PTM113310 - International: UK tax charges on non-UK schemes: the annual allowance charge and non-UK schemes: essential principles
| Glossary | PTM000001 |
When the annual allowance rules apply to members of non-UK schemes
Currently-relieved non-UK pension schemes
Currently-relieved members
Tax liability
Where a scheme pays a member’s annual allowance charge
When the annual allowance rules apply to members of non-UK schemes
Paragraphs 8 to 12 Schedule 34 Finance Act 2004
The annual allowance provisions apply to Currently-relieved members of Currently-relieved non-UK pension schemes as if that scheme was a registered pension scheme.
The annual allowance provisions impose a tax charge on individuals who have pension savings of more than the annual allowance across all of their registered pension schemes in a tax year. By applying the annual allowance provisions to certain overseas pension schemes this means, broadly, that an individual is charged on all of their UK tax-relieved savings in any currently-relieved non-UK pension schemes as well as in any registered pension schemes that together are in excess of the annual allowance.
To determine if a member is liable to an annual allowance charge, their total pension savings (pension input amounts) need to be tested against the annual allowance. This test involves calculating the pension input amount for each arrangement of the member under a registered pension scheme or a currently-relieved non-UK pension scheme in a pension input period.
The aggregate of these pension input amounts will be the total pension input amount and this will reflect the amount of the increase in their UK tax-relieved pension savings.
The pension input period in relation to an arrangement under a currently-relieved non-UK pension scheme is always the UK tax year; that is from 6 April to the following 5 April.
If a member’s pension savings (pension input amounts) for a tax year are more than the annual allowance the member may carry forward unused annual allowance from the previous three years. If the total pension input amount is more than the annual allowance for the year plus any unused annual allowance carried forward the excess will be liable to the annual allowance charge.
From 2015-16 if an individual has flexibly accessed their pension savings under either a registered pension scheme or a relevant non-UK scheme (see PTM113210 for definition) they will be subject to the money purchase annual allowance rules. This broadly means that:
- any money purchase pension input amounts of more than £10,000 (£4,000 from 2019-20 to 2022-23, and £10,000 before 2017-18) will be liable to the annual allowance charge, and
- if the individual’s money purchase pension input amount is more than £10,000 (£4,000 from 2019-20 to 2022-23, £10,000 before 2017-18) they will have a lower annual allowance for their non-money purchase pension input amounts.
As the annual allowance provisions apply as if the Currently-relieved non-UK pension scheme was a registered pension scheme, this means from 2016-17 the tapered annual allowance rules apply to high income individuals. The tapered annual allowance applies to an individual if
- their ‘threshold income’ is more than £260,000 (£260,000 from 2020-21 to 2022-23, and £100,000 from 2016-17 to 2019-20), and
- their ‘adjusted income’ is more than £260,000 (£240,000 from 2020-23 to 2022-23, and £150,000 from 2016-17 to 2019-20)
Where the tapered annual allowance applies the individual’s annual allowance will be reduced by £1 for every £2 their ‘adjusted income’ is in excess of £260,000 (£240,000 from 2020-23 to 2022-23, and £150,000 from 2016-17 to 2019-20).
A full explanation of the annual allowance and the annual allowance charge starts at PTM050000.
Guidance on the money purchase annual allowance rules starts at PTM056500.
PTM057100 provides guidance on the tapered annual allowance including definitions of ‘threshold income’ and ‘adjusted income’.
Guidance for the annual allowance provisions for tax years before 2011-12 can be found in the archived version of RPSM on the National Archives.
Guidance on the calculation of a pension input amount under the different types of currently-relieved non-UK pension scheme is at PTM113320 to PTM113340.
Currently-relieved non-UK pension schemes
Paragraph 8(3) Schedule 34 and 51(3) Schedule 36 Finance Act 2004
Article 15 The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572
A pension scheme is a currently-relieved non-UK pension scheme in relation to a tax year if any of the following apply for that tax year:
- 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 have received tax relief under a double taxation arrangement - see PTM111600, or
- any member of the scheme has been exempt from liability to tax by virtue of section 307 Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) 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).
Section 307 ITEPA 2003 exempts members from tax on their accrual of benefits in the scheme as a benefit in kind. So the annual allowance charge provisions will apply even where no contributions have been made to the scheme during the tax year, for example because of a contributions holiday or because the scheme is unfunded.
Currently-relieved members
Paragraph 8(4) Schedule 34 Finance Act 2004
An individual is a currently-relieved member of a currently-relieved non-UK pension scheme in relation to a tax year if:
- contributions paid by or in respect of the member to the scheme have received migrant member relief (see PTM111200), transitional corresponding relief (see PTM111500) or relief under a double taxation arrangement - see PTM111600, or
- they have been exempt from liability to tax by virtue of section 307 ITEPA 2003.
Where a currently-relieved non-UK pension scheme has a ‘vesting period’ (a period of time that a new member must wait after joining, before they become entitled to benefits under the scheme), the application of the annual allowance provisions will depend on whether benefits actually accrue to the individual in that period. It will not matter that such benefits may be contingent on the member getting to the end of the vesting period - if the benefits are accruing then they will be part of the pension input amount. This will depend on the facts.
Tax liability
Section 227 Finance Act 2004
The person liable to an annual allowance charge is the individual whose total pension input amount for the tax year exceeds the annual allowance. That is the case whether or not they, or the scheme manager, are resident or domiciled in the UK.
Individuals who are liable to an annual allowance charge will need to declare that on their Self Assessment tax return for the tax year in which the annual allowance charge arises. If a member has not been served with a notice to file a tax return they are bound by the normal obligation to tell HMRC of their chargeability to UK tax.
The annual allowance charge will not be within the scope of, and will not be exempted or overridden by, any of the UK’s double taxation arrangements. That is because it is not a charge on income and so does not fall within any of the articles in the treaties.
In certain circumstances the member can ask their scheme manager to pay the annual allowance charge for them in return for a proportionate reduction in the member’s pension savings in the scheme.
Where a scheme pays a member’s annual allowance charge
If a currently-relieved member decides to ask their scheme manager to pay all or part of their annual allowance charge they must give a notice in the same way a member electing to require their registered pension scheme to pay all or part of their annual allowance charge does (see PTM056420).
The scheme manager must use form APSS210 to notify HMRC of their intention to pay an amount of the member’s annual allowance charge. Once received, HMRC will send an assessment to the scheme manager for the amount the member has asked them to pay and HMRC will also provide details of the payment options.
When a scheme manager notifies HMRC about more than one member or annual allowance charge a separate APSS210 form must be completed for each the member and the charge.
If the member does not have a National Insurance number (NINO), they should have explained why they do not qualify for a NINO in their notification to the scheme manager. This information should be included on the form or a copy of the member’s notification letter can accompany the form.
The member’s tax charge will relate to a specific UK tax year. The UK tax year runs from 6 April one year, to the 5 April the following year. The member should have informed the scheme manager in their notification which UK tax year the charge relates to, for example 2012-13.