PTM113210 - International: UK tax charges on non-UK schemes: the member payment charges and taxable property charges: the member payment charges: basic principles
Glossary PTM000001
Certain payments made, or treated as made, from a relevant non-UK scheme (RNUKS) can be subject to UK tax charges that arise under Finance Act 2004 (FA 2004). As a group these tax charges are known as the ‘member payment charges’.
Pensions paid to a UK resident are taxable under Part 9 ITEPA 2003 - see EIM75500. Note that from tax year 2017 to 2018 onwards 100% of the pension is taxable.
What are the member payment charges?
Who the member payment charges apply to
How the member payment charges work
Definition of a relevant non-UK scheme
Relieved members
Transfer members
When the member payment charges do not apply
Tax liability
What are 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 FA 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 any provision of Chapter 15A of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), or under section 579A ITEPA as applied by virtue of any provision of Chapter 15A.
The charges under the final bullet point above include:
- a pension commencement excess lump sum under section 637B ITEPA (see PTM177000)
- a serious ill-health lump sum under section 637C ITEPA (see PTM063400)
- an uncrystallised funds pension lump sum under section 637D ITEPA (see PTM063300)
- a trivial commutation lump sum or winding-up lump sum under section 637G ITEPA (see PTM063500 and PTM063600 repsectively)
- charges under sections 637H to 637N ITEPA on the payment of certain death benefits to qualifying persons (see PTM073010).
Who the member payment charges apply to
Paragraphs 1 and 5 schedule 34 Finance Act 2004
The member is liable to pay the tax charge on a payment (other than lump sum death benefits) that is subject to one of the member payment tax charges. Where the payment is a lump sum death benefit it is the recipient of that payment who is liable to pay the special lump sum death benefits charge. Schedule 34 FA 2004 modifies the application of sections 205 and 206 FA 2004 to remove tax liability from the scheme administrator and place it instead on the member or recipient of the lump sum death benefit.
The member payment charges apply to payments made, or treated as made, to or in respect of a relieved member or a transfer member of a relevant non-UK scheme (RNUKS) - see Definition of a relevant non-UK scheme below.
Section 161 FA 2004 provides a wide definition to the term ‘payment’. Broadly speaking, section 161 defines a payment as including a transfer of assets (either directly or indirectly) and any transfer of money’s worth. Section 161 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 reference to a payment ‘treated as made’ reflects provisions under FA 2004 where there is no actual payment but where an unauthorised payment is deemed to be made. Examples include the provisions regarding value shifting, the use of scheme assets and assignment.
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.
Liability to the member payment charges arises wherever the individual is resident.
Where a member has made a transfer to a qualifying recognised overseas pension scheme (QROPS) they can still be liable to the member payment charges if that scheme loses or gives up QROPS status after the transfer was made.
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.
For example, a transfer from an RNUKS to a scheme that is neither a registered pension scheme nor a qualifying recognised overseas pension scheme would be subject 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 normal minimum pension age (currently age 55, but this will increase to age 57 from 6 April 2028; see PTM062100). The payment of a pension before normal minimum pension age can give rise to an unauthorised payments 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).
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)
- 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 to the scheme of funds representing accrued rights under another scheme that is either a registered pension scheme or another RNUKS.
An indirect transfer can occur where an individual's funds are transferred to a RNUKS 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 RNUKS are established and regulated allows 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.
Relieved members
Paragraph 1(7) schedule 34 Finance Act 2004
A member of an RNUKS is a relieved member if either:
- 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)
- they have been exempted from liability to tax by virtue of section 307 ITEPA.
Transfer members
Paragraph 1(8) schedule 34 Finance Act 2004
A member of an RNUKS is a transfer member if that scheme has received a transfer (either directly or indirectly) in respect of that member from a registered pension scheme or another RNUKS.
When the member payment charges do not apply
There are time limits to the application of the member payment charges based on when the member became non-UK resident and when pension savings were transferred out of a registered pension scheme. Different rules apply depending on when the RNUKS received the funds that generated the payment.
The member payment charges also apply only to the extent that a payment is referable to a member’s UK funds.
5-year non-residence rule
Paragraph 2(1) and (4) schedule 34 Finance Act 2004
This rule applies to payments made in respect of a member’s:
- UK tax-relieved funds that were built up before 6 April 2017
- relevant transfer funds
- ring-fenced transfer funds with a key date earlier than 6 April 2017.
For payments from these types of fund the member payment charges do not apply if both:
- at the time the payment is made (or is treated as made) the member is not UK resident
- they were neither UK resident earlier in the tax year nor UK resident in any of the 5 previous tax years.
10-year non-residence rule
Paragraph 2(2) to (4) schedule 34 Finance Act 2004
This rule applies to payments made in respect of a member’s:
- UK tax-relieved funds that were built up after 5 April 2017
- ring-fenced transfer funds with a key date of 6 April 2017 or later.
The member payment charges do not apply to payments from these types of fund if both:
- at the time the payment is made (or is treated as made) the member is not UK resident
- the member was neither UK resident earlier in the tax year nor UK resident in any of the 10 previous tax years.
5 years from transfer rule
Paragraph 2(3) and (4) schedule 34 Finance Act 2004
For payments made in respect of a ring-fenced transfer fund with a key date of 6 April 2017 or later, the member payment charges apply for a period of 5 years beginning with the key date for the particular ring-fenced transfer fund.
This means that even if the member has been non-resident for longer than 10 full tax years the member payment charges can still apply if it is less than 5 years since the funds were transferred from a registered pension scheme.
See PTM113230 for guidance on the meaning of the phrases:
- UK tax-relieved fund
- relevant transfer funds
- ring-fenced transfer fund
- key date.
See RDR3 Statutory Residence Test for guidance on the statutory residence test.
Payments must be referable to UK funds
Paragraphs 3 and 4 schedule 34 Finance Act 2004
The member payment charges apply only to the extent that the payment made (or treated as made) from an RNUKS is referable to the member’s:
- UK tax-relieved fund
- relevant transfer fund
- ring-fenced transfer fund or funds.
See PTM113230 for the meaning of these terms.
If a payment is not referable to any of these funds it cannot be subject to the tax charges listed – see What are the member payment charges? above.
Payments made by an RNUKS to or in respect of the member are made out of the member's UK funds in priority to any non-UK funds under that scheme.
Regulations specify when and how a payment is attributed to a member’s UK funds and how a member’s UK funds may be reduced. How the regulations work depends on whether a payment was made before 6 April 2017 or on or after 6 April 2017.
For guidance on how a payment made before 6 April 2017 is referable to a member’s UK funds go to PTM113240.
PTM113249 to PTM113270 provide guidance on how payments made on or after 6 April 2017 are attributable to a member’s UK funds.
Tax liability
Paragraphs 5A and 6 schedule 34 Finance Act 2004
Individuals who are liable to a member payment charge will need to declare it 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 notice to file a tax return they are bound by the normal obligation to notify HMRC of their chargeability to UK tax as soon as practicable.
Liability to the member payment charges arises wherever the individual is resident.
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 Chapter 15A, or under section 579A ITEPA as applied by virtue of any provision of Chapter 15A, 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.
If a payment subject to the member payment charges is not taxed in the UK due to the operation of a double taxation agreement, it is treated as a payment of pension and a ‘relevant withdrawal’ under section 576A ITEPA.
Where an individual is liable 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.