overseas pension scheme is entitled to income-tax relief on any member contributions to that scheme. Member contributions include contributions paid by the member or someone else (except their employer) on the member’s behalf. Tax relief will be subject to the same conditions that would apply to member contributions to a registered pension scheme (see PTM044100). The amount of tax relief is limited by section 190 Finance Act 2004 so that each individual has an overall limit on relief in a tax year. This limit takes into account not only any UK tax-relieved contributions they make to but also any contributions they make to registered pension schemes.

The maximum amount of member contributions to either an overseas pension scheme or a registered pension scheme that may receive tax relief is 100 per cent of the member’s relevant UK earnings that are chargeable to UK income tax for the tax year.

One of the routes to obtaining tax relief under section 188 Finance Act 2004 mentioned above, involves having ‘relevant UK earnings’ chargeable to income tax for that particular year. Relevant UK earnings are however treated as not being chargeable to income tax if, in accordance with a DTA, they are not taxable in the United Kingdom. Earnings will not be taxable in the UK where the DTA gives sole taxing rights on those earnings to the other country named in the DTA. This differs from the situation where the DTA provides for credit to be given for tax paid to the other country on earnings - in such circumstances the UK has subsidiary taxing rights.

An individual can only obtain tax relief under a DTA by making a claim to HMRC. Tax relief on contributions to overseas pension schemes cannot be given under relief at source or a net pay arrangement.

Where a DTA gives tax relief for member contributions, employees will also not be liable to income tax on contributions made to an overseas pension scheme by their employer. The DTA provision means such contributions qualify for relief as if section 308 Income Tax (Earnings and Pensions) Act 2003 applied to exempt the employee from an income tax liability charge.

If the DTA provides that relief on contributions to a pension scheme that is tax-recognised in the other country is subject to the same conditions as that which applies to contributions made to a UK tax-recognised pension scheme then relief will be subject to the manager undertaking to provide the same information about the member’s benefit crystallisation events as would be required if the member was receiving migrant member relief.

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Relief for employers

Sections 196 to 200 Finance Act 2004

Some DTAs provide for an employer’s contribution to an overseas pension scheme for their employees’ benefit to qualify for tax relief if certain conditions are met. Such contributions are relieved on the same basis as employer contributions to a registered pension scheme (see PTM043000) so the extent to which they are deductible is determined as if sections 196 to 200 Finance Act 2004 applied.

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Content of double taxation agreements

The conditions that have to be met in order that contributions to an overseas pension scheme qualify for UK tax relief under a DTA are specified in the relevant agreement. You can find lists of DTAs online at

Guidance on the terms of a particular article may be found in the part of the Double Taxation Relief Manual that deals with the agreement concerned.

The conditions in pension contributions relief articles vary from DTA to DTA, but always include both of the following:

  • the scheme is tax-recognised in the other country, and
  • the scheme is accepted by HMRC as corresponding to a UK tax-recognised pension scheme.

Pension contributions relief articles may also include one or more other conditions, such as

  • the individual was contributing to (or was a member of) the scheme before becoming a UK resident (or before beginning employment in the UK),
  • the individual was not a resident of the UK immediately before beginning employment in the UK,
  • the individual is employed in the UK by the person who was his employer immediately before beginning employment in the UK.