An individual can make tax relievable member pension contributions if they’re a relevant UK individual for the tax year in question.
Someone is a relevant UK individual for a tax year if any one of the following applies:
- They have relevant UK earnings chargeable to UK income tax for that tax year
- They’re 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 who leave the UK to work full time overseas for at least a full tax year will 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’s also possible to become dual resident for tax purposes.
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 of 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 operating relief at source before becoming non-UK resident, they can continue making tax relievable contributions of up to £3,600 gross for a further five tax years after ceasing to be UK resident.
Contract-based pensions, including individual and group personal pensions, self-invested personal pensions and stakeholder pensions, all normally operate on this basis. This is where the member pays their contributions net of basic rate tax with the provider immediately topping them up to the gross amount.
However, the member can’t 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’s legislatively possible to make non-tax relievable member contributions, but schemes operating relief at source are usually unable to accept them.
Liam is already a member of his employer’s group personal pension (GPP) when he’s seconded to Dubai, initially for three years. Liam leaves the UK in September 2017. He contributes £10,000 gross to his GPP in 2017/18, when he has relevant UK earnings of £60,000. He pays £8,000 net, gets £2,000 tax relief at source and claims a further 20% relief via self-assessment. He also benefits from a £10,000 employer contribution.
Liam is then non-UK resident for the whole of 2018/19. In fact, after his secondment is extended he doesn’t become UK resident again until 2025/26. Liam pays £2,880 net member contributions – £3,600 after his provider adds tax relief – to his GPP for the five year period 2018/19 to 2022/23. Liam makes no member contributions for 2023/24 and 2024/25, as his GPP provider is unable to accept non-tax relieved member contributions.
A UK employer can continue making pension contributions while an employee is working overseas, with 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.
Continuing the above example, Liam’s employer agrees to continue £10,000 a year employer contributions while he’s working overseas. His whole secondment to Dubai 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.
If we look a slight variation on those circumstances, we can see when an employer might not qualify for tax relief on contributions for an employee who’s been seconded overseas.
Noelle’s employer agrees to continue £10,000 a year employer contributions while she’s working 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 isn’t actually incurring any business expenses in relation to the contributions and can’t claim corporation tax relief.
Overseas tax rules
This article looks at UK tax rules – but someone who’s moved abroad to live and/or work will usually become tax resident in that overseas country. As they’ll be subject to the other country’s tax laws, 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 residence is concerned.
Bernadette Lewis is financial planning manager at Scottish Widows