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 paymentsSTOP PRESS: This guidance note may be affected by the changes to the taxation of pensions made by FA 2024, Sch 9 from 6 April 2024 onwards. The commentary below covers the rules that apply prior to that date. Before continuing your research, see the Abolition of the lifetime allowance guidance note.Registered 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)•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
Overseas pension schemes ― taxable events
Overseas pension schemes ― taxable eventsSTOP PRESS: This guidance note may be affected by the changes to the taxation of pensions made by FA 2024, Sch 9 from 6 April 2024 onwards. The commentary below covers the rules that apply prior to that date. Before continuing your research, see the Abolition of the lifetime allowance guidance note.This 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.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.A UK tax charge might arise in relation to overseas pension savings in arrangements not registered in the UK when the scheme includes ‘UK tax-relieved funds’ or ‘UK transferred funds’. Each of these terms is expanded on below. UK tax-relieved funds are essentially as they sound, ie the amount saved into an overseas pension that benefited from UK tax relief or exemption. However,
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 a type of authorised member payment. The term ‘authorised member payment’ means that this is a type of transaction that can be made without any tax implications on the member. Such transfers are reported to HMRC but there are no taxation consequences.To constitute authorised member payments, transfers must be made to either a UK registered pension scheme or to an overseas pension scheme which is recognised by HMRC as a Qualifying Recognised Overseas Pension Scheme (QROPS). A QROPS is a Recognised Overseas Pension Scheme (ROPS) which has given certain undertakings to HMRC relating to the reporting of payments. So the relevant legislation which sets out the necessary conditions (see SI 2006/206) refers to ROPS rather than QROPS. This guidance note uses the term QROPS when referring to an ROPS where it is presumed that the scheme has given the relevant undertakings to be regarded as a QROPS. The position has changed however in relation to transfers to QROPS and between QROPS from 9 March 2017 with the introduction of the overseas transfer charge (see below). HMRC guidance on transfers into a QROPS starts at PTM102000.A transfer from a registered pension scheme to a non-UK pension scheme that is not a QROPS
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 breakdownSTOP PRESS: This guidance note may be affected by the changes to the taxation of pensions made by FA 2024, Sch 9 from 6 April 2024 onwards. The commentary below covers the rules that apply prior to that date. Before continuing your research, see the Abolition of the lifetime allowance guidance note.When 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.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
Payroll for pension schemes
Payroll for pension schemesSTOP PRESS: This guidance note may be affected by the changes to the taxation of pensions made by FA 2024, Sch 9 from 6 April 2024 onwards. The commentary below covers the rules that apply prior to that date. Before continuing your research, see the Abolition of the lifetime allowance guidance note.IntroductionIn general terms, running payroll for pension schemes is no different than running PAYE for employees. Pensions are treated as income for PAYE and so pensioners are issued with a tax code (see the PAYE notices of coding guidance note) and tax is deducted accordingly.The major difference between a ‘pensioner payroll’ and an ‘employee payroll’ is that no NIC is due on pensions (this is on the assumption that the pension is being paid from a pension scheme registered with HMRC).Deductions from pensionsApart from NICs, other deductions, with one further exception, can be made from pension payments in the same way as they are taken from earnings.Attachment of earnings orders (AEO)Pensions are treated as earnings for AEO purposes. Thus, AEO may be received in respect of pensioners.Voluntary deductionsThe pension payer needs authorisation from the pensioner in order to take voluntary deductions from the pension, see the Income and deductions guidance note.Student / postgraduate loansThe calculation for a student loan deduction (SLD) / postgraduate loan deduction (PGLD) is based on the earnings that are used to determine the amount of Class 1 NIC due (see the Student and postgraduate loan deductions guidance note).As a pension is
Non-UK pension schemes ― overview
Non-UK pension schemes ― overviewIntroductionThis guidance note examines the tax regime associated with overseas pensions and considers how it applies to those who relocate to work or retire overseas.Those who decide to emigrate from the UK may continue to be, or decide to become, members of UK-registered pension schemes subject to certain conditions.Living overseas and retaining membership of or joining a registered pension schemeSince 6 April 2006, membership of a UK-registered pension scheme has been open to anyone regardless of where they are resident. Neither is there any restriction on the amount that can be contributed by an overseas resident individual, or by an employer in respect of overseas resident individuals. However, relief from UK income tax may not be available or may be restricted on contributions made by the scheme member and / or their employer where applicable.Member contributionsRelief from UK income tax on contributions by an individual to a registered pension scheme is dependent on their being a ‘relevant UK individual’ during a tax year.There is an annual limit for UK tax-relieved pension contributions, which is the greater of 100% of the individual’s UK relevant earnings that are chargeable to income tax in the UK and £3,600. The annual allowance (set out in FA 2004, s 228) applies in the same way as it applies to UK resident pension scheme members. For the definition of relevant UK earnings, see the Member pension contributions to registered pension schemes guidance note. The term ‘relevant UK individual’ means an individual
Lifetime allowance
Lifetime allowanceSTOP PRESS: This guidance note may be affected by the changes to the taxation of pensions made by FA 2024, Sch 9 from 6 April 2024 onwards. The commentary below covers the rules that apply prior to that date. Before continuing your research, see the Abolition of the lifetime allowance guidance note.The maximum amount that an individual can build up in pension savings is limited in two ways:•first, the annual allowance limits the amount that can be paid into pensions and benefit from tax relief (or the value attributed to increases in scheme benefits for defined benefits pensions). See the Annual allowance guidance note•second, prior to 6 April 2024 the lifetime allowance limited the total tax-relieved value that could be accumulated into registered pension schemes. Its operation and the lifetime allowance charges that could have arisen before 6 April 2023 are discussed belowThe 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. See the Abolition of the lifetime allowance guidance note. Lifetime allowancePrior to 6 April
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
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