Contributions to registered schemes for overseas individuals

Who are relevant UK individuals?

• they have relevant UK earnings chargeable to UK income tax for that tax year,
• they are resident in the UK, or
• who were resident in the UK in one of the previous five tax years and, at the time they were resident, became members of a UK registered pension scheme, or
• who are a Crown Servant, or a spouse/civil partner of a Crown Servant and have earnings subject to UK tax

What are relevant UK earnings? 

• employment income
• self-employed income
• income from patents
• earnings from overseas crown employment

How much tax relief is available?

Relevant UK individuals, who have relevant UK earnings of £3,600 or more, can receive tax relief on contributions up to 100% of their earnings with a tax charge on any contributions above the annual allowance.

Relevant UK individuals who have either no relevant UK earnings or relevant UK earnings of £3,600 or less will receive tax relief on contributions up to £3,600 each tax year only. Non-relevant UK individuals who do not have relevant UK earnings will receive no tax relief on their contributions. The ability to contribute for non-UK individuals will also depend on the pension provider allowing this.

The 5-year rule

If someone moves overseas, in the year they leave the UK, maximum tax relievable contributions will be 100% of their UK earnings in that tax year or £3,600 if greater. For the next 5 tax years they can still make member contributions of up to £3,600 a year and get tax relief. The contributions must be to a pension scheme they were a member of before they left the UK. This assumes they have no earnings taxed in the UK. If they do continue to have earnings taxed in the UK, tax relievable contributions can be based on these earnings, or £3,600 a year if greater.

As an example, if someone moved overseas in November 2017 and paid £5,000 a year which was reduced to £3,600 from April 2017, as they had no UK earnings and are not a crown employee do we stop collecting contributions at the end of the 2021/22 tax year or end of the 2022/23 tax year?

The 5-year rule is that after someone leaves the UK they can continue to receive tax relief on contributions paid to a scheme they were a member of while resident in the UK for as long as they still come under the definition of a relevant UK individual.

This is up to 5 tax years after the tax year in which they left the UK.

In the example, they left in the 2017/18 tax year and presumably had enough earnings in 2017/18 to warrant a gross contribution of £5,000. The maximum tax relievable contribution reduced to £3,600 a year from 6 April 2018 and that can be paid for 5 tax years including 2018/19 – that is up to 5 April 2023.

As far as HMRC are concerned, contributions can continue indefinitely after that at any level but with no tax relief. Most providers can’t accept member contributions that don’t get tax relief, so they’d have to stop collecting contributions after 5 April 2021. If they return to the UK for any time during a tax year, that ‘resets the clock’ for the 5 tax year rule.

What about employer contributions?

In theory, an employer can pay any amount for an employee regardless of their salary. Employers may receive 100% tax relief on the whole contribution, but it will be up to the employer's local Inspector of Taxes whether or not the entire contribution will be relievable for tax purposes.

If the employer's contribution, together with all other contributions to money purchase schemes and the value of any benefits accrued in defined benefit schemes exceeds the annual allowance, the scheme member will be liable to a tax charge on the amount over and above the annual allowance.

How does this work in practice?

Example 1

Marius is a member of his employer's final salary scheme and has been working in Germany on secondment since 2019. He is currently paid £35,000 each year and is taxed in the UK. The maximum gross employee contributions eligible for tax relief is £35,000.

Example 2

Didier is a member of a group personal pension plan and he's going to work in France for an overseas subsidiary of his current employer. For the first two years, Didier will still be paid by the UK company (£30,000 a year) and from the third year, he will be paid in Euros and taxed under the French tax system.

The maximum gross employee contributions eligible for tax relief is £30,000 in the tax year he left, and £30,000 in the first tax year after he left, then £3,600 each year for the following four tax years. Eligibility for tax relief will then stop unless Didier becomes a 'relevant UK individual' again.

Automatic Enrolment

An overseas company has automatic enrolment duties if they have employees working and ordinarily working in the UK. If the employee is seconded temporarily to the UK, they’re not regarded as ordinarily working in the UK and the employer will have no automatic enrolment duties in respect of them. If the company do not have a UK bank account, they have to pay contributions via a 3rd party such as an accountant or payroll provider.

A UK employer will have automatic enrolment duties for overseas employees if they are working or ordinarily working in the UK, for example if they were temporarily seconded overseas. 

If they don’t ordinarily work in the UK, there would be no automatic enrolment employer duties for these employees.

United States (US) Citizens

Most providers can accept US citizens if they are a relevant UK individual or have relevant UK earnings. There are no reporting requirements to the US Internal Revenue Service (IRS) for them, although the individual themselves may have to report to the IRS. 

Frequently asked questions

• If a UK company employs German nationals who are currently resident in the UK, do they need to be included in the automatic enrolment scheme?
  The employer would have automatic enrolment duties for the German employees if they are working or ordinarily working in the UK (relevant to auto enrolment pensions). If their contracts don’t place them in the UK, there will be no employer duties for these employees. See Pensions Regulator guidance for more information
• The sponsoring employer has an automatic enrolment scheme. They are expanding internationally and setting up subsidiaries in Australia and USA and some UK staff are being re-deployed there. They will remain on a UK contract during the redeployment and will be paid by the UK Company. What automatic enrolment duties does the employer have?
  The key for automatic enrolment is whether they are working or ordinarily working in the UK. If they are on temporary secondment overseas, the employer will continue to have automatic enrolment duties for them. Any employer contributions could continue but tax relief on any member contributions will be dependent on whether they have UK earnings or not. If they don’t, they will be restricted to £3,600 for the 5 tax years after they leave the UK. This only applies to contributions paid to a scheme they were a member of when they left the UK. See Pensions Regulator guidance for more information.

Further Information

• HMRC Pensions Tax Manual - PTM044100 : Contributions: tax relief for members: conditions
• The Pensions Regulator - Automatic enrolment detailed guidance

Note

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.