Here our Tax Partner, Oscar Wingham reviews these changes.
100% of pension income will be liable to UK tax
Currently only 90% of foreign pension income paid to UK resident individuals is subject to tax. With effect from 6 April 2017, 100% of pension income, irrespective of when it was accrued, will be subject to tax.
Oscar Wingham commented “In many cases, this will lead to an increase in tax owed to HMRC for those with foreign pension income.”
Changes to lump sum payments
In addition, there are also changes to the lump sum payments. Currently, any lump sum paid to a UK resident that accrued pension benefits whilst working overseas reduces the amount subject to tax.
This benefit will be removed from 6 April 2017 so that it is not possible to accrue benefits from overseas pension from that date. However, foreign pension funds that have accrued benefits up to 5 April 2017 will retain those benefits, but no more contributions can accrue after that date.
Oscar Wingham commented, “This change is likely to have a significant impact on employees, such as those working for large multinational companies, who have accrued lump sum rights under a non-UK pension scheme while working outside of the UK.”
“In some cases individuals may wish to take any lump sum they are entitled to before 6 April 2017 in order to ensure they benefit from the current reliefs and exemptions. Where this is not possible, individuals should review the possibility of drawing any lump sum they are entitled to while a UK non-resident.”
It is also advisable for employers to review their Pay As You Earn (PAYE) procedures to ensure that they are in a position to account for any PAYE withholding due on any lump sum payments made by non-UK pension schemes.
Who will be impacted and what action should I take?
This is a complex area and those who receive foreign pensions will need to understand how these tax changes impact their tax position and prepare their self-assessment tax return accordingly.
Most importantly, if you have not yet retired, you should plan in advance of retirement if you are accruing overseas pension benefits.
Employers that have employees who are, or could be affected, may wish to communicate the proposed changes. Employers should bear in mind that the tax consequences in the country where the individual is resident and the country/countries where he or she has been working will need to be taken into account.
Contact us
We are currently contacting our clients with Foreign Service pensions to discuss these changes. Please contact us if you would like to discuss any of the points raised in this article or to find out more about becoming a client.
Oscar heads our tax department and provides advice on tax structuring, planning and compliance services to entrepreneurs and their businesses.