A UK resident individual in receipt of a foreign pension is only taxable on 90% of income arising in the tax year (section 615 scheme).
Lump sums paid from foreign pensions are taxable in the UK where they fall into one of the following categories:
- the foreign pension scheme is a registered pension scheme under FA 2004, Part 4;
- the scheme contains funds that have been the subject of UK tax relief, is a Relevant Non-UK Scheme (RNUKS) under FA 2004, Sch 34 and UK tax rules apply;
- the scheme is provided in relation to an employer-financed retirement benefits scheme;
- the payment is a ‘relevant step’ under the provisions ITEPA 2003, Part 7A; or
- in some circumstances where the scheme is constituted as a section 615 schemes.
In any other circumstance the lump sum is not taxable.
As announced at the Autumn Statement 2016, the Government will legislate in Finance Bill 2017 to more closely align the treatment of foreign pensions with the UK’s domestic pension scheme. Foreign pension schemes paid to a UK resident individual will be chargeable to tax on 100% of the income as it arises.
The legislation has been revised to set out the position for defined benefit specialist pension schemes for those employed abroad (section 615 schemes) and clarify that all lump sums paid out of funds built up before 6 April 2017 will be subject to the existing tax treatment.
This affects individuals with pension savings in a pension scheme based outside the UK or specialist pension schemes for those employed abroad. UK resident individuals that previously claimed a 10% deduction from a foreign pension will be required to pay UK tax on the full amount received in the future.