UK: Changes to taxation of non-UK pensions in the UK

Tax legislation regarding the UK tax treatment of overseas pension schemes has changed since 6 April 2017 with the removal of the tax-free treatment for payments of lump sums relating to “foreign service”, as well as aligning the UK tax treatment of foreign pension income with that of UK pension income. 

This article sets out in brief detail the tax changes for lump sum payments and pension income from overseas pension schemes.

Pre-6 April 2017 rules 

Lump sums 

Lump sum payments from non-UK registered foreign pension schemes were fully taxable when received by a UK resident taxpayer. However, where individuals were non-UK tax resident and had performed their employment duties outside the UK, foreign service relief (similar to that which applies to termination payments) could be obtained. This meant UK resident taxpayers could receive lump sum payments from nonUK pension schemes and not have to pay any or some UK tax. 

Pension income 

UK resident taxpayers used to receive a 10% abatement from income tax in relation to foreign pension income, which meant that only 90% of the pension income (i.e. not lump sums) was taxable. 

What’s changed after 6 April 2017? 

Lump sums: There have been significant changes implemented by HMRC, namely that they have removed foreign service relief for pension lump sums received after 6 April 2017. 

By way of softening the blow on individuals who have overseas pension fund entitlements, HMRC have confirmed that an individual who receives a lump sum from a non-UK pension scheme after 6 April 2017, is able to take relief on the element of the lump sum that was earned overseas prior to 6 April 2017. The individual can use the same relief that would have been obtained had the lumpsum been taken prior to the introduction of Finance Act (FA)2017. 

In addition, where a foreign pension is registered with HMRC, members will be able to receive a tax-free lump sum of up to 25% of the fund value, in the same way as a UK registered pension. A 25% tax-free lump sum is also available for overseas pensions where the contributions have received UK tax relief. 

It should also be noted that where these lump sum payments from overseas pensions are taxable then, depending on the circumstances, there may also be a liability for National Insurance Contributions (NICs) on the payments, and the tax liabilities on the payments may also need to be reported and paid to HMRC under the PAYE system. 

Pension income 

The 10% abatement rule has been removed by FA 2017 so that 100% of foreign pension income is subject to income tax. 

Conclusion

While this article does not go into great detail it highlights the need for advisers to maintain their awareness of the changes as they may affect those clients who have been living overseas but are potential retiring to the UK.

‍