Pensions are a tricky area of tax and particularly when it comes to globally mobile employees. It isn’t hard to see why.
Making contributions to a pension scheme is normally one of the most tax-efficient ways of saving in any country. Recognising the clear benefits of enabling citizens to grow a pension pot for their retirement means that most governments globally allow employees to contribute to their pension from gross employment income (i.e. pre-tax). Furthermore, governments also generally allow employer contributions to be made tax free.
However, this generosity on the part of many states when it comes to tax-efficient pension contributions is often tempered by a range of restrictions. These can include an annual cap on the amount of tax-free contributions that can be made, a lifetime cap of total tax-efficient pension savings and strict criteria on what constitutes a qualifying pension plan (i.e. a pension plan into which contributions can be made tax efficiently).
The UK is no different. Annually, contributions of up to £40,000 can be made tax-efficiently to a registered pension plan. This allowance is tapered down by £1 for every £2 contribution where an individual’s income exceeds £240,000 per annum. There are some complexities involved in working out the relevant figure for ‘income’ (adjustment income) for this purpose and also the concept of threshold income to consider. However, in simple terms, the effect of the taper is that those earning over £312,000 per annum have a reduced annual allowance of £4,000 per annum.
Most countries will have their own equivalents of these limits, capping the amount that employees and employers can contribute tax efficiently to pension plans. You will also note that the contributions must be made to a ‘registered pension plan’.
What are the implications for globally mobile employees?
Given the position above, it is not surprising that the cross-border tax implications for employee pension contributions are complex. Quite simply, the UK does not automatically recognise a non-UK pension scheme as being a registered pension scheme for UK tax purposes. This means that the normal UK tax relief on employer and employee contributions to an overseas pension scheme may not apply.
In my previous article article, I considered auto-enrolment for employees, that is the question of whether a globally mobile employee should be or should remain auto-enrolled in a UK pension scheme when they are seconded to or from the UK respectively.
Auto-enrolment aside, from a tax perspective, the central question is whether an employee seconded from their home country can continue to contribute tax efficiently to a pension in their home country.
For this purpose, we look at the example of employees who are seconded to the UK. Assuming that the overseas pension scheme allows the employee to remain in the overseas pension scheme whilst they are living and working in the UK, will the UK allow tax relief on employer and employee contributions?
Let’s take employer contributions to start with:
Employer contributions
Fortunately, there is a helpful article in the income and earnings legislation which normally enables tax-efficient employer contributions to overseas pension schemes (Article 307, ITEPA 2003). In essence, and subject to the normal UK contributions limits, employer contributions may be made tax-efficiently provided that they are paid into a plan which only provides for the employee’s retirement or death.
This may sound straightforward but care should be taken. The terms of the overseas pension scheme should be reviewed to ensure that it does not provide for other benefits. For example, some overseas schemes allow early withdrawal from the pension scheme (i.e. well before retirement or death). Other overseas schemes allow the employee to take loans from the non-UK scheme. Both of these elements and any other non-retirement or death related benefits would be a denial of UK tax relief on any employer contributions.
Where tax relief is not available on employer contributions, it means that any employer contributions made to such a plan would be subject to income tax and NIC in the same way as any other form of employer-provided remuneration. When it happens this way and is unplanned it can be a real shock to the employee as they will suffer a UK tax charge and will not have access to the net income (i.e. because it will have gone into their overseas pension plan). This means that the tax and NIC would be deducted from their regular pay. So, care is needed!
Note that this tax relief, where available, does not apply to employee contributions.
Employer and employee contributions
Fortunately, there are two additional avenues that can be pursued in order to claim tax relief on both employer and employee contributions.
Firstly, a small number of double tax treaties (such as the UK/US double tax treaty) enable tax-efficient employer and employee contributions, provided that the pension scheme is approved in the employee’s home country. There are sometimes additional conditions for tax relief and so the relevant double tax treaty should be reviewed in each case.
Where this relief is due, it can be a big help. For example, US secondees to the UK are often eligible to claim UK tax relief on contributions made to US pension plans such as the US 401(k) plan. That is, subject to the prevailing UK limits, contributions may be made to an approved US plan from gross income. Furthermore, any employer contributions may be made tax free by the employer (again, subject to the UK limits).
When it applies, this form of pensions tax relief is the least onerous. Having confirmed the position, payroll may simply document the basis on which they are enabling tax relief in respect of the employer and employee contributions. However, unfortunately, as I pointed out above, there are very few double tax treaties which contain such provisions.
So, what can be done if the employee is seconded from a country with which the UK does not have a double tax treaty or where there is a double tax treaty but there is no provision for tax-efficient pension contributions?
In such cases, UK employers may want to consider Migrant Member Relief (“MMR”). In simple terms, where it is available, MMR treats the non-UK scheme in much the same way as a UK registered scheme when it comes to tax-efficient employer and employee contributions. However, it is not entirely straightforward and there is a raft of conditions required to ensure that MMR applies. In summary, the overseas pension must be recognised for tax purposes in the overseas country and must be regulated by a pensions regulator in the overseas country. The employee must have been a member of the scheme before coming to the UK. In addition, the overseas pension scheme must report certain information to HMRC such as notifying HMRC when there are ‘benefit crystallisation events’ and also other specified details regarding the scheme.
In my experience, not many employers pursue MMR due to the steps required to ensure that it is applied successfully. However, in some cases and particularly where there are numerous employees coming to work in the UK who want to remain in the same home country plan, it may be worth the effort.
What should employers do?
Where globally mobile employees remain in their home country pension scheme whilst they are seconded to the UK, are eligible to do so and contributions continue, employers should:
- determine whether the employee and employer contributions can be made efficiently from a UK tax perspective using a double tax treaty or - if deemed appropriate - under MMR;
- consider a salary sacrifice arrangement such that only employer contributions are made, such that they may attract UK tax relief under s307 ITEPA 2003 per above; or
- consider whether it is in the employee’s best interests to continue to make contributions to the non-UK scheme whilst they are working in the UK. For example, in some cases and where there is no UK tax relief on employer or employee contributions, then employees may wish to temporarily cease contributions to the overseas scheme where this is permitted.
Given the complexity in this area, it is important that employers obtain advice before committing to any course of action.
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
Pensions are a tricky area of tax and particularly when it comes to globally mobile employees. It isn’t hard to see why.
Making contributions to a pension scheme is normally one of the most tax-efficient ways of saving in any country. Recognising the clear benefits of enabling citizens to grow a pension pot for their retirement means that most governments globally allow employees to contribute to their pension from gross employment income (i.e. pre-tax). Furthermore, governments also generally allow employer contributions to be made tax free.
However, this generosity on the part of many states when it comes to tax-efficient pension contributions is often tempered by a range of restrictions. These can include an annual cap on the amount of tax-free contributions that can be made, a lifetime cap of total tax-efficient pension savings and strict criteria on what constitutes a qualifying pension plan (i.e. a pension plan into which contributions can be made tax efficiently).
The UK is no different. Annually, contributions of up to £40,000 can be made tax-efficiently to a registered pension plan. This allowance is tapered down by £1 for every £2 contribution where an individual’s income exceeds £240,000 per annum. There are some complexities involved in working out the relevant figure for ‘income’ (adjustment income) for this purpose and also the concept of threshold income to consider. However, in simple terms, the effect of the taper is that those earning over £312,000 per annum have a reduced annual allowance of £4,000 per annum.
Most countries will have their own equivalents of these limits, capping the amount that employees and employers can contribute tax efficiently to pension plans. You will also note that the contributions must be made to a ‘registered pension plan’.
What are the implications for globally mobile employees?
Given the position above, it is not surprising that the cross-border tax implications for employee pension contributions are complex. Quite simply, the UK does not automatically recognise a non-UK pension scheme as being a registered pension scheme for UK tax purposes. This means that the normal UK tax relief on employer and employee contributions to an overseas pension scheme may not apply.
In my previous article article, I considered auto-enrolment for employees, that is the question of whether a globally mobile employee should be or should remain auto-enrolled in a UK pension scheme when they are seconded to or from the UK respectively.
Auto-enrolment aside, from a tax perspective, the central question is whether an employee seconded from their home country can continue to contribute tax efficiently to a pension in their home country.
For this purpose, we look at the example of employees who are seconded to the UK. Assuming that the overseas pension scheme allows the employee to remain in the overseas pension scheme whilst they are living and working in the UK, will the UK allow tax relief on employer and employee contributions?
Let’s take employer contributions to start with:
Employer contributions
Fortunately, there is a helpful article in the income and earnings legislation which normally enables tax-efficient employer contributions to overseas pension schemes (Article 307, ITEPA 2003). In essence, and subject to the normal UK contributions limits, employer contributions may be made tax-efficiently provided that they are paid into a plan which only provides for the employee’s retirement or death.
This may sound straightforward but care should be taken. The terms of the overseas pension scheme should be reviewed to ensure that it does not provide for other benefits. For example, some overseas schemes allow early withdrawal from the pension scheme (i.e. well before retirement or death). Other overseas schemes allow the employee to take loans from the non-UK scheme. Both of these elements and any other non-retirement or death related benefits would be a denial of UK tax relief on any employer contributions.
Where tax relief is not available on employer contributions, it means that any employer contributions made to such a plan would be subject to income tax and NIC in the same way as any other form of employer-provided remuneration. When it happens this way and is unplanned it can be a real shock to the employee as they will suffer a UK tax charge and will not have access to the net income (i.e. because it will have gone into their overseas pension plan). This means that the tax and NIC would be deducted from their regular pay. So, care is needed!
Note that this tax relief, where available, does not apply to employee contributions.
Employer and employee contributions
Fortunately, there are two additional avenues that can be pursued in order to claim tax relief on both employer and employee contributions.
Firstly, a small number of double tax treaties (such as the UK/US double tax treaty) enable tax-efficient employer and employee contributions, provided that the pension scheme is approved in the employee’s home country. There are sometimes additional conditions for tax relief and so the relevant double tax treaty should be reviewed in each case.
Where this relief is due, it can be a big help. For example, US secondees to the UK are often eligible to claim UK tax relief on contributions made to US pension plans such as the US 401(k) plan. That is, subject to the prevailing UK limits, contributions may be made to an approved US plan from gross income. Furthermore, any employer contributions may be made tax free by the employer (again, subject to the UK limits).
When it applies, this form of pensions tax relief is the least onerous. Having confirmed the position, payroll may simply document the basis on which they are enabling tax relief in respect of the employer and employee contributions. However, unfortunately, as I pointed out above, there are very few double tax treaties which contain such provisions.
So, what can be done if the employee is seconded from a country with which the UK does not have a double tax treaty or where there is a double tax treaty but there is no provision for tax-efficient pension contributions?
In such cases, UK employers may want to consider Migrant Member Relief (“MMR”). In simple terms, where it is available, MMR treats the non-UK scheme in much the same way as a UK registered scheme when it comes to tax-efficient employer and employee contributions. However, it is not entirely straightforward and there is a raft of conditions required to ensure that MMR applies. In summary, the overseas pension must be recognised for tax purposes in the overseas country and must be regulated by a pensions regulator in the overseas country. The employee must have been a member of the scheme before coming to the UK. In addition, the overseas pension scheme must report certain information to HMRC such as notifying HMRC when there are ‘benefit crystallisation events’ and also other specified details regarding the scheme.
In my experience, not many employers pursue MMR due to the steps required to ensure that it is applied successfully. However, in some cases and particularly where there are numerous employees coming to work in the UK who want to remain in the same home country plan, it may be worth the effort.
What should employers do?
Where globally mobile employees remain in their home country pension scheme whilst they are seconded to the UK, are eligible to do so and contributions continue, employers should:
- determine whether the employee and employer contributions can be made efficiently from a UK tax perspective using a double tax treaty or - if deemed appropriate - under MMR;
- consider a salary sacrifice arrangement such that only employer contributions are made, such that they may attract UK tax relief under s307 ITEPA 2003 per above; or
- consider whether it is in the employee’s best interests to continue to make contributions to the non-UK scheme whilst they are working in the UK. For example, in some cases and where there is no UK tax relief on employer or employee contributions, then employees may wish to temporarily cease contributions to the overseas scheme where this is permitted.
Given the complexity in this area, it is important that employers obtain advice before committing to any course of action.
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