Expats Tax-Free Pensions
The majority of UK pension payments are taxed since contributions were initially tax-relieved. However, expatriates may enjoy tax-free UK pensions under certain double tax treaties.
When dealing with expat individuals relocating abroad, it's possible that pension payments can be received without a UK tax deduction. Most foreign countries have pension double tax treaties based on the OECD model.
It's crucial to ensure that non-resident individuals eligible for taxable UK pensions receive and fill out the requisite tax office forms. There are notable exceptions to consider.
TAX-FREE PENSIONS
Long-term expat individuals resident abroad can apply to receive gross payment of UK pensions. At a time when non-domiciles are considering leaving the UK because of the new tax rules it is not surprising that others will be joining them in this exodus from the UK. There are many individuals in the UK who are expecting or already have their pensions subjected to UK tax. If, however, they relocate abroad for work or retirement and are classed as non-resident under the Statutory Residency Test the opportunity arises to receive their UK pensions to be paid gross with a nil tax (NT) coding being applied by their pension administrator.
Not all UK pensions have the facility under the general DT Individual form process to be paid gross. A number of these forms are country-specific and require appropriate particular attention. Most country forms that are required in this area are detailed on the HMRC website.
It is important to check with the HMRC’s International Tax Manual whether the pension paid is government, local authority or non-government from the list provided. The client may have been a teacher in the UK and now provides teaching services abroad in a case such as this one would have to distinguish which pension scheme is applicable as there are several government and non-government teachers' pensions. The government pensions do not benefit from gross payment relief when a DT Individual form is completed. Many professions are similarly divided such as the police and fire security services, etc.
Arriving abroad on retirement or for a new job the UK state pension will be taxed at the individual’s marginal rate after the personal allowance is set off.
Other additional pensions are then taxed at the person’s marginal rate. The foreign country may not tax foreign source income (FSI) including pensions received in that country e.g. many of the Middle East countries do not have taxation on remitted FSI. Foreign countries may require the submission of a local tax return where there is local employment and many foreign countries do not in any case tax UK pensions. Clearly, the double tax treaty articles should be checked to ensure that the taxation of pensions is specified by limiting it to the ‘paying state’ i.e. UK. Under the OECD double tax treaty convention applied by most countries, this is normally detailed under the heading Pensions. In the UK/Malaysian Treaty, Articles 19 & 20 on ‘pensions’ importantly distinguish between the Articles on government and non-government pensions. In a new amendment made recently, there has been the imposition of Malaysian tax law (PU(A)s 234, 235) to foreign income remittance which includes foreign pensions e.g. in such a case Malaysia has imposed tax on FSI which includes amongst other things pensions and annuities within Income Tax Act 1967, s 4.
Having confirmed that the pension being paid is government or non-government i.e. UK taxable or not, the foreign country’s tax office can be approached for stamping of the completed DT individual or providing a foreign residence ruling accompanying the DT individual when it is sent to HMRC. Normally there will not be any pushback by the foreign tax office doing this task. Commonly, their view is often that the end result is more foreign income enters the country in the long run to their benefit. The DT Individual does ask numerous detailed questions including whether the expat will be remitting the income to the foreign state.
Certain countries come within a special category of countries which have differing requirements regarding the UK pension payments. Many of these are in the Middle East so to obtain tax-free benefits the individual considered a non-resident in UK however, must meet that country’s criteria to be classed as a resident in the foreign state
As is so often with tax this can be a complex issue, if you would like to discuss non-residency tax issues in more detail then please do not hesitate to contact the Tax Matters team.