Global mobility: what you need to know about tax and pension contributions

Global mobility: what you need to know about tax and pension contributions
07 Dec 2021

Globally, employer-provided pensions are the most common form of tax-efficient long-term savings for employees. The basic rules for pension contributions in any country are normally understood by employers and employees alike, Lee McIntyre-Hamilton takes us through them.  

Some common principles globally… 

Whilst there is substantial variation in the specific rules, there are key commonalities from country to country when it comes to employer pensions, including the concept of ‘approved’ plans, the imposition of contribution limits and tax relief via payroll.  

‘Approved’ plans 

Most countries have the concept of an ‘approved’ pension plan or something similar whereby employee contributions attract tax relief and employer contributions can be made tax free.  

Where contributions are made to an unapproved plan, tax relief will normally be denied. Legislation in any country will normally define an approved pension scheme by reference to a set of rules and conditions. For example, these may specify the earliest date that funds can be drawn down, whether benefits will be provided on the early death of an employee and the reporting and compliance obligations of the pension fund.  

Such rules make sense as, otherwise, people could potentially get tax relief for contributions to a scheme that is not actually a pension scheme but a short-term savings vehicle, for example. Most governments are happy to offer employees tax efficiency when it comes to saving for retirement but not for any other form of savings, at least to the same degree.  

Contribution limits 

Countries that offer tax relief on contributions to an approved pension scheme will usually place a limit on contributions that can be made tax efficiently. For example, the US imposes an annual cap of $19,500 (2021 limit) on tax-efficient contributions from those under 50 years old into a 401k traditional or safe harbour pension plan. In South Africa, pension contributions of up to 27.5% of taxable income (or R350,000 if lower) can be made tax-efficiently to a relevant scheme. In the UK, a more generous £40,000 per annum can be paid tax efficiently into a UK registered pension plan (reduced for those with an adjusted income exceeding £240,000 per annum).  

Payroll 

Where countries offer tax relief on employer-provided pensions then this relief is normally available via payroll. This is helpful for employees as, often, they don’t need to do anything to receive tax relief. However, it does of course place an additional burden on payroll, especially when it comes to globally mobile employees.  

Complexity for globally mobile employees 

Despite the commonalities above (and in some cases because of them), when an employee is seconded to work in another country, this can make for a complex situation when it comes to pension contributions. In particular, the concept of an ‘approved plan’ for pensions can be problematic.  

An approved pension scheme in one country (i.e. a pension into which contributions can be made tax-efficiently) may not be (and is often not, in my experience) considered approved in another country. This can have a significant impact on globally mobile employees.  

Take, for example, an employee who is seconded from South Africa to work in the UK. Where the employee continues to contribute to their pension scheme in South Africa, it is unlikely that the contributions will be tax-deductible for UK tax purposes on the basis that the scheme in South Africa is unlikely to be approved for UK pension purposes. Furthermore, where the South African scheme does not fall into the UK definition of a pension or annuity (e.g. income can be drawn down at any time, employees can access the funds via loans etc.), then employer contributions could be subject to UK tax.  

Aside from the position in the UK, where the employee has no taxable earnings in South Africa (i.e. because they are on assignment in the UK and have become non-resident in South Africa), it is unlikely that there will be any employment income against which to relive contributions in South Africa.  

What can be done? 

* Obtain approval for tax relief in respect of the overseas plan. This may be an option in some countries. For example, in the UK, employers can apply for “Migrant Member Relief” with respect to the overseas plan in order that employee contributions can be made tax-deductible and employer contributions can be made tax free. Contributions would be subject to the UK annual and lifetime allowance limits. However, the process for obtaining such relief is not straightforward and makes certain reporting demands of the overseas pension scheme. Furthermore, in my experience, such an option for obtaining tax relief is simply not possible.  

* Tax relief via double tax treaty. Some double tax treaties enable tax-efficient contributions to overseas schemes provided that the overseas scheme meets certain conditions. For example, contributions to a US 401(k) plan are normally tax efficient in the UK under the US/UK double tax treaty, provided that contributions were made before the employee starts work in the UK. Despite the benefits afforded by double tax treaties, unfortunately not many treaties globally included a clause that enables relief in such a way.  

* Leave the home country pension plan and/or suspend payments. In many cases, ceasing contributions to the home country pension scheme may be the most straightforward option. This avoids any potential issues with employer contributions being taxed in the host country and any complexity around employee contributions. However, whilst this may be appropriate for short-term secondments, most employees would not want to cease making pension contributions altogether for long.  

* Join a pension scheme in the host country. In conjunction with ceasing payments to a home country scheme, seconded employees may want to join a pension scheme in the host country whilst on secondment. This has the advantage of the fact that the host country scheme is likely to be tax-efficient in that country when it comes to contributions. However, the downside is that there may well be complexity when the employee relocates back to their home country and, at some point, wishes to draw down the overseas pension. In some circumstances, the employee may find themselves being doubly taxed (i.e. in the home and host country) on the same payments from their pension scheme.  

Aside from the tax implications, there can also be quite complex rules (regulatory and otherwise) on who can and can’t be a member of a specific pension scheme. Therefore, even where an employee wishes to join another scheme in another country, this may not always be possible. Conversely, in some countries, it may be mandatory.  

In conclusion: 

* Pensions are a particularly difficult area when it comes to global mobility tax. However, as always, it is best to consider and determine the position before someone is sent overseas to work rather than having to deal with unexpected issues further down the line.  

* For payroll, it is important to understand the pensions position for globally mobile employees because all of the above considerations will impact what relief (if any) is given via payroll and/or whether there may be additional taxable income to report (in respect of unrelievable employer contribution to an overseas scheme).  


Author: Lee McIntyre-Hamilton

Lee has over 23 years of experience in international mobility, expatriate tax and employment tax. He works with a diverse range of international organisations, from small owner-managed businesses to large multi-national corporations and non-profit organisations.  Lee delivers coordinated, joined-up global mobility tax, international social security and payroll advice across many territories globally. He is a published writer on international tax matters, notably the Tiley & Collinson UK Tax Guide.

Contact Lee:  lee@globalpayrollassociation.com


 

 

Globally, employer-provided pensions are the most common form of tax-efficient long-term savings for employees. The basic rules for pension contributions in any country are normally understood by employers and employees alike, Lee McIntyre-Hamilton takes us through them.  

Some common principles globally… 

Whilst there is substantial variation in the specific rules, there are key commonalities from country to country when it comes to employer pensions, including the concept of ‘approved’ plans, the imposition of contribution limits and tax relief via payroll.  

‘Approved’ plans 

Most countries have the concept of an ‘approved’ pension plan or something similar whereby employee contributions attract tax relief and employer contributions can be made tax free.  

Where contributions are made to an unapproved plan, tax relief will normally be denied. Legislation in any country will normally define an approved pension scheme by reference to a set of rules and conditions. For example, these may specify the earliest date that funds can be drawn down, whether benefits will be provided on the early death of an employee and the reporting and compliance obligations of the pension fund.  

Such rules make sense as, otherwise, people could potentially get tax relief for contributions to a scheme that is not actually a pension scheme but a short-term savings vehicle, for example. Most governments are happy to offer employees tax efficiency when it comes to saving for retirement but not for any other form of savings, at least to the same degree.  

Contribution limits 

Countries that offer tax relief on contributions to an approved pension scheme will usually place a limit on contributions that can be made tax efficiently. For example, the US imposes an annual cap of $19,500 (2021 limit) on tax-efficient contributions from those under 50 years old into a 401k traditional or safe harbour pension plan. In South Africa, pension contributions of up to 27.5% of taxable income (or R350,000 if lower) can be made tax-efficiently to a relevant scheme. In the UK, a more generous £40,000 per annum can be paid tax efficiently into a UK registered pension plan (reduced for those with an adjusted income exceeding £240,000 per annum).  

Payroll 

Where countries offer tax relief on employer-provided pensions then this relief is normally available via payroll. This is helpful for employees as, often, they don’t need to do anything to receive tax relief. However, it does of course place an additional burden on payroll, especially when it comes to globally mobile employees.  

Complexity for globally mobile employees 

Despite the commonalities above (and in some cases because of them), when an employee is seconded to work in another country, this can make for a complex situation when it comes to pension contributions. In particular, the concept of an ‘approved plan’ for pensions can be problematic.  

An approved pension scheme in one country (i.e. a pension into which contributions can be made tax-efficiently) may not be (and is often not, in my experience) considered approved in another country. This can have a significant impact on globally mobile employees.  

Take, for example, an employee who is seconded from South Africa to work in the UK. Where the employee continues to contribute to their pension scheme in South Africa, it is unlikely that the contributions will be tax-deductible for UK tax purposes on the basis that the scheme in South Africa is unlikely to be approved for UK pension purposes. Furthermore, where the South African scheme does not fall into the UK definition of a pension or annuity (e.g. income can be drawn down at any time, employees can access the funds via loans etc.), then employer contributions could be subject to UK tax.  

Aside from the position in the UK, where the employee has no taxable earnings in South Africa (i.e. because they are on assignment in the UK and have become non-resident in South Africa), it is unlikely that there will be any employment income against which to relive contributions in South Africa.  

What can be done? 

* Obtain approval for tax relief in respect of the overseas plan. This may be an option in some countries. For example, in the UK, employers can apply for “Migrant Member Relief” with respect to the overseas plan in order that employee contributions can be made tax-deductible and employer contributions can be made tax free. Contributions would be subject to the UK annual and lifetime allowance limits. However, the process for obtaining such relief is not straightforward and makes certain reporting demands of the overseas pension scheme. Furthermore, in my experience, such an option for obtaining tax relief is simply not possible.  

* Tax relief via double tax treaty. Some double tax treaties enable tax-efficient contributions to overseas schemes provided that the overseas scheme meets certain conditions. For example, contributions to a US 401(k) plan are normally tax efficient in the UK under the US/UK double tax treaty, provided that contributions were made before the employee starts work in the UK. Despite the benefits afforded by double tax treaties, unfortunately not many treaties globally included a clause that enables relief in such a way.  

* Leave the home country pension plan and/or suspend payments. In many cases, ceasing contributions to the home country pension scheme may be the most straightforward option. This avoids any potential issues with employer contributions being taxed in the host country and any complexity around employee contributions. However, whilst this may be appropriate for short-term secondments, most employees would not want to cease making pension contributions altogether for long.  

* Join a pension scheme in the host country. In conjunction with ceasing payments to a home country scheme, seconded employees may want to join a pension scheme in the host country whilst on secondment. This has the advantage of the fact that the host country scheme is likely to be tax-efficient in that country when it comes to contributions. However, the downside is that there may well be complexity when the employee relocates back to their home country and, at some point, wishes to draw down the overseas pension. In some circumstances, the employee may find themselves being doubly taxed (i.e. in the home and host country) on the same payments from their pension scheme.  

Aside from the tax implications, there can also be quite complex rules (regulatory and otherwise) on who can and can’t be a member of a specific pension scheme. Therefore, even where an employee wishes to join another scheme in another country, this may not always be possible. Conversely, in some countries, it may be mandatory.  

In conclusion: 

* Pensions are a particularly difficult area when it comes to global mobility tax. However, as always, it is best to consider and determine the position before someone is sent overseas to work rather than having to deal with unexpected issues further down the line.  

* For payroll, it is important to understand the pensions position for globally mobile employees because all of the above considerations will impact what relief (if any) is given via payroll and/or whether there may be additional taxable income to report (in respect of unrelievable employer contribution to an overseas scheme).  


Author: Lee McIntyre-Hamilton

Lee has over 23 years of experience in international mobility, expatriate tax and employment tax. He works with a diverse range of international organisations, from small owner-managed businesses to large multi-national corporations and non-profit organisations.  Lee delivers coordinated, joined-up global mobility tax, international social security and payroll advice across many territories globally. He is a published writer on international tax matters, notably the Tiley & Collinson UK Tax Guide.

Contact Lee:  lee@globalpayrollassociation.com


 

 

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