International: UK tax charges on non UK schemes: the member payment charges and taxable property charges: the member payment charges: basic principles
Nature of the member payment charges
Paragraph 1 Schedule 34 Finance Act 2004
The member payment charges are:
- the unauthorised payments charge (see PTM134100), but not a taxable property unauthorised payments charge imposed by virtue of section 174A Finance Act 2004
- the unauthorised payments surcharge (see PTM134100)
- the short service refund lump sum charge (see PTM045000)
- the serious ill-health lump sum charge (where the lump sum is paid before 16 September 2016 - see PTM063400)
- the special lump sum death benefits charge (see PTM073400)
- charges under section 636A(1A) and (1B) of the Income Tax (Earnings and Pensions) Act 2003(ITEPA) on payment of an uncrystallised funds pension lump sum (see PTM063300), and
- charges under Sections 636B that relate to trivial commutation and winding-up lump sums and under 636C ITEPA that relate to trivial commutation and winding-up lump sum death benefits (see PTM073800).
Who the member payment charges apply to
The member payment charges apply to payments made, or treated as made, to or in respect of a:
- relieved member, or
- transfer member
of a relevant non-UK pension scheme (RNUKS) - see Definition of a relevant non-UK scheme below.
The reference above to ‘treated as made’ reflects the wide definition of ‘payment’ set out in section 161(2) Finance Act 2004. Broadly speaking, section 161 defines a payment as including a transfer of assets (either directly or indirectly) and any transfer of money’s worth. It extends payment to include transactions where there is no actual payment but where an unauthorised payment is deemed to be made, for example the provisions regarding value shifting, the use of scheme assets and assignment.
Section 161 Finance Act 2004 also treats payments made by a scheme to a person connected to a scheme member (who is neither a member nor a sponsoring employer) as effectively a payment to that scheme member.
The member payment charges apply not just to payments to a member but also to payments in respect of a member. For example, a transfer is a payment in respect of a member and so will potentially be caught by the member payment charges
How the member payment charges work
For the purposes of the member payment charges the ‘member payment provisions’ apply to a payment made (or treated as made) by an RNUKS as if it was made from a registered pension scheme. So you would need to consider each RNUKS payment and ask yourself if the payment was made from a registered pension scheme, what type of payment would it be and how would it be taxed?
For example a transfer from a RNUKS to a scheme that is neither a registered pension scheme nor a qualifying recognised overseas pension scheme would be liable to the unauthorised payments charge. This is because if the payment had been made from a registered pension scheme, the transfer would be an unauthorised payment (as the transfer could not be a recognised transfer).
Another example might be where the unauthorised payments charge may apply if benefits were paid to an RNUKS member before the normal minimum pension age. The payment of a pension before the age of 55 can give rise to an unauthorised payment charge if that payment would have been an unauthorised payment if it were made from a registered pension scheme. To determine whether or not it was an unauthorised payment all of the provisions that apply to registered pension schemes would need to be taken into account, including the provision concerning a member’s protected pension age (see PTM062200).
When the member payment charges do not apply
Paragraph 2 Schedule 34 Finance Act 2004
The member payment charges do not apply if:
- at the time the payment is made (or is treated as made) the member is not UK resident, and
- the member was neither UK resident earlier in the tax year nor UK resident in any of the five previous tax years.
RDR3 (PDF 447KB) provides guidance on the statutory residence test.
Paragraphs 3 and 4 Schedule 34 Finance Act 2004
Regulation 4 The Pensions Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2006 - SI 2006/207
The member payments charges also only apply to the extent that the payment made (or treated as made) is referable to the member’s
under the RNUKS.
Payments made by an RNUKS to or in respect of the member are made out of the member’s UK tax-relieved fund or relevant transfer fund in priority to any other fund under that scheme. Once a member has exhausted their UK tax-relieved fund and relevant transfer fund under the RNUKS the member payment charges will no longer apply to them in respect of payments made by that scheme.
Definition of a relevant non-UK scheme
Paragraphs 1(5) Schedule 34 and 51(3) Schedule 36 Finance Act 2004
A scheme is a relevant non-UK scheme (RNUKS) if it is not a registered pension scheme and if one or more of the following conditions are met:
- migrant member relief (see PTM111200) has been given in respect of contributions paid to the scheme
- transitional corresponding relief (see PTM111500) has been given in respect of contributions paid to the scheme
- contributions made to the scheme after 5 April 2006 by or on behalf of a member, or by an employer in respect of them, have received tax relief under a double taxation arrangement (see PTM111600),
- any member of the scheme has been exempt from liability to tax by virtue of section 307 ITEPA in respect of provision for retirement or death benefits made by the employer after 5 April 2006 when the scheme was an overseas pension scheme (see PTM112200), or
- there has been a relevant transfer to the scheme at any time after 5 April 2006 when it was a qualifying recognised overseas pension scheme (see PTM112100).
A relevant transfer is a transfer made directly or indirectly of funds representing accrued rights under
- a registered pension scheme, or
- another relevant non-UK scheme.
An indirect transfer can occur where an individual’s funds are transferred to a relevant non-UK scheme from another relevant non-UK scheme and those funds had previously been transferred by the individual from a registered pension scheme.
An indirect transfer can also occur if the country in which the transferring and receiving relevant non-UK schemes are established, and regulated permits funds to be transferred, or rolled over from another, into such a pension scheme via the individual whose rights are being transferred, and if the conditions associated with such a transfer are met. It is possible for such a transfer to be made between certain US qualified retirement plans.
Paragraph 1(7), Schedule 34 Finance Act 2004
A member of an RNUKS is a relieved member, and therefore subject to the member payment provisions, if:
- contributions have been paid by or in respect of the member and those contributions have received migrant member relief (see PTM111200), transitional corresponding relief (see PTM111500) or relief under a double taxation agreement (see PTM111600), or
- they have been exempt from liability to tax by virtue of section 307 ITEPA.
Paragraph 1(8), Schedule 34 Finance Act 2004
A member of an RNUKS is a transfer member, and therefore subject to the member payment charges, if there is a relevant transfer related to the member.
Paragraphs 5 and 6 Schedule 34 Finance Act 2004
The member payment charges are modified by Schedule 34 Finance Act 2004, where necessary, to remove tax liability from the scheme administrator and place it instead on the member to, or in respect of, whom the payment is made. But where the payment is made after the member’s death, the person to whom the payment is made is liable.
Liability to the member payment charges arises wherever the individual is resident. Individuals who are liable to a member payment charge will need to declare that on their Self Assessment tax return for the tax year in which the member payment charge arises. If a member has not been issued with a return they are bound by the normal obligation to notify HMRC of their chargeability to UK tax as soon as practicable.
Where a member has made a transfer to a qualifying recognised overseas pension scheme they can still be liable to the member payment charges if that scheme loses or gives up qualifying recognised overseas pension scheme status after the transfer was made.
Most of the member payment charges will not be within the scope of, and will not be exempted or overridden by, any of the UK’s double taxation arrangements. Nor will the taxable property unauthorised payments charge (see PTM113220) be subject to double taxation agreements. That is because they are not charges on income and so do not come within any of the articles in the treaties. The member payment charges that arise under sections 636A, 636B and 636C ITEPA are exceptions to this rule. As they are charges on pension income they are relievable under those of the UK’s double taxation agreements that provide for residence State taxation of such income.
However, where an individual is subject to a member payment charge they can receive credit for foreign tax paid. The amount of any liability to UK tax imposed on that individual will be reduced by the amount of any tax paid in respect of that payment under the law of any country or territory outside the UK.
Should that individual pay the member payment charge, as well as pay tax in respect of the payment from the scheme at a later date under the law of any country or territory outside the UK, an appropriate adjustment will be made in the individual’s tax liability. Commonly, a discharge or repayment of UK tax will be made.
There are no specific rules dealing with benefits expressed in a foreign currency, but where a member payment charge arises it would be acceptable to calculate the tax payable by converting the benefits payment into sterling using the spot rate for the date of the payment.