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View the related Tax Guidance about Lifetime allowance

Employee trusts ― implications of disguised remuneration and where are we now?

Employee trusts ― implications of disguised remuneration and where are we now?Employee benefit trusts (EBTs) are commonly used to support employees’ share schemes and to provide other benefits to employees. For example, EBTs were used to provide additional benefits where the previous reduction of the pension lifetime allowance resulted in employees having significantly less tax efficient pension provision than was intended. Many employers established employer financed retirement benefit schemes although the trusts were in fact an EBT that permitted the provision of retirement benefits. EBTs were also used to provide what was believed to be ‘tax efficient’ bonuses ― contributions to an EBT would be held for an employee’s (or a class of employees’) benefit. The EBT would either invest for the benefit of the employees, or more widely, the EBT would provide a loan to the employee. The employee would have the benefit of the loan and not suffer the tax liability of a payment made outright to the employee.The use of EBTs has been significantly affected by the introduction of the disguised remuneration rules. For further information, please see the Disguised remuneration ― overview guidance note. There are statutory exclusions from those rules to cover many of the share scheme-related activities of EBTs. However, providing loans or opportunities for wealth creation through long-term investment schemes, has declined due to the tax and NIC treatment as a result of the disguised remuneration legislation.Legislation introduced in Finance Act 2014 promoted employee ownership of companies. Employee owners who dispose of

Pension schemes ― unauthorised payments

Pension schemes ― unauthorised paymentsRegistered pension schemes are permitted by law to make certain payments to members, known as ‘authorised’ member payments. Any payments to members other than those set out in the legislation are ‘unauthorised’. Subject to conditions, the following payments are likely to be authorised payments:•all forms of pensions, including lump sum and income withdrawals permitted under the pensions freedom rules introduced from 6 April 2015 (see FA 2004, Sch 28)•pension commencement lump sums (a lump sum which a member becomes entitled to when a pension comes into payment), or a pension commencement excess lump sum•serious ill-health lump sums (a lump sum paid by commuting the whole of a member’s pension because of serious ill-health)•short-service refund lump sums (a lump sum refunding a member’s contributions because the member has only a short period of service ― that is, less than two years for defined benefit schemes and 30 days for money purchase schemes)•refund of excess contributions lump sums (lump sums refunding a member of contributions which did not receive tax relief)•trivial commutation lump sums (a lump sum paid by commuting the whole of a member’s benefits because their total pension benefits do not exceed £30,000)•small lump sums (a lump sum paid by commuting the whole of a member’s benefits because the pension benefits do not exceed £10,000 in value)•winding-up

Overseas pension schemes ― taxable events

Overseas pension schemes ― taxable eventsThis guidance note provides support for those needing to report taxable events in relation to overseas pension schemes that are not registered in the UK. It provides an overview only, with reference to further research materials. You may need to take specialist advice.The tax treatment of income from foreign pensions is discussed in the Foreign pension income guidance note.HMRC guidance on reporting pension savings tax charges, including those arising on overseas pensions, can be found in HMRC Helpsheet HS345. See also PTM113200.Significant changes have been made to the UK taxation of overseas pensions, broadening the application of UK tax to overseas pensions. Most of the changes in this legislation apply from 6 April 2017, but some provisions (for example, the overseas transfer charge below) date from 9 March 2017. See also Simon’s Taxes E7.248–E7.248B.The abolition of the lifetime allowance charge from 6 April 2023 created circumstances under which transfers from registered pension schemes to a qualifying recognised overseas pension scheme (QROPS) would be entirely tax-free. To remedy this, an 'overseas transfer allowance' is introduced (see below). For transitional provisions, particularly in relation to benefits crystallised before 6 April 2024, see FA 2024 Sch 9 paras 125-132A. See also Simon’s Taxes, E7.248A.Autumn Budget 2024 announced that the rules for overseas pension schemes (OPS) and recognised overseas pension schemes (ROPS) established in the EEA will be aligned with rules for overseas pension schemes in the rest of the world from 6 April 2025. The scope of

Transfer of rights in a UK pension scheme overseas

Transfer of rights in a UK pension scheme overseasIntroductionA pension transfer is the movement of an individual’s accrued pension rights from one pension scheme to another. UK pensions tax legislation specifies which transfers may be made without adverse tax consequences.Such transfers are known as ‘recognised transfers’ and are authorised payments. The term ‘authorised payment’ means that the payment is authorised under UK tax law. Transfers of pension rights can be made between registered pension schemes without restriction and without triggering a test against a member’s lump sum allowance / lump sum and death benefit allowance (from 6 April 2024 onwards) or against a member’s lifetime allowance (prior to 6 April 2024). However, if the member applied for lifetime allowance protection on or after 15 March 2023, the transfer may cause them to lose this protection. For more details of lifetime allowance protection, see the Lifetime allowance transitional protections guidance note. To constitute a recognised transfer, the transfer must be:•from a registered pension scheme to another registered pension scheme (eg a member wishes to consolidate smaller pension funds from previous employments to the scheme to which they are currently contributing)•from a registered pension scheme to a qualifying recognised overseas pension scheme (QROPS), see the Qualifying recognised overseas pension schemes (QROPS) guidance noteThere is a further condition that to be a recognised transfer, the sums and assets representing accrued rights of the member under a registered pension scheme that are transferred to another registered pension scheme or to a

Automatic re-enrolment

Automatic re-enrolmentThis guidance note applies only to pension schemes in England and Wales.IntroductionThe automatic enrolment regime imposes a duty on employers to make arrangements for the automatic enrolment of all of their eligible jobholders into a ‘qualifying scheme’ (also called a workplace pension). Employers are also required to contribute to that scheme on behalf of eligible jobholders. Although the regime requires the employer to automatically enrol eligible jobholders into a qualifying scheme, the jobholders have the right to opt out or even if they did not initially opt out they may, at some point after enrolment, cease active membership of the scheme. For any such jobholders, the employer has a duty of automatic re-enrolment.This re-enrolment duty is subject to the same sanctions for non-compliance as the original obligation to automatically enrol workers into a qualifying scheme with effect from the employer’s staging date (see the ‘Sanctions for non-compliance’ section of the Automatic enrolment ― overview guidance note). See Simons Taxes E7.210B.There are two types of re-enrolment duty:•cyclical•immediateCyclical re-enrolmentEmployers need to regularly review those eligible jobholders who have previously opted out of being automatically enrolled. This needs to be done at three yearly intervals and after each review the employer has to re-certify to the Pensions Regulator their compliance with the automatic enrolment rules. Choosing the re-enrolment dateThe employer can choose the first re-enrolment date within a six-month window fixed by reference to the third anniversary of the employer’s original staging date or duties start date. That window

Pensions and divorce ― marriage or civil partnership breakdown

Pensions and divorce ― marriage or civil partnership breakdownWhen a married couple divorces or a civil partnership is dissolved, there is likely to be a sharing out of the assets belonging to the former couple.Accrued pension benefits, whether in a defined contribution or defined benefit pension scheme, may be a major asset. With the automatic enrolment of many employees into workplace pensions, this is only likely to increase.If either or both of the parties to the marriage or partnership have accrued pension rights, then these are viewed by the court as part of the former couple’s assets for disposition on divorce. In Scotland, the process is different and, for example, only pension rights built up during the marriage are shared (see McDonald). If a prenuptial agreement is in place, and if it was freely entered into by each party with a full appreciation of its implication, the courts may uphold it, unless it would not be fair to hold the parties to it. While it is outside the scope of this guidance note to discuss the validity of prenuptial agreements, you should note that the existence of such a document could impact on pension arrangements on a break-up.In this guidance note ‘marriage’ applies similarly to civil partnerships, ‘divorce’ applies similarly to the dissolution of a civil partnership and ‘spouse’ applies equally to a civil partner.Some of the other terms used are explained in the Pensions glossary of terms guidance note.As with all pensions matters, considering the impact of divorce

Weekly tax highlights ― 27 January 2025

Weekly tax highlights ― 27 January 2025Direct taxesFinance Bill 2025 roundup (24 January 2025): latest Government amendmentsThe Government has published a raft of amendments to be considered by the Public Bill Committee. Most of the changes affect the replacement of remittance basis / domicile Schedules.The Government has published a further batch of amendments to Finance Bill 2025 which will be considered (and almost certainly passed) by the Public Bill Committee, which is to begin its work on Tuesday 28 January 2025.Amendments are proposed as follows.Clause 21 ― PAYE / internationally mobile employeesChanges are made to clarify points around the application of ITEPA 2003 new s 690 and HMRC notices under new s 690A (Government amendments 15 to 19).Clause 37 ― non-doms changes: claims for relief on foreign incomeThis amendment provides for income treated as arising to a settlor of a trust as a result of a capital payment made by the trustees, to be eligible for relief to the extent that the deemed income arises from foreign income (Gov amend 20).Schedule 4 ― Pillar Two (multinational top-up tax)This is a further batch of amendments, following the original tranche released on 19 December 2024. The further amendments include the following:•new sections 198ZA to 198ZC (to be inserted into F(No 2)A 2023), replacing the original new s 198ZA. The changes provide that eligible payroll costs and eligible tangible asset amounts are allocated from flow-through entities in a manner that is consistent with the Pillar Two model rules (Gov amends 22,

Lifetime allowance

Lifetime allowanceThis guidance note looks at the lifetime allowance which applied until 5 April 2024. The lifetime allowance charge was removed from 6 April 2023 and the lifetime allowance itself was abolished from 6 April 2024. For details of the replacement system for taxation of pension lump sums, see the Pension income and lump sum allowances from 6 April 2024 guidance note. The commentary below covers the rules that apply prior to that date.Until 6 April 2024, the maximum amount that an individual could build up within registered pension schemes was limited in two ways, by a charge (the lifetime allowance charge) based on the value of the fund and attributable pension benefits, if the value exceeded the lifetime allowance, and by a limit on the maximum annual tax-relieved pension input amount permitted. See the Annual allowance guidance note.The operation of the lifetime allowance and the lifetime allowance charge (that could arise before 6 April 2023) are discussed below. The lifetime allowance was introduced from 6 April 2006. Prior to 6 April 2023, when a member of a scheme took benefits in excess of their applicable lifetime allowance, they were liable to a tax charge and the amount of the tax charge depended on whether the excess benefits were taken as a lump sum or not. From 6 April 2024, the lifetime allowance legislation is repealed and replaced with a similar concept that applies limits to tax-free lump sum pension benefits payable in life and on the member’s death.

Pension contributions for sole traders

Pension contributions for sole tradersPension planning should play an important part of any annual review. This is true for any personal tax clients, but for unincorporated sole traders it can be especially important.In terms of profit extraction, pension contributions are one of the main tax efficient options available to a sole trader. With sufficient planning and care, contributions provide a very flexible means of achieving tax savings at high marginal rates. Where a sole trader’s marginal rate of income tax fluctuates between tax years due to variations in trading income, pension contributions can be timed to take place in the good years in order to maximise the rate of tax relief received.Unless advisers are suitably qualified and authorised to give investment advice, it is vital that they do not give investment advice of any sort. This includes advice concerning pensions. Advice should be restricted to the tax consequences of making contributions. For further information, see the Regulated investment advice guidance note.Pension contributionsFor a sole trader the income tax benefits of making a pension contribution into a registered pension scheme are similar to those for creating further expenditure in the year. It creates a reduction in the income tax liability that is

Pensions glossary of terms

Pensions glossary of termsThis guidance note provides an overview of the following terms:•Annual allowance•Automatic enrolment•Deferred member•Defined benefit arrangements•Flexi-access drawdown•Lifetime allowance•Lump sum allowance•Lump sum and death benefit allowance•Money purchase annual allowance•Money purchase arrangements•National Employment Savings Trust•Net payment arrangement•Occupational pension schemes•Pension commencement lump sum•Pension input amount•Pension input period•Personal pensions•Registered pension scheme•Regulated investment advice•Relevant UK earnings•Relief at source•Retirement annuity contract•Scheme administrator•Short service refund lump sum•Stakeholder pensions•Trivial commutation lump sum•Uncrystallised funds pension lump sumsThis guidance note has been updated to reflect the changes announced in Spring Budget 2023.Annual allowanceThe annual allowance is the maximum amount which can be contributed (or deemed to be contributed) in a pension input period without the member incurring a tax charge.The annual allowance for 2023/24 onwards is £60,000. The annual allowance from 2014/15 to 2022/23 was £40,000. The annual allowance is tapered where the individual is a ‘high-income individual’. From 2023/24 onwards, this means someone with adjusted income of over £260,000. From 2020/21 to 2022/23 the threshold was £240,000. From 2016/27 to 2019/20 the threshold was £150,000. The amount of the annual allowance is reduced by £1 for every £2 of the excess over the threshold for the tax year down to a minimum of £10,000 (£4,000 for tax years 2020/21 to 2022/23). The annual allowance and the tapering of the annual allowance is discussed in detail in the Annual allowance