EIM75500 - The taxation of pension income: foreign pensions
Overview
Foreign pensions chargeable under section 573 ITEPA 2003
What is not taxable under section 573 ITEPA 2003
Amount of pension income chargeable under section 573 subject to tax
Pre-1973 pensions paid under the Overseas Pensions Act 1973
Overseas government pensions paid in the UK
Exemption for consular employees
Overview
Foreign pensions are pensions, annuities and certain lump sums paid by or on behalf of a person who is outside the UK. Tax is due on foreign pension income paid to a UK resident. Different types of foreign pension income may be chargeable under different sections of ITEPA 2003 as follows:
- employment related annuities – see EIM75300 for guidance on the tax treatment of these annuities
- certain overseas government pensions may be chargeable under section 615 ITEPA 2003 – see the section Overseas government pensions paid in the UK below for more information
- pensions paid under the Overseas Pensions Act 1973 - the section Pre-1973 pensions paid under the Overseas Pensions Act 1973 provides guidance on their tax treatment
- voluntary annual payments made by someone outside the UK – EIM75800 for more information
- any other type of foreign pension is chargeable under section 573 ITEPA 2003. See the next section for more details.
It is important to identify the type of foreign pension income to know which legislation applies, as this affects:
- whether or not the payment is taxable
- the amount of tax due
- for individuals subject to the remittance basis, whether or not tax is due only if the income is remitted to the UK.
UK pension schemes can provide benefits in respect of overseas employments, so it cannot be assumed that because the pension relates to an employment outside the UK that it is foreign pension income.
(This content has been withheld because of exemptions in the Freedom of Information Act 2000)
Foreign pensions chargeable under section 573 ITEPA 2003
Sections 573 to 574A ITEPA 2003
Pensions paid by or on behalf of a person outside the UK are chargeable to tax under section 573, unless they are chargeable under another provision. See What is not taxable under s573 ITEPA 2003 below.
The definition of foreign pension includes:
- certain voluntary pensions - see Voluntary pensions below
- from 2011 to 2012 - annuities paid under or purchased with funds from a ‘relevant non-UK scheme’ (RNUKS) or an ‘overseas pension scheme’
- from 2011 to 2012 payments of income withdrawal or dependants’ income withdrawal made under an RNUKS or an ‘overseas pension scheme’
- from 2015 to 2016 payments of nominees’ or successors’ income withdrawal made under an ‘overseas pension scheme’ or an RNUKS
- from 2017 to 2018 payments of certain lump sums (relevant lump sums) – see EIM75550.
Pensions chargeable to tax under section 573 include payments to:
- individuals who have built up pension in their own right (members) to take when they retire or reach a certain age
- other persons as a result of the death of a member (known as death benefits).
Where those death benefits are provided under an ‘overseas pension scheme’ or an RNUKS, in certain circumstances the pension payment may not be chargeable to tax. EIM75600 provides guidance on the tax treatment of pensions paid from an ‘overseas pension scheme’ or RNUKS following a member’s death.
What is an overseas pension scheme
The term ‘overseas pension scheme’ has a specific meaning. It is not simply a pension scheme set up outside the UK. An overseas pension scheme is a non-UK pension scheme, which is not a registered pension scheme, that satisfies certain conditions specified by legislation. Broadly these are schemes that are an overseas equivalent of registered pension schemes. See PTM112200 for guidance on the meaning of the term ‘overseas pension scheme’, and the conditions a pension scheme must satisfy to be an overseas pension scheme.
What is a relevant non-UK scheme (RNUKS)
The term ‘relevant non-UK scheme’ is set by paragraph 1(5) schedule 34 FA 2004. PTM113210 provides guidance on the definition of an RNUKS, but broadly it is a foreign pension scheme that has benefitted from at least one of the following UK tax reliefs:
- on contributions
- funds transferred in from a registered pension scheme
- under section 307 ITEPA 2003.
What is income withdrawal
In broad terms income withdrawal occurs when an individual draws an amount from a pension pot that the individual has specifically put aside (designated) to pay drawdown pension. Income withdrawal has slightly differing names depending on who the pension recipient is. When paid to a:
- member it is called ‘income withdrawal’ - PTM062710 provides more information about income withdrawal
- dependant it is called ‘dependants’ income withdrawal’
- nominee it is called ‘nominees’ income withdrawal’
- successor it is called ‘successors’ income withdrawal’.
PTM072410 provides more information about beneficiaries’ drawdown pension and income withdrawal. Under the guidance ‘beneficiary’ is the collective name given for a dependant, nominee or successor.
Income drawdown may be organised as a regular series of payments, a number of irregular payments or even be a single payment of the whole of the individual’s drawdown pension pot.
Voluntary pensions
A pension that is paid voluntarily or is capable of being discontinued will be chargeable to tax under section 573 ITEPA 2003 if both:
- it is paid to a former employee or office holder, their widow, widower, surviving civil partner, child, relative or dependant of that former employee or office holder
- it is paid by or on behalf of the person who employed the former employee, or under whom the former office holder held the office, or by a successor of that person.
What is not taxable under section 573 ITEPA 2003
The following pension income falls outside the definition of ‘foreign pension’ and will be taxable under another section of ITEPA 2003.
Pensions paid under a registered pension scheme
Sections 579A to 579D ITEPA 2003
Some registered pension schemes have been established outside the UK. Payments under or in respect of a registered pension scheme established outside the UK are not classed as foreign pension income. These payments are chargeable to tax under section 579A. See EIM75400 for guidance on the correct tax treatment of payments from a registered pension scheme.
Payments that are subject to the ‘member payment charges’
Paragraphs 1 to 7 schedule 34 Finance Act 2004
As part of the scheme funds of an RNUKS have benefitted from UK tax reliefs, some of the tax charges relating to registered pension schemes still apply to those ‘UK funds’. These tax charges are collectively called the ‘member payment charges’. These tax charges apply in place of the provisions of chapter 4 Part 9 ITEPA 2003 (sections 573 to 576A). The member payment charges include the following:
- taxation of an uncrystallised funds pension lump sum under section 636A ITEPA 2003 (see EIM75420)
- taxation of trivial commutation lump sums and trivial commutation lump sum death benefits under section 636B and 636C (see EIM75420)
- certain lump sums taxed as pension income under section 636A(4ZA) (see EIM75620)
- unauthorised payments chargeable to tax under sections 208 and 209 Finance Act 2004
PTM113210 provides more information about the application of the member payment charges.
The amount of payment subject to the member payment charges is limited to the extent of the member’s ‘UK funds’ (see PTM113210 and PTM113230). Where the pension payment is more than the member’s ‘UK funds’ the excess will be taxed in accordance with the provisions of chapter 4 Part 9 ITEPA 2003.
Certain pensions and annuities paid following a member’s death
Section 573(2A) to (2F), 646D and 646E ITEPA 2003
Certain pensions paid from, and annuities purchased using funds from, an overseas pension scheme or relevant non-UK scheme (RNUKS) are not taxable under Part 9 ITEPA 2003. EIM75640 and EIM75660 provide guidance on which pensions and annuities paid following a member’s death are taxable and which are not taxable.
Pensions and annuities taxable under chapters 10, 11 and 14 Part 9 ITEPA 2003
Certain employment-related annuities are taxable under chapter 10 Part 9 ITEPA 2003. These are:
- annuities for dependants chargeable under section 609 ITEPA 2003 – see EIM75600
- annuities payable under an occupational pension scheme that is not a registered pension scheme chargeable under section 610 ITEPA 2003 – see EIM75200
- annuities in recognition of another’s service chargeable under section 611 ITEPA 2003 – see EIM75200.
The government of certain overseas countries and territories may pay pensions in respect of overseas government service in the UK to UK residents – see the section Overseas government pensions paid in the UK below for more information.
Pre-1973 pensions paid under the Overseas Pensions Act 1973 are chargeable to tax under section 629 ITEPA.
Amount of pension income chargeable under section 573 subject to tax
Sections 573, 575, 576, and 576A ITEPA 2003
Paragraph 2(6) and 2(7) schedule 3 Finance Act 2017
The person receiving or entitled to receive the pension is liable to pay tax. Liability to tax arises only if that recipient is UK resident.
Subject to the temporary non-residence provisions (see EIM75450) from 6 April 2017 the taxable amount is full amount of the payment arising in the tax year. For payments arising before 6 April 2017 the taxable amount is 90% of the amount arising in the tax year.
Pension income chargeable under section 573 is treated as ‘relevant foreign income’ for the purposes of chapters 2 and 3 of Part 8 ITTOIA 2005. For individuals subject to the remittance basis this means tax is due only on pension remitted to the UK. For payments made before 6 April 2017, the 10% deduction is not available for individuals subject to the remittance basis (see RDRM10430).
Where the temporary non-residence provisions apply, ‘relevant withdrawals’ will be taxable in the year the individual returns to the UK. For individuals who return to the UK in 2017 to 2018 or a later tax year, that taxable amount of the relevant withdrawals depends on when it was actually paid. For relevant withdrawals actually paid on or after 6 April 2017, the taxable amount is the full amount of the payment. For relevant withdrawals actually paid before 2017 to 2018, the taxable amount is 90% of the amount paid before 6 April 2017.
Where the UK has a double taxation agreement (DTA) with the country or territory which is the source of the foreign pension, a relief or exemption from tax may be available – see EIM75070.
Pre-1973 pensions paid under the Overseas Pensions Act 1973
Section 629 ITEPA 2003
Under the Overseas Pensions Act 1973 the UK government took responsibility for paying certain Commonwealth government pensions. The effect of section 629 is to tax these pensions as if they were foreign pensions. Section 629 applies to a pension payable under section 1 of the Overseas Pensions Act 1973 that immediately before 6 April 1973 was payable to a UK resident who was either:
- an individual who had retired from service before 6 April 1973 and the pension was in respect of that service
- their widow or widower.
Increases to certain government and public sector pensions are given under the provisions of the Pensions (Increase) Act 1971. This includes increases to pensions payable under section 1 of the Overseas Pensions Act 1973. These pension increases are not taxed as foreign pension. The increases are taxed as UK source pension under the provisions of section 569 ITEPA 2003 (see EIM75200).
Exemption for Malawi, Trinidad and Tobago and Zambia
Section 643 ITEPA 2003
Government pensions for these countries paid to a pensioner who retired before 6 April 1973, or their surviving spouse or civil partner are exempt from tax. This exemption applies provided that the double taxation agreements with these countries continue to provide for the exemption of government pensions.
The exemption applies only to the amount of pension paid under section 1 of the Overseas Pensions Act 1973. It does not apply to any statutory increases resulting from the application of the Pensions (Increase) Act 1971.
Amount chargeable to tax
Sections 629, 631 and 632 ITEPA 2003
Where the pension is chargeable, the person receiving or entitled to receive the pension is liable to pay tax.
The taxable amount is 90% of the amount of pension arising in the tax year.
Pension income chargeable under section 629 is treated as ‘relevant foreign income’ for the purposes of section 838 ITTOIA 2005.
Overseas government pensions paid in the UK
Section 615 ITEPA 2003
Certain overseas governments may pay pensions in the UK through any public department, officer or agent. Where the following conditions are met, these pensions are chargeable to Income Tax under section 615 ITEPA 2003, and not section 573 like other foreign pensions:
- the pension is payable in the UK to an individual who is UK resident
- the pension is payable by or on behalf of the government of a country that is listed at schedule 3 of the British Nationality Act 1981 or a British Overseas Territory
- the pension is paid to an individual who was employed outside the UK in service of the Crown, or the government of a country that is listed at schedule 3 of the British Nationality Act 1981 or a British Overseas Territory, or to the widow, widower, surviving civil partner, child, relative or dependant of that former employee.
Pensions that are payable out of the public revenue of the UK or Northern Ireland are not chargeable under section 615.
Schedule 3 British Nationality Act 1981: Commonwealth countries
The countries that make up the Commonwealth and the countries listed in schedule 3 of the British Nationality Act 1981 do vary over time. To find a current list within the Act, go to British Nationality Act 1981. The footnotes will show when a country was added to or taken off the list.
British Overseas Territories
Schedule 6 of the British Nationality Act 1981 provides a list of British Overseas Territories (previously known as British dependant territories). To find the current list within the Act, go to British Nationality Act 1981. The footnotes will show when a territory was added to or taken off the list.
Amount chargeable to tax
Sections 616 to 618, 567 and 683(3) ITEPA 2003
The person receiving or entitled to receive the pension is liable to pay tax.
Section 616 provides that the whole amount of the pension accruing in the tax year is classed as ‘taxable pension income’. This is the amount of pension to which the pensioner is entitled to be paid in the tax year rather than the amount that is actually paid.
However, section 617 allows for a deduction of 10% from the amount of taxable pension income. This means that the amount of tax due is 90% of the amount of the pension to which the pensioner is entitled to be paid in the tax year.
Pensions chargeable under section 615 do not fall within the definition of ‘relevant foreign income’. There is no special treatment for individuals subject to the remittance basis.
The pension falls within the definition of PAYE pension income. The pension payer should operate PAYE deducting the appropriate tax due. Detailed guidance on the operation of PAYE can be found in CWG2: further guide to PAYE and National Insurance contributions.
Exemption for consular employees
Section 646A ITEPA 2003
Persons in the UK who are consular officers or employees for a foreign state can receive foreign pension Income Tax-free if certain conditions are met. Consular officers or employees are persons employed for the purposes of the official business of a consular officer at any consulate, consular establishment or any other premises used for that purpose.
Foreign pension income paid to someone resident in the UK will not be taxable if all the following 4 conditions are met. The consular officer or employee is:
- employed by a foreign state for which there is an Order in Council directing that section 646A ITPEA 2003 to give effect to a reciprocal arrangement with that state
- not a British citizen, British Overseas Territories citizen, a British National (Overseas) or a British Overseas citizen
- not engaged in any trade, profession, employment or vocation in the UK other than as a consular officer or employee of the state in question
a permanent employee of that state, or was not ordinarily resident in the UK immediately before they became a consular officer or employee of that state in the UK.