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HMRC internal manual

Pensions Tax Manual

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HM Revenue & Customs
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International: Overseas membership of a registered pension scheme

Glossary PTM000001
   

Eligibility for membership of a registered pension scheme
Tax relief for member contributions
Relief for employers’ contributions
Payments to individuals
Administration

Eligibility for membership of a registered pension scheme

After 5 April 2006 membership of a registered pension scheme is open to anyone regardless of where they are resident or of where their employer (if any) is resident. There also isn’t any restriction on the amount that can be contributed by an overseas resident individual or by an employer in respect of them. But relief from UK income tax is not unlimited. It may not be available, or may be restricted on such contributions in certain circumstances.

Overseas resident members of a registered pension scheme can also be subject to the annual and lifetime allowances and their associated charges, and to other charges under Part 4, such as the unauthorised payments charge (see Payments to individuals below for when this might be the case, and see PTM134000 for details of the unauthorised payments charge).

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Tax relief for member contributions

Sections 188, 189 and 190 Finance Act 2004

Relief from UK income tax on an individual’s contributions to a registered pension scheme is dependent on a number of factors covered in guidance starting at PTM044000. Of particular relevance to overseas members is the requirement to be a relevant UK individual during a given tax year. The conditions necessary to be a relevant UK individual are outlined at PTM044100. There is also an annual limit for relief on a member’s contributions - see PTM044100.

This means that if an individual is a relevant UK individual but has no relevant UK earnings that are chargeable to UK income tax, then tax relief is only available on contributions up to £3,600 in a tax year - and only so long as their registered pension scheme operates the ‘relief at source’ mechanism (see PTM044220).

It also means that a person who has ceased to be UK tax resident can only qualify for relief on their personal contributions if their UK tax residence stopped within the last five tax years (and they still meet the other necessary conditions).

The whole value of the individual’s pension savings in any year is tested against the annual allowance. The annual allowance charge (see PTM056000) then applies if the annual allowance is exceeded in a tax year by the total pension input amount relating to the individual under all registered pension schemes and certain overseas pension schemes of which they are a member. PTM053000 provides guidance on what are pension input amounts under registered pension schemes.

The annual allowance does not apply to individuals who have never been UK resident and have never benefited from UK tax relief on contributions to the scheme. For other members of relevant schemes, the annual allowance rules apply regardless of where the individual is resident. It is not covered by double taxation agreements because it is not a tax on income.

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Relief for employers’ contributions

Section 196 Finance Act 2004

An employer that makes contributions to a registered pension scheme in respect of an overseas resident employee may be able to make a deduction in its accounts under section 196 Finance Act 2004.

It is necessary for the payments to satisfy the normal rules for trading income deductions - and so must have been made wholly and exclusively for the purposes of the trade - see PTM043200 for more detail on the conditions.

In certain circumstances relief will be spread over more than one year. The rules concerning the spreading of the relief given to employer contributions are explained in PTM043400.

Where a UK resident employer makes contributions in respect of an individual who has been seconded to work for an overseas resident employer there is no requirement that the UK employer is reimbursed by the overseas employer. Whether or not the UK employer is reimbursed, where a deduction is claimed, the HMRC officer dealing with the Income Tax/Corporation Tax return of the employer may consider enquiring into the allowability of the expense.

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Payments to individuals

Section 164 Finance Act 2004

Broadly, overseas resident individuals receiving pension payments from a registered pension scheme are liable to UK income tax unless they are exempted by a double taxation agreement. A double taxation arrangement means an agreement between the UK and any territory outside the UK as set out in sections 2-6 Taxation (International and Other Provisions) Act 2010.

They are also subject to the annual and lifetime allowances, and their associated charges, and liable to other charges under Part 4 Finance Act 2004, such as the unauthorised payments charge.

Unauthorised payments charge

An unauthorised payments charge would arise if a payment to or in respect of an individual from a registered pension scheme is not an authorised member payment under section 164 Finance Act 2004 or an unauthorised payment is deemed to arise (see PTM131000).

Lifetime allowance charge

A lifetime allowance charge would only arise if the total value of an individual’s benefits exceeded their lifetime allowance. This refers to benefits from registered pension schemes, as well as any from certain overseas pension schemes where the member benefitted from UK tax relief after 5 April 2006 (see PTM113400).

A member of a registered pension scheme can enhance their lifetime allowance in respect of part of an active membership period of the scheme during which they were a relevant overseas individual (see PTM095300). The enhancement offsets the benefits relating to any contributions made by or in respect of the individual to the scheme, or to any increase in value of the individual’s rights under the scheme, during that period.

Scope

Charges under Part 4 Finance Act 2004 will normally only apply to overseas resident individuals if they were active members of the scheme whilst being a relevant UK individual. So, effectively, members of registered pension schemes will not normally be chargeable if they have never been UK resident and have never benefited from UK tax relief on contributions to the scheme.

The lifetime allowance charge and the unauthorised payments charge apply regardless of where the individual is resident, subject to the exception above. They are not covered by double taxation agreements as they are not taxes on income but rather taxes on excess relief.

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Administration

Sections 153, 186 and 187 Finance Act 2004

Registered pension schemes with non-resident members will need to keep separate records for members who have benefited from UK tax relief on their contributions to the scheme or have been UK resident whilst in active membership. They will need:

  • to make sure that all the scheme rules comply with the authorised pension and lump sum payment requirements (see PTM060000), or
  • have separate rules for such UK members so as to ensure that the rules as they apply to those members meet those pension and lump sum provisions.

They may also need to notionally ring-fence scheme assets relating to such UK members for the application of the unauthorised borrowing rules (see PTM124000). In practice, this is mainly relevant to money purchase schemes as borrowing is attributable to a member’s arrangement under such a scheme.

All of the assets of a registered pension scheme containing members who have never been relevant UK individuals whilst being active members of the scheme can be invested on the same basis as the assets of other registered pension schemes. Sections 186 and 187 Finance Act 2004 apply to the scheme’s investment and gains regardless of any notional ring-fencing.

Registering the scheme

If a scheme is to be a registered pension scheme the scheme administrator has to make various declarations - see PTM032100. However, such declarations only apply to matters relating to members who are or have been relevant UK individuals whilst being active members of the scheme.

Information reports

The registered pension scheme information reporting requirements also apply only in respect of members who have been relevant UK individuals whilst being active members of the scheme. For example there is no need to include in an Event Report reports for individuals who have never been a relevant UK individuals whilst they were an active member.