Bernadette Lewis looks at the handling of pension contributions after moving overseas
With an internationally mobile workforce, existing members often want to continue contributing to registered UK pension schemes after moving abroad.
An individual can make tax-relievable member pension contributions if they are a relevant UK individual for the tax year in question – that is, any one of the following applies:
- They have relevant UK earnings chargeable to UK income tax for that tax year;
- They are UK resident for tax purposes for at least part of the tax year;
- They were UK tax resident at some time during the five previous tax years and when they became a member of the pension scheme;
- They or their spouse/civil partner has general earnings from overseas Crown employment subject to UK tax for the tax year.
Most people leaving the UK to work full-time overseas for at least a full tax year become non-UK resident for tax purposes under the statutory residence test. However, if they move abroad in other circumstances, they might remain treated as UK tax resident. It is also possible to become dual resident for tax purposes.
Dave is already a member of his employer’s group personal pension (GPP) when he is seconded to Hong Kong, initially for three years. Dave leaves the UK in February 2018. He contributes £5,500 gross to his GPP in 2017/2018, when he has relevant UK earnings of £55,000. He pays £4,400 net, gets £1,100 tax relief at source and claims a further 20% tax relief via self-assessment. He also benefits from an £8,250 employer contribution.
Dave is then non-UK resident for the whole of 2018/2019. In fact, after his secondment is extended he does not become UK resident again until 2025/2026. He pays £2,880 net member contributions – £3,600 after his provider adds tax relief – to his GPP for the five-year period 2018/2019 to 2022/2023. He makes no member contributions for 2023/2024 and 2024/2025, as his GPP provider is unable to accept non-tax relieved member contributions.
The statutory residence test includes split-year provisions. This means someone can cease to be treated as UK tax resident part way through a tax year. If so, they remain a relevant UK individual for pension purposes for the whole of that tax year. So they can make tax relievable member pension contributions up to 100% of their relevant UK earnings, or £3,600 gross if this is higher, for that tax year.
If someone is a member of a UK pension scheme operating relief at source before becoming non-UK resident, they can continue making tax-relievable contributions to the same scheme of up to £3,600 gross for five tax years after ceasing to be UK resident. Contract-based pensions, including individual and group personal pensions, SIPPs and stakeholder pensions, all normally operate on this basis.
However, the member cannot benefit from tax relief on contributions they make after ceasing to be UK tax resident, if their existing scheme operates tax relief on the net pay method. This applies to most occupational pension schemes.
It is legislatively possible to make non-tax-relievable member contributions, but schemes operating relief at source are usually unable to accept them.
Continuing the previous example, Dave’s employer agrees to pay £9,900 a year employer contributions while he is working overseas. Dave’s whole secondment to Hong Kong involves him performing duties on behalf of his UK employer. His employer can show that these contributions are wholly and exclusively a business expense. As a result, it gets corporation tax relief in the usual way.
UK employers can continue making pension contributions while an employee is working overseas – there is no time limit. The employer should benefit from tax relief in the normal way, providing the contributions are made wholly and exclusively for the purposes of the trade.
If we look at a slight variation on these circumstances, it is possible to show when an employer will not qualify for tax relief on contributions for an employee who has been seconded overseas.
Overseas tax rules
Someone who moves abroad to live and/or work usually becomes subject to another country’s tax laws. So they should always seek local tax advice on the consequences of making or benefitting from pension contributions to a UK scheme – which will be an overseas scheme as far as their country of tax residence is concerned.
For a wider consideration of the factors to consider, read Scottish Widows’ 60-minute CPD course on UK pensions and internationally mobile members: scottishwidows.co.uk/Extranet/Literature/Doc/FP0695
Vicky’s employer agrees to continue £12,000 a year employer contributions while she is seconded to work overseas. Her whole secondment involves her performing duties on behalf of her overseas employer, which pays her salary for its duration. Her overseas employer reimburses her UK employer for the cost of the pension contributions. Therefore, her UK employer is not actually incurring any business expenses in relation to these contributions and cannot claim corporation tax relief.
Bernadette Lewis is financial planning manager at Scottish Widows