HS346 Pension savings tax charges - guidance for members of overseas pension schemes that are not UK registered pension schemes (2015)

Question 1

Pension savings tax charges and taxable lump sums from overseas pension schemes

Accepted Answer

Box 7 Value of pension benefits in excess of your Available Lifetime Allowance, taken by you as a lump sum

Enter the total excess amount of the lump sum or sums in box 7 if in 2014 to 2015:

benefits deemed to have come from UK tax-relieved funds exceed your Available Lifetime Allowance
those benefits were taken as a lump sum

If you’ve a mixture of UK tax-relieved funds and other funds in an overseas pension scheme, payments from it are deemed to come first from the UK tax-relieved funds until they’re reduced to nil. Payments can only give rise to any of these charges if they’re deemed to have come from the UK tax-relieved funds. You can find more information about this in the Registered Pension Schemes Manual.

The amount of your UK tax-relieved funds in an overseas pension scheme is the aggregate of your pension input amounts in it for each tax year from 2006 to 2007. The way in which your annual pension input amount is calculated is explained in the note for box 10 below, and the sections which follow it.

Don’t include in box 7 tax-free lump sums paid with a pension which are payable within your Lifetime Allowance. Include the amount of any lump sums paid before you reached age 75 for serious ill-health which exceed the Lifetime Allowance, any lump sums expressly paid for being over the Lifetime Allowance and any amount deemed to have crystallised from UK tax relieved funds in 2014 to 2015 in excess of your Available Lifetime Allowance, following the submission of an APSS 254. You can find information about deemed crystallisations here in the Registered Pension Schemes Manual.

Convert benefits into sterling using the ‘spot rate’ at the date of payment. You can find spot rates on the Bank of England’s website or you may be able to obtain them from your bank.

Box 8 Value of pension benefits in excess of your Available Lifetime Allowance, not taken as a lump sum

Enter in box 8 the total of:

the benefits deemed to have come from UK tax-relieved funds in 2014 to 2015, or any part of those benefits, in excess of your Available Lifetime Allowance that were not paid to you as a lump sum (normally this means the excess is used to provide you with pension income)
any amount transferred to a qualifying recognised overseas pension scheme deemed to have come from UK tax-relieved funds in 2014 to 2015, or any part of that amount, in excess of your Available Lifetime Allowance

Convert benefits and transferred amounts to sterling using the spot rate at the date of payment or transfer

Box 9 Lifetime Allowance tax paid by your pension scheme

Ignore box 9 as it only applies to members of UK registered pension schemes. The manager of an overseas pension scheme will not pay tax to HM Revenue and Customs.

Box 10 Amount saved towards your pension, in the period covered by this tax return, in excess of the Annual Allowance

Ignore box 10 if:

your funds in an overseas pension scheme derive solely from UK transferred funds
you’re the personal representative of someone who died during 2014 to 2015 and you’re filling in this form on that person’s behalf for the period up to the date of death

If you’ve UK tax-relieved funds in an overseas pension scheme, you may be liable to an Annual Allowance excess tax charge.

Even if you have UK tax-relieved funds you can ignore box 10 if in 2014 to 2015:

your savings in overseas pension schemes have not increased by more than £40,000
you have no rights in any UK registered pension scheme

You’re liable to a tax charge if the overall amount of the increase in your pension savings (your ‘pension input amount’) in overseas pension schemes and UK registered pension schemes in the 2014 to 2015 tax year (the ‘pension input period’) was more than your Annual Allowance. The charge applies to the excess amount. Members of UK registered pension schemes can find more in Helpsheet 345 Pension savings – tax charges on any excess over the Lifetime Allowance and the Annual Allowance, and on unauthorised payments.

If you’ve more than one arrangement in a scheme your pension input amount in the scheme is the total of the pension input amounts in each of those arrangements. The way in which your pension input amount in an arrangement is calculated will depend on the nature of that arrangement. You can ignore the increase in your savings in a particular pension arrangement in a scheme if you took all of your benefits in 2014 to 2015 for that arrangement on severe ill-health grounds. This means that you took benefits following a registered medical practitioner telling your pension scheme manager that, because of your ill-health, you’re unlikely to be able to work at any time before State Pension age or if your pension entitlement is paid as a serious ill-health lump sum because you expect to live for less than 12 months.

Question 2

What is my Annual Allowance for 2014 to 2015

Accepted Answer

The Annual Allowance for tax year 2014 to 2015 is £40,000.

The Annual Allowance excess tax charge will not apply to you for this tax year if the increase in all your pension savings for pension input periods ending in 2014 to 2015 does not exceed the £40,000 Annual Allowance.

You still might not have any Annual Allowance excess tax charge to pay if the increase in your pension savings is more than £40,000. You can carry forward any Annual Allowance that you’ve not used from the previous 3 tax years to 2014 to 2015. The amount of the unused Annual Allowance is added to this year’s Annual Allowance. This gives you a higher amount of available Annual Allowance.

If the increase in your pension savings is less than your available Annual Allowance you will have no Annual Allowance excess tax charge to pay. If the increase in your pension savings is more than your available Annual Allowance, you’ll have to pay the Annual Allowance excess tax charge - but only on the amount of the increase over your available Annual Allowance.

There is a strict order in which you use up your Annual Allowance. You use the Annual Allowance in the current tax year first. You then use your unused Annual Allowance from earlier years, using the earliest tax year first.

You may be able to use the HMRC Annual Allowance Calculators to calculate your carry forward.

If you’re using or have used flexible drawdown

If you’ve entered into flexible drawdown, different Annual Allowance rules will apply to you. These rules will apply for every tax year following the year you first go into flexible drawdown. You’ll go into flexible drawdown if you’ve entered into either a flexible drawdown pension or a dependant’s flexible drawdown pension arrangement.

Where you’ve entered into flexible drawdown, the amount of your pension savings liable to the Annual Allowance excess tax charge is calculated by the formula.

TPIA minus RPIA

TPIA	Total pension input amount

RPIA	Pension input amount under either a defined benefits arrangement or a cash balance arrangement where you’re not an active member as long as it is less than the Annual Allowance

So if you’re using or have used flexible drawdown, any pension savings under

a money purchase arrangement
a defined benefit arrangement or a cash balance arrangement where you’re an active member

will be liable to the Annual Allowance excess tax charge

The pension input amount varies depending on the type of arrangement. The following paragraphs explain how to calculate your pension input amount in:

a money purchase arrangement (one in which benefits are provided from a pension pot derived from contributions made by your employer and perhaps also by you)
a defined benefits arrangement (typically one in which the level of benefits is calculated by reference to your earnings and length of employment)
a cash balance arrangement (one where there is a promised pot but without specifying the form of benefit)
a hybrid arrangement (one where your eventual pension might come from more than one of the above types of arrangement, but you’ll ultimately only receive benefits from one of the types)

Money purchase arrangement

If you’ve a money purchase arrangement, your pension input amount in it is arrived at by adding together:

the UK tax-relieved contributions you paid into it in 2014 to 2015
the fraction below of the total amount of contributions paid to it by your employer in 2014 to 2015

The fraction you have to apply is (TE + TSI) ∕ EI. EI is the total amount of your employment income from any employment with an employer that made contributions to the arrangement in 2014 to 2015. TE is so much of EI as is UK taxable earnings. TSI is so much of EI as constitutes taxable specific income.

How to calculate pension savings under a money purchase arrangement

If you know the date on which each contribution was made, then you should use the spot rate for that date of payment or add up each contribution and convert the total amount using the spot rate for

6 April (ie the spot rate at the start of 2014 to 2015)
5 April (ie the spot rate at the end of 2014 to 2015)
the average exchange rate over all of 2014 to 2015

The chosen method must be used on a consistent basis.

However, if you don’t know the exact date on which each contribution was paid, you can use the same spot rate that you used to convert the salary on which the contribution was based. That salary may have been converted using the spot rate for the dates on which it was received or another method that HM Revenue and Customs has agreed in your particular case.

Example 1

During the UK tax year 2014 to 2015 Michael is a member of an overseas pension scheme which is a money purchase scheme. Each month Michael has paid a contribution of 7% of his salary and his employer has paid a contribution of 8%.

To work out his pension input amount for 2014 to 2015 he uses the spot rate for the dates on which his salary was received during the tax year. Using this, Michael’s salary on which both his and his employer’s contributions were based is £180,000.

Based on £180,000, Michael’s pension contributions were £12,600 (£180,000 x 7%) and his employer’s contributions were £14,400 (£180,000 x 8%).

Michael received UK tax relief on all of his contributions so the full amount of £12,600 is included as part of his pension input amount.

The fraction (TE + TSI) / EI is applied to the employer contribution of £14,400 to determine how much of the employer contribution is included as part of Michael’s pension input amount.

Michael has total employment income (EI) from his employment with his employer in that tax year of £180,000 (excluding the employer contribution). Of that income £120,000 is UK taxable earnings (TE). Michael also has £30,000 UK taxable under Part 7 ITEPA in relation to an employment related share option scheme.

The appropriate fraction (TE + TSI) / EI is applied to the employer contribution

(£120,000 + £30,000) / £180,000 x £14,400 = £12,000.

His pension input amount for this scheme is the total of Michael’s UK tax relieved contributions (£12,600) and the appropriate fraction of his employer’s contributions (£12,000) = £24,600

Defined benefits arrangement

If you’ve a defined benefits arrangement your pension input amount is the capital value of the increase of your rights in 2014 to 2015. That is calculated in two stages. You can ignore any increase in rights in an overseas pension scheme of which you were a deferred member for the whole of 2014 to 2015, provided the increase was in line with a rate set out in the scheme rules on 14 October 2010 or otherwise the increase was in line with the increases in the Consumer Prices Index for a 12-month period ending in 2014 to 2015 as chosen by your pension scheme manager.

First stage

Work out the increase in your pension rights under the arrangement in the 2014 to 2015 tax year and convert it to a capital value. You can do this by taking the figure for the annual amount of promised pension immediately before the start of that year increased by the increase in the Consumer Prices Index, or a Relevant Prices Index, for the 12-month period to September 2013 (the opening value) away from the corresponding figure at the end of that year (the closing value), and by multiplying the resulting amount by 16. Don’t take into account:

any pension increase or reduction due to a transfer into or out of the arrangement
any pension increase or reduction due to a pension sharing order
any reduction in your promised pension at the end of the year due to your having taken some or all of the benefits for that arrangement

Then, add to that figure any increase over the 2014 to 2015 tax year in your rights to a separate lump sum in the arrangement, being a lump sum not paid for by giving up some of your pension rights. If your lump sum is not separate, do not add anything to the calculation of your pension rights above.

The opening and closing value of your pension rights can be converted to the sterling equivalent by using:

the spot rate at the start of 2014 to 2015
the spot rate at the end of 2014 to 2015
the average exchange rate over all of 2014 to 2015

The chosen method must be used on a consistent basis.

Second stage

The pension input amount is the greater of:

the total amount of UK tax-relieved contributions paid by you or on your behalf (but not by an employer) to the arrangement in 2014 to 2015
the fraction below of the amount arrived at in the first stage

The fraction you have to apply is (TE + TSI) / EI. EI is the total amount of your employment income from any employment with an employer that is sponsoring the scheme in 2014 to 2015. TE is so much of EI as is UK taxable earnings.TSI is so much of EI as constitutes taxable specific income.

How to calculate pension savings under a defined benefits arrangement

First stage

The amount of your pension savings under a defined benefits arrangement is the increase in the value of your promised benefits over 2014 to 2015. This is the difference between the value of your benefits immediately before the start of 2014 to 2015 (the opening value) and the value of your benefits at the end of 2014 to 2015 (the closing value). The difference is found by taking away the opening value from the closing value. If the difference is a negative amount then your pension savings for the arrangement is nil.

How to find the opening value

The opening value of your benefits can be thought of as the amount of money that might be needed to provide the expected benefit. It is a notional ‘capital’ value and is determined as follows.

Step 1

Find the amount of your annual pension. (This is the amount of pension that you would be paid if you retired now at normal pension age and without any extra benefits for ill-health. So, if you took your benefits today, what would you get without any adjustment for early payment?)

Step 2

Multiply the annual amount of your pension by 16.

Step 3

If your scheme also gives you a separate lump sum in addition to your pension (that is, you don’t have to exchange an amount of pension for the lump sum), add the amount of the promised lump sum to the amount found after step 2.

Step 4

Increase the total after step 3 by the 12 month increase in the Consumer Prices Index (or Relevant Prices Index) to the September before the start of the tax year which you’re calculating annual allowance for.

How to find the closing value

The closing value is the notional ‘capital’ value of the expected benefits at the end of 2014 to 2015 in the same way as you find your opening value, but missing out the final step. So:

Step 1

Find the amount of your annual pension.

Step 2

Multiply that amount of your pension by 16.

Step 3

If your scheme also gives you a separate lump sum in addition to your pension (that is, you don’t have to exchange an amount of pension for the lump sum), add the amount of the promised lump sum to the amount found after step 2.

Adjustments to the closing value

Certain events can cause the closing value of your benefits to be bigger or smaller than they would otherwise be. These events include where a transfer payment has been made or received by the pension scheme in relation to you or, following a pension share (on divorce there is a pension debit or credit attached to your benefits), or a ‘benefit crystallisation event’ has occurred. In these circumstances you’ll need to adjust the amount of your closing value as shown below. (The most likely benefit crystallisation event is where you start to take some or all of your benefits from your pension scheme.)

If there has been a transfer into the arrangement in 2014 to 2015

Deduct the amount of pension (and separate lump sum if appropriate) that relates to the transfer in from your expected benefits at the end of 2014 to 2015, before you work out the closing value.

If there has been a transfer out of the arrangement in 2014 to 2015

Add the amount of pension (and separate lump sum if appropriate) that relates to the transfer out to your expected benefits at the end of 2014 to 2015 before you work out the closing value.

If there has been a pension debit in 2014 to 2015

Add the amount of pension (and separate lump sum if appropriate) that relates to the pension debit to your expected benefits at the end of 2014 to 2015, before working out the closing value.

If there has been a pension credit in 2014 to 2015

Deduct the amount of pension (and separate lump sum if appropriate) that relates to the pension credit from your expected benefits at the end of 2014 to 2015, before working out the closing value.

If there has been a benefit crystallisation event during 2014 to 2015

Add the benefit resulting from the benefit crystallisation event to your expected benefits at the end of 2014 to 2015 before working out the closing value. For example, for a scheme pension taken from a defined benefits arrangement, you would add to your expected benefits at the end of the pension input period the amount of scheme pension that was taken. For a benefit crystallisation event that occurs when your pension in payment is increased you should add in the whole amount of the increase in your earlier pension.

Second stage

Find the pension input amount by establishing what is the greater of the amount of contributions paid by you or on your behalf (but not by an employer) to the arrangement in 2014 to 2015 that received UK tax relief and the first stage amount after application of the (TE+TSI)/EI fraction.

Example 2

Jan is a member of a defined benefit overseas pension scheme. Immediately before the start of 2014 to 2015 Jan’s benefit entitlement under the scheme is an accrued pension of £40,000. At the end of 2014 to 2015 Jan’s accrued pension has increased to £45,000.

Jan’s contributions to the pension scheme during the tax year that had UK tax relief were £40,000.

The total amount of Jan’s employment income (EI) from the employments to which those benefits relate is £200,000. Jan’s UK taxable earnings (TE) from these employments (excluding overseas income that is not chargeable to UK tax and his employer’s contribution to the scheme) are £100,000. Jan also has £20,000 UK taxable under Part 7 ITEPA in relation to an employment related share option scheme.

First Stage

First the pension input amount is worked out in the same way as for a UK registered pension scheme. This is the difference between the opening value and the closing value of his promised benefits. Jan’s promised benefits are likely to be expressed in a currency other than sterling, such as in the currency of the country in which the overseas pension scheme is established. Jan’s accrued benefits at the start and end of 2014 to 2015 can be converted to sterling by using the spot rate for the end of 2014 to 2015 (5 April 2015).

Calculating the opening value

Jan’s opening value is calculated as:

Find amount of annual pension	£40,000
Multiply annual rate of pension by flat factor of 16 (£40,000 x 16)	£640,000

Add amount of separate lump sum - there is no separate lump sum so running total is still £640,000

Increase by the Consumer Prices Index or, if available Relevant Prices Index (3% used for illustrative purposes only) £640,000 x 1.03

£659,200

Jan’s opening value is £659,200

Calculating the closing value

Jan’s closing value is calculated as:

Find amount of annual pension	£45,000
Multiply annual rate of pension by flat factor of 16 (£45,000 x 16)	£720,000

Add amount of separate lump sum - there is no separate lump sum so running total is still £720,000
Jan’s closing value is £720,000 The difference between the closing value and the opening value is £60,800 (£720,000 - £659,200).

Second Stage

Working out the pension input amount using the fraction (TE + TSI) / EI The appropriate fraction is applied to £60,800

(£100,000 + £20,000) / £200,000 x £60,800

£36,480

Working out the amount of Jan’s contributions to the pension scheme that had UK tax relief in the tax year Jan’s UK tax relieved contributions amounted to £40,000.

Working out the pension input amount

Jan’s UK tax relieved contributions (£40,000) were greater than his adjusted first stage amount (£36,480). Therefore, Jan’s pension input amount for 2014 to 2015 is £40,000.

Cash balance arrangement

If you’ve a cash balance arrangement your pension input amount is also calculated in two stages. You can ignore any increase in rights in an overseas pension scheme of which you were a deferred member for the whole of 2014 to 2015, provided the increase was in line with a rate set out in the scheme rules on 14 October 2010 or otherwise the increase was in line with the increases in the Consumer Prices Index for a 12-month period ending in 2014 to 2015 as chosen by your pension scheme manager.

First stage

Work out any increase in 2014 to 2015 in the promised amount that will be available for the provision of benefits by taking the promised amount immediately before the start of that year (the opening value) away from the corresponding figure at the end of that year (the closing value). The value of the promised amount at the start of 2014 to 2015 should be increased by Consumer Prices Index, or the Relevant Prices Index, for the 12-month period to September 2013. Don’t take into account:

any pension increase or reduction due to a transfer into or out of the arrangement
any pension increase or reduction due to a pension sharing order
any reduction in your promised amount at the end of the year due to your having taken some or all of the benefits for that arrangement.

The opening and closing value of your promised amount can be converted to the sterling equivalent by using:

the spot rate at the start of 2014 to 2015
the spot rate at the end of 2014 to 2015
the average exchange rate over all of 2014 to 2015

The chosen method must be used on a consistent basis.

Second stage

The pension input amount is the greater of:

the total amount of UK tax-relieved contributions paid by you or on your behalf (but not by an employer) to the arrangement in 2014 to 2015
the fraction below of the amount arrived at in the first stage.

The fraction you have to apply is (TE + TSI) / EI. EI is the total amount of your employment income from any employment with an employer that is sponsoring the scheme in 2014 to 2015. TE is so much of EI as is UK taxable earnings. TSI is so much of EI as constitutes taxable specific income.

How to calculate pension savings under a cash balance arrangement

The method of valuing pension savings to a cash balance arrangement is similar to that for defined benefits arrangements. Your pension savings amount is the increase in the value of your promised pension fund over 2014 to 2015. This is the difference between the value of your promised pension fund immediately before the start of 2014 to 2015 (the opening value) and the value of your promised pension fund at the end of 2014 to 2015 (the closing value). If the difference is a negative amount then your pension input for the arrangement is nil.

How to find the opening value

This is a two-step process.

Step 1

Find the amount of your promised pension fund.

Step 2

Increase this amount by the 12-month increase in the Consumer Prices Index, or Relevant Prices Index, to the September before the start of the tax year which you’re calculating annual allowance for.

How to find your closing value

Your closing value is the amount of your promised pension fund at the end of 2014 to 2015.

Adjustments to the closing value

Certain events can cause the closing value of your benefits to be bigger or smaller than they would otherwise be. These events include where a transfer payment has been made or received by the pension scheme in relation to you or, following a pension share (on divorce there is a pension debit or credit attached to your benefits), or a ‘benefit crystallisation event’ has occurred. In these circumstances you will need to adjust the amount of your closing value as shown below. (The most likely benefit crystallisation event is where you start to take some or all of your benefits from your pension scheme.)

If there has been a transfer into the arrangement in 2014 to 2015

Deduct the amount of the increase in your promised fund relating to the transfer from the closing value.

If there has been a transfer out of the arrangement in 2014 to 2015

Add the amount of the reduction in your promised fund relating to the transfer to the closing value.

If there has been a pension debit in 2014 to 2015

Add the amount of the reduction in your promised fund relating to the pension debit to the closing value.

If there has been a pension credit in 2014 to 2015

Deduct the amount of the increase in your promised fund relating to the pension credit from the closing value.

If there has been a benefit crystallisation event during 2014 to 2015

Add the amount of the reduction in your promised fund relating to the benefit crystallisation event to the closing value. For a benefit crystallisation event that occurs when your pension in payment is increased, you should add in the whole amount of the increase in your earlier pension.

Example 3

Mark is a member of a cash balance overseas pension scheme. His pension promise is that his pension fund will be increased by 12 per cent of his pay each year with a minimum amount of £10,000. Mark wants to work out what his pension saving is for the tax year 2014 to 2015. The annual increase in Consumer Prices Index to September 2013 is 2.7% (a Relevant Prices Index is not available in this case).

Mark’s contributions to the pension scheme during the tax year that had UK tax relief were £3,500.

The total amount of Mark’s employment income (EI) from the employments to which those benefits relate is £100,000. Mark’s UK taxable earnings (TE) from these employments (excluding overseas income that is not chargeable to UK tax and his employer’s contribution to the scheme) are £60,000. Mark also has £10,000 UK taxable under Part 7 ITEPA in relation to an employment related share option scheme.

First Stage

Immediately before the start of 2014 to 2015, Mark’s fund stands at £56,000. This amount is increased by 2.7% to £57,512. This is Mark’s opening value. Mark’s pay for the year was £100,000, 12 per cent of which is £12,000. This is more than the promised minimum increase to his pension fund, so £12,000 was added to Mark’s promised funds. This brings Mark’s closing value to £68,000.

The difference between Mark’s opening value and his closing value is £10,488 (£68,000 minus £57,512).

Second Stage

Step 1

Working out the pension input amount using the fraction (TE+TSI)/EI
The appropriate fraction is applied to £10,488 (£60,000 + £10,000) / £100,000 x £10,488 = £7,341.60.

Step 2

Working out the amount of Mark’s contributions to the pension scheme that had UK tax relief in the tax year Mark’s UK tax relieved contributions amounted to £3,500.

Step 3

Working out the pension input amount.

Mark’s UK tax relieved contributions (£3,500) were less than his adjusted first stage amount (£7,341.60). Therefore, Mark’s pension input amount for 2014 to 2015 is £7,341.60.

Hybrid arrangement

Use the relevant method set out above to calculate the amount for each of the different types of arrangement that applies to you. Your pension input amount in the hybrid arrangement is the greater, or greatest, of those amounts.

Question 3

What is the ‘Relevant Prices Index’

Accepted Answer

You can use an overseas equivalent to the Consumer Prices Index provided that alternative index in the movement of consumer prices is maintained, or officially recognised, by the government of the country or territory in which your overseas pension scheme is established.If there is no such equivalent index you should use the Consumer Prices Index instead.

Question 4

How do I carry forward unused Annual Allowance

Accepted Answer

You’re able to carry forward unused Annual Allowance automatically. You don’t need to make any claim to HM Revenue and Customs to carry forward unused Annual Allowance and you don’t need to show this on your tax return if your unused Annual Allowance means that an Annual Allowance excess tax charge isn’t due.

For 2014 to 2015, to see if you have any Annual Allowance charge, you need to take the following steps:

Step 1

Work out how much your pension saving is for 2014 to 2015.

Step 2

Is the increase in your total pension saving more than £40,000? If the answer is no, you don’t have to pay the Annual Allowance excess tax charge. You don’t need to carry out any more steps.
If the answer is yes, go to step 3.

Step 3

Work out how much your pension saving was in each of the last 3 tax years.

Step 4

Work out how much unused Annual Allowance you have for these 3 tax years Please note – for working out the unused Annual Allowance for the previous 3 tax years use the Annual Allowance of £50,000 for each of those years.
Add any unused Annual Allowance to the £40,000 available for this tax year. This is your available Annual Allowance.

Step 5

Is your available Annual Allowance more than the increase in your pension savings for 2014 to 2015?
If the answer is yes, you don’t have to pay the Annual Allowance excess tax charge. You don’t need to contact HM Revenue and Customs to make a claim or election for this carry forward. However, you’ll need to keep a record in case the increase in your pension savings exceeds the Annual Allowance in a subsequent tax year.
If the answer is no, the Annual Allowance excess tax charge is due on the amount of your pension savings that is more than your available Annual Allowance.

Example 4

Jim’s total pension savings for pension input periods ending in 2014 to 2015 are £62,000 and his pension savings in the previous 3 tax years were:

2013 to 2014		£35,000
2012 to 2013		£30,000
2011 to 2012		£25,000

Using the Annual Allowance for each of those years of £50,000 Jim has unused Annual Allowance of £25,000, £20,000 and £15,000 from those 3 tax years:

2013 to 2014		£15,000
2012 to 2013		£20,000
2011 to 2012		£25,000
Total		£60,000

This means Jim has £60,000 unused Annual Allowance to carry forward. Together with the £40,000 Annual Allowance for 2014 to 2015 Jim can have pension savings of £100,000 without the annual allowance charge being due. As Jim’s pension savings for 2014 to 2015 is less than his available Annual Allowance, he doesn’t have to pay the Annual Allowance excess tax charge. Jim has used up the £40,000 Annual Allowance for 2014 to 2015 and £22,000 unused Annual Allowance from 3 years ago. Although he still has £3,000 unused Annual Allowance from 3 years ago he can’t carry this forward to the next tax year. Jim can only carry forward unused Annual Allowance from the last 3 years and next year the £3,000 unused amount will be from 4 years ago and so will be out of time and not available. Jim has £35,000 unused Annual Allowance to carry forward to the next tax year.

If you’ve been a member of the overseas pension scheme for any of the previous 3 tax years you can carry forward unused Annual Allowance from those earlier years. The basis on which the unused Annual Allowance is calculated depends on whether the Annual Allowance rules applied to you in those earlier years. That is, did you qualify for UK tax relief in those years? For a year in which the Annual Allowance rules apply, you can carry forward unused Annual Allowance but remember the way your pension input amount is calculated for that tax year is modified by the application of the TE/EI fraction. If you’d been a member of the scheme for any of the previous 3 tax years but the Annual Allowance rules did not apply to you for any year (that is, you did not qualify for UK tax relief for that year) you can still carry forward unused Annual Allowance. However, for the tax year in question, you do not apply the TE/EI fraction to your pension input amount.

You may not be able to carry forward unused Annual Allowance from one or more of the previous 3 tax years if you were not a member of your current overseas pension scheme during any part of that earlier tax year, for example, because you were in a different pension scheme with your current employer or you were in a pension scheme with another employer.

If you were in a different pension scheme in an earlier tax year you’ll be able to carry forward only if that other pension scheme was either a UK registered pension scheme or was, itself, an overseas pension scheme because you got UK tax relief for the year concerned for that scheme.

Question 5

How to work out the rate of the Annual Allowance excess tax charge

Accepted Answer

Your excess pension savings can be charged to tax in whole or in part at 45%, 40% or 20% depending on your taxable income and the amount of excess pension savings. To work out which rate applies and to how much, take the following steps.

Step 1

Establish your taxable income, after personal allowances, for the year (called ‘reduced net income’ in tax legislation). This is the amount on which you actually pay tax for the year.

Step 2

Work out how much of your pension savings for the tax year is liable to the charge. This is the total pension savings for the tax year, less your Annual Allowance for that year, less any unused Annual Allowance you carried forward from earlier years.

Step 3

Add together your reduced net income (from Step 1) and your excess pension savings (from step 2).The amount of excess pension savings (from Step 2):

over your higher rate limit will be taxed at 45%
over your basic rate limit but below your higher rate limit will be taxed at 40%
below your basic rate limit will be taxed at 20%

Step 4

Where the total after step 3 exceeds your higher rate limit (generally £150,000 but may be more if your pension savings are paid net of basic rate tax - read ‘What is reduced net income?’ below), the excess is chargeable at 45%.

Step 5

From the amount of your excess pension savings (step 2) deduct the amount brought into charge at 45% in Step 4.

Step 6

Work out the difference between your higher and basic rate limits.

Step 7

If the amount after step 5 is less than the amount after step 6, the amount at step 5 is chargeable at 40%. Otherwise the amount chargeable at 40% is the difference between the higher and basic rate limits from step 6.

Step 8

Any remaining amount of excess pension savings not brought into charge in step 4 or step 7 is then chargeable at 20%.

If you’re filing your Self Assessment tax return online, we will work out the amount of the tax charge for you.

Example 5

Frances has £30,000 pension savings on which she has to pay the Annual Allowance excess tax charge. Frances also has £140,000 income that she has to pay tax on (her ‘reduced net income’). Frances’s pension savings and reduced net income added together is £170,000.

For the purpose of this example Frances’s higher rate limit is £150,000 and her basic rate limit is £40,000.

Step 1

Frances has £140,000 income that she has to pay tax on (her ‘reduced net income’).

Step 2

Frances has £30,000 pension savings on which she has to pay the Annual Allowance charge.

Step3

Frances’s excess pension savings and reduced net income added together is £170,000.

Step 4

The total after Step 3 exceeds £150,000 by £20,000, so £20,000 of her excess pension savings is chargeable at 45%.

Step 5

The amount of Frances’s excess pension savings not chargeable at Step 4 is £30,000 - £20,000 = £10,000.

Step 6

The difference between Frances’s higher and basic rate limits is £150,000 - £40,000 = £110,000.

Step 7

The amount after Step 5 (£10,000) is less than the amount after Step 6 (£110,000), so £10,000 is chargeable at 40%.

Step 8

There is no remaining amount of excess pension savings not brought into charge by Step 4 or Step 7. Frances’s tax charge is calculated as:

£20,000 @ 45% = £9,000
£10,000 @ 40% = £4,000
£0 @ 20% = £0

Frances’s Annual Allowance excess tax charge is £13,000.

Question 6

What is ‘reduced net income’

Accepted Answer

In broad terms reduced net income is the income on which you actually pay tax. This is your taxable income that is more than your personal tax allowance. In legal terms ‘reduced net income’ is the amount found after step 3 of Section 23 Income Tax Act (ITA) 2007. This is after you have:

identified your total income
deducted the reliefs (allowed for under Section 24 ITA 2007)
deducted any personal tax allowance that you may have

How you pay your pension contribution can affect the amount of your ‘reduced net income’. If your contribution is paid using ‘Relief At Source’ (RAS) it will not have been taken off your taxable income at this point. Someone who has paid a contribution using RAS will have a higher ‘reduced net income’ than someone who has paid their contribution by another method. However, someone who makes a contribution using RAS will have an increased basic rate limit above which they start to pay higher rate tax. The higher rate limit, above which tax is payable at 45% is increased in the same way if contributions are made using RAS. The effect is that the amount of the Annual Allowance charge you will pay is the same whichever method you use to make your contribution.

For more details about the Annual Allowance excess tax charge, please read the Registered Pension Schemes Manual, from page RPSM13102310

Box 10 Amount saved towards your pension, in the period covered by this tax return, in excess of the Annual Allowance

If your total pension input amount in overseas pension schemes in 2014 to 2015 exceeds your available Annual Allowance, enter the excess amount in box 10. You can convert the pension input amount to sterling by using the spot rate for 5 April 2015.

Question 7

Paying the Annual Allowance excess tax charge from your pension savings in your overseas pension scheme

Accepted Answer

You’re liable to the Annual Allowance excess tax charge if your pension savings is more than the total of the Annual Allowance for 2014 to 2015 plus any unused Annual Allowance you can carry forward from the 3 previous tax years. However, you may be able to ask the scheme manager of your overseas pension scheme to pay some or all of your Annual Allowance charge liability relating to that scheme on your behalf out of your pension savings in that scheme. In return there will be an appropriate reduction in your benefits in that scheme.

Box 11 Annual Allowance tax paid or payable by your pension scheme

Enter the amount of your Annual Allowance excess tax charge for 2014 to 2015 that has or will be paid by the scheme manager of your overseas pension scheme. Where more than one pension scheme has paid such a tax charge, enter the total.If you put an amount in box 11 remember to put your excess amount in box 10 as well.

Box 12 Pension scheme tax reference number

If your overseas pension scheme is paying an amount of your Annual Allowance excess tax charge you will not have a Pension Scheme Tax Reference ‘PSTR’ number for that pension scheme. Instead put the name and address of the scheme manager of the overseas pension scheme in box 21 on page Ai4 of the additional information pages.

More information

There are Annual Allowance calculators to help you work out whether you’ve any unused Annual Allowance to carry forward and to help you with pension input amounts. However, the calculators can’t be used for all types of pension arrangements. For more information go to the introduction on pension savings annual allowance calculators.

Boxes 13 to 16 Unauthorised payments charge and surcharge and short service refund charge

You can ignore boxes 13 to 16 if you were not UK resident in 2014 to 2015 or in any of the previous 5 tax years. You may be liable to any of these charges if you have UK tax-relieved funds or UK transferred funds in an overseas pension scheme. You may have in an overseas pension scheme a mixture of:

UK tax-relieved funds
UK transferred funds
other funds

If so, payments from the scheme are deemed to come first from the UK tax-relieved funds and the UK transferred funds until both of those funds are reduced to nil. Payments can only give rise to any of these charges if they are deemed to have come from the UK tax-relieved funds or the UK transferred funds. You can find more information in the Registered Pension Schemes Manual. The amount of your UK tax-relieved funds in an overseas pension scheme is the aggregate of your pension input amounts in it for each tax year from 2006 to 2007. The way in which your annual pension input amount is calculated is explained in the note for box 10 above.

Boxes 13 and 14 Unauthorised payments charge and surcharge

Unauthorised payments are payments by overseas pension schemes from the UK tax-relieved funds or the UK transferred funds which are made either to you or for you and which:

are specifically described in the UK pensions tax legislation as being unauthorised payments
don’t fit within the UK pensions tax legislation as being an authorised payment

‘Payments’ need not necessarily be monetary amounts but may include, for example, a transfer of assets. You can find more information about whether or not a payment is unauthorised and on how to value payments in the Registered Pension Schemes Manual, from page RPSM04104010.

Unauthorised payments charge

If you received an unauthorised payment, or if one was paid to someone else but for you, you’re liable to an Income Tax charge of 40% of the value of the unauthorised payment. This is called the unauthorised payments charge.

Unauthorised payments surcharge

An unauthorised payments surcharge applies where the amount of the unauthorised payments made to, or for, you in a ‘surcharge period’ (see below) reaches a set ‘surcharge threshold’. This is where the amount of the unauthorised payments from an overseas pension scheme reaches 25% of the total value of your rights from your UK tax-relieved funds and UK transferred funds under that scheme. The surcharge is an Income Tax charge of 15% of the value of the unauthorised payment, and is on top of the 40% unauthorised payments charge.

Unauthorised payments surcharge period

A surcharge period starts on the date that the first unauthorised payment was made to, or for, you and ends:

12 months after that date
on the day on which the surcharge threshold is reached, if earlier

So, if in any 12 months the total unauthorised payments to you or for you from your UK tax-relieved funds and UK transferred funds in a particular scheme are less than 25% of the value of rights from those funds, there is no unauthorised payments surcharge.

For more details about the unauthorised payments charge and the unauthorised payments surcharge, please read the Registered Pension Schemes Manual, from page RPSM13102110.

Box 13 Amount of unauthorised payment from a pension scheme, not subject to surcharge

If you received an unauthorised payment, and the payment is not subject to the unauthorised payments surcharge, enter the amount of the unauthorised payment in box 13. But read the note on ‘Unauthorised payment not subject to surcharge when paid which later becomes subject to surcharge’ below. You can convert the payment into sterling using the spot rate for the date of payment.

Box 14 Amount of unauthorised payment from a pension scheme, subject to surcharge

If you received an unauthorised payment, and the payment is subject to the unauthorised payments surcharge, enter the amount of the unauthorised payment in box 14. But read the note below. You can convert the payment into sterling using the spot rate for the date of payment.

Unauthorised payment not subject to surcharge when paid which later becomes subject to surcharge

If an unauthorised payment was paid to or for you in the previous tax year that was not subject to the unauthorised payments surcharge when it was paid, that payment might become subject to the surcharge because of an unauthorised payment paid to or for you in this tax year. That is because the additional payment means that the surcharge threshold is reached and all of the payments fall within the same surcharge period. If this happens, please contact us about your tax return for 2013 to 2014.

Box 15 Foreign tax paid on an unauthorised payment (in £ sterling)

As the unauthorised payments charge and surcharge are not charges on income, they are not exempted by any of the UK’s Double Taxation Agreements. However, if a payment gives rise to a charge (and a surcharge) you can receive credit for foreign tax paid on the payment that can be set against the charge (and the surcharge).

Enter in box 15 the sterling equivalent of the amount of any foreign tax that you’ve paid on a payment entered in box 13 or box 14. You can convert the amount into sterling using the spot rate for the date of the tax payment. If, after you’ve submitted this tax return, you pay foreign tax for a payment entered in box 13 or box 14 on which you have paid an unauthorised payments charge (and a surcharge), you can then make a claim for an appropriate adjustment to be made in your liability to UK tax. If you’re not sure what to do contact HMRC.

Box 16 Taxable short service refund of contributions (overseas pension schemes only)

If you’ve not received any lump sum payments from overseas pension schemes during 2014 to 2015, do not fill in box 16.

If you left pensionable service in an overseas pension scheme, and received in 2014 to 2015 a refund of UK tax-relieved contributions that you made to that scheme, you’re liable to a tax charge on that refund.

The amount of tax due on a refund is:

20% on the first £20,000
50% on any amount over £20,000

You can find more information about short service refunds and liability to tax on them in the Registered Pension Schemes Manual, from pages RPSM04101090 and RPSM13102110. Enter the amount of your refund of UK tax-relieved contributions at box 16. You can convert the refund into sterling using the spot rate for the date of payment.

Box 17 Taxable lump sum payment (overseas pension schemes only)

You need to make an entry in box 17 if in 2014 to 2015 you’ve received a payment from an overseas pension scheme that qualifies as a serious ill-health lump sum (read the conditions below). You’re liable to a tax charge at the rate of 55% if you’ve reached the age of 75 when the lump sum is paid.

Conditions

A lump sum that you received in 2014 to 2015 from an overseas pension scheme may be a serious ill-health lump sum if:

it’s paid after the scheme received evidence from a registered medical practitioner that you’re expected to live for less than one year (read the Registered Pension Schemes Manual from page RPSM09104610)
it extinguishes your entitlement to benefits under the scheme
you’ve not previously crystallised benefits under the scheme
you have Available Lifetime Allowance when the lump sum is paid (read the note for boxes 7 to 9 at the beginning of this helpsheet, and in the Registered Pension Schemes Manual, from page RPSM11100000)

For the avoidance of doubt, if you’re paid a serious ill-health lump sum before you reached the age of 75, it remains not liable to Income Tax, but the amount of the lump sum counts towards your Available Lifetime Allowance. For more details about serious ill-health lump sums, please read the Registered Pension Schemes Manual, from page RPSM09104600. You may also need to make an entry in box 17 if, after the death of a member of an overseas pension scheme, you’ve received in 2014 to 2015 from the deceased member’s UK tax-relieved funds or UK transferred funds any of the following lump sum payments:

a pension protection lump sum death benefit
an annuity protection lump sum death benefit
a drawdown pension fund lump sum death benefit (this was previously known as an unsecured pension fund lump sum death benefit)
a defined benefits lump sum death benefit where the member had reached age 75 at the date of their death
an uncrystallised funds lump sum death benefit where the member had reached age 75 at the date of their death.

You can find more information about lump sum death benefits in the Registered Pension Schemes Manual, from page RPSM04101110. If the deceased member had a mixture of UK tax-relieved funds, UK transferred funds and other funds in an overseas pension scheme, payments from it are deemed to come first from the UK tax-relieved funds and the UK transferred funds until they are reduced to nil. Such payments can only give rise to a charge if they’re deemed to have come from those funds. You can find more information about this in the Registered Pension Schemes Manual, from page RPSM13102190. You can ignore box 17 if the deceased member was not UK resident in 2014 to 2015 or in any of the previous 5 tax years. The tax charge is at the rate of 35% on the amount of the benefit payment if the payment is made in 2014 to 2015 for a member who died before 6 April 2012 and at the rate of 55% where the member died on or after that date. Enter the amount of the benefit received at box 17. You can convert the amount into sterling using the spot rate for the date of payment.

Box 18 Foreign tax paid (in £ sterling) on boxes 16 and 17

As the tax charges on short service refunds of contributions, serious ill-health lump sums paid after reaching age 75 and lump sum death benefit payments are not charges on income, they are not exempted by any of the UK’s Double Taxation Agreements. If a payment gives rise to such a charge, however, you can receive credit for foreign tax paid on the payment that can be set against the charge. If you’ve paid foreign tax on any payments that you’ve entered in box 16 and/or 17, enter the sterling equivalent of the tax paid in box 18. Add the amounts together where foreign tax has been paid on more than one type of payment. Convert the foreign tax paid into sterling at the rate of exchange prevailing on the date of each tax payment. If, after you’ve submitted this tax return, you pay foreign tax for a payment entered in box 16 or 17 on which you’ve paid such a UK tax charge, you can then make a claim for an appropriate adjustment to be made in your liability to UK tax. If you are not sure what to do, you can contact HMRC.

Question 8

Trivial commutation lump sums and winding-up lump sums

Accepted Answer

If in 2014 to 2015 you’ve received a payment from an overseas pension scheme that qualifies as a trivial commutation lump sum or a winding-up lump sum (read the conditions below), you’re liable to an Income Tax charge on the lump sum. If you’ve not previously received or become entitled to any benefits from the scheme then 75% of the lump sum is taxable. If you’ve previously received a pension, or become entitled to any other benefits, from the scheme, then:

all of that part of the lump sum that is extinguishing your rights to the pension or any other benefits that you’re already drawing is taxable
75% of the remaining part of the lump sum – the part which relates to rights that had not yet come into payment – is taxable.

You should include the amount that is taxable in box 16 ‘other taxable income’ on page TR 3 of your tax return. Do not include the amount in any of the boxes above.

Conditions

A lump sum that you received in 2014 to 2015 from an overseas pension scheme may be a trivial commutation lump sum if:

it does not exceed £18,000
it was paid after you reached age 60
it extinguishes your entitlement to benefits under the scheme
the value of your benefit entitlement under all overseas pension schemes (and any UK registered pension scheme) on the date nominated for valuation purposes (read the Registered Pension Schemes Manual from page RPSM09104950) before the lump sum was paid did not exceed £18,000
you have Available Lifetime Allowance when the lump sum is paid (read the note for boxes 7 to 9 at the beginning of this helpsheet, and in the Registered Pension Schemes Manual, from page RPSM11100000)
you have not previously been paid a trivial commutation lump sum from an overseas pension scheme (or any UK registered pension scheme), after 5 April 2006, or if such a payment was made it was within 12 months of this payment and the rights underlying that payment were included in the valuation on the ‘nominated date’

For the avoidance of doubt, if all of the other conditions are met but you’ve received a lump sum of more than £18,000, then none of the lump sum counts as a trivial commutation lump sum. The whole of the lump sum is an unauthorised payment (read the note for boxes 13 and 14 above).

Up to £18,000 of a lump sum that you’ve received in 2014 to 2015 from an overseas pension scheme that is being wound up may be a winding-up lump sum if:

If you’ve received a lump sum of more than £18,000 and all of these conditions are met then £18,000 of the lump sum paid will be a winding-up lump sum. But the remaining part of the lump sum is an unauthorised payment (read the note for boxes 13 and 14 above).

For more details about trivial commutation lump sums and winding-up lump sums, please read the Registered Pension Schemes Manual, from page RPSM09104900 and from page RPSM09105100.

Question 9

Flexible drawdown during a period of ‘temporary’ non-residence

Accepted Answer

For more details about flexible drawdown, please read the Registered Pension Schemes Manual, from page RPSM09103600 to page RPSM09103650.

From 6 April 2011, if you held pension savings held in a money purchase arrangement (other than a cash balance arrangement) in either a registered pension scheme or an overseas pension scheme (where the funds concerned have benefitted from UK tax relief), you’re able to withdraw those savings in their entirety as ‘flexible drawdown’ pension income subject to meeting certain conditions. If, during a period of temporary non-residence, you take flexible drawdown from either a UK registered pension scheme or from an overseas pension scheme that is not a registered pension scheme to the extent that the payment is referable to the individual’s tax-relieved fund under the overseas scheme, then the amount taken as flexible drawdown is treated as taxable pension income arising in the tax year in which you resume residence in the UK.

Temporary non-residence broadly occurs if you left the UK to take up residence abroad, later resume UK residence and:

were solely tax resident in the UK for any part of at least four out of the 7 tax years immediately preceding your year of departure
were not solely resident in the UK for a period of less than 5 full tax years

Nothing in any double taxation relief arrangements between the UK and the country or territory in which you were resident at the time is to be read as preventing you from being chargeable to Income Tax. However, you will be given a credit for any overseas tax that is charged in respect of a flexible drawdown payment.

For more detail on the operation of the tax charge and what counts as temporary non-residence, read the Employment Income Manual pages EIM74050 to EIM74060.

Where flexible drawdown during a period of temporary non-residence was taken from a registered pension scheme you should include the amount(s) taken in box 10 of the pension section on the main Self Assessment tax return. Where it was taken from an overseas pension scheme, you should include the amount(s) taken in boxes for ‘overseas pensions’ on page F 2 of the Foreign pages.

Use the working sheet to work out the figure to put into box 6 on the tax calculation summary pages.

Question 10

Contact

Accepted Answer

Online forms, phone numbers and addresses for advice on Self Assessment.

Cookies on GOV.UK

This guidance was withdrawn on 7 June 2019

Boxes 7 to 9 Lifetime Allowance excess tax charge

Pension savings tax charges and taxable lump sums from overseas pension schemes

Box 7 Value of pension benefits in excess of your Available Lifetime Allowance, taken by you as a lump sum

Box 8 Value of pension benefits in excess of your Available Lifetime Allowance, not taken as a lump sum

Box 9 Lifetime Allowance tax paid by your pension scheme

Box 10 Amount saved towards your pension, in the period covered by this tax return, in excess of the Annual Allowance

What is my Annual Allowance for 2014 to 2015

If you’re using or have used flexible drawdown

Money purchase arrangement

How to calculate pension savings under a money purchase arrangement

Example 1

Defined benefits arrangement

First stage

Second stage

How to calculate pension savings under a defined benefits arrangement

First stage

How to find the opening value

Step 1

Step 2

Step 3

Step 4

How to find the closing value

Step 1

Step 2

Step 3

Adjustments to the closing value

If there has been a transfer into the arrangement in 2014 to 2015

If there has been a transfer out of the arrangement in 2014 to 2015

If there has been a pension debit in 2014 to 2015

If there has been a pension credit in 2014 to 2015

If there has been a benefit crystallisation event during 2014 to 2015

Second stage

Example 2

First Stage

Calculating the opening value

Calculating the closing value

Second Stage

Working out the pension input amount

Cash balance arrangement

First stage

Second stage

How to calculate pension savings under a cash balance arrangement

How to find the opening value

Step 1

Step 2

How to find your closing value

Adjustments to the closing value

If there has been a transfer into the arrangement in 2014 to 2015

If there has been a transfer out of the arrangement in 2014 to 2015

If there has been a pension debit in 2014 to 2015

If there has been a pension credit in 2014 to 2015

If there has been a benefit crystallisation event during 2014 to 2015

Example 3

First Stage

Second Stage

Step 1

Step 2

Step 3

Hybrid arrangement

What is the ‘Relevant Prices Index’

How do I carry forward unused Annual Allowance

Step 1

Step 2

Step 3

Step 4

Step 5

Example 4

How to work out the rate of the Annual Allowance excess tax charge

Step 1

Step 2

Step 3

Step 4

Step 5

Step 6

Step 7

Step 8

Example 5

Step 1