We examine what steps employers should take for their international assignees after the new pensions tax regime in the UK came into effect this April.

The UK has historically provided tax relief for foreign nationals' contributions to most home country pension plans while on assignment to the UK. This relief has been applicable where the terms of the foreign plan broadly 'correspond' to the terms of a UK plan. Once approval had been granted for a plan, all future assignees participating in the plan qualified for the following tax relief:

• Employee contributions are tax deductible for the employee.
• Employer contributions are not considered taxable income of the employee.
• The employer is eligible for a corporate tax deduction for the employer contributions.

The new regime after 'A-day' – 'Migrant member relief'

For new assignees arriving in the UK from 6 April 2006, the same tax relief will be available, but a new regime takes effect, which imposes more conditions on the participants and the plans and requires more administration to make it work. Employers will therefore need to consider refreshing current processes to take advantage of the same savings.

Where the previous regime required merely that each plan be submitted once, the new regime will require the following process:

• The plan is submitted once with a new form. 
• Upon arrival in the UK, the individual will need to discuss with their tax adviser whether they meet the requirements of the new regime to qualify for tax relief.
• The individual will then need to notify the overseas plan administrator to confirm that they intend to claim the relief.
• The plan administrator then must notify the individual that they undertake to provide required information to the UK tax authorities.
• After the individual has left the UK, a form must be filed with the UK tax authorities to advise of the amounts contributed to the plan during the UK assignment.

The new process is far more involved, requires a number of additional steps and will cost more to administer in terms of resources. Your tax adviser will be best placed to take care of many of the steps on behalf of your new assignees and a discussion of responsibilities in the new process should take place as soon as possible.

There is no strict deadline for completing the new process as relief can be claimed many years in arrears but, practically, it will be important to have it in place to ensure that new assignees coming to the UK after A-Day are dealt with efficiently.

Benefits from non-UK schemes

There is a further point to watch with regard to lump sums, loans and unauthorised payments generally, including payments made below the minimum pension age; currently 50 but rising to 55 from 6 April 2010. 

As with a UK-registered scheme, members may take an initial tax-free lump sum of up to one third of the amount crystallised as a pension or annuity. However, 'unauthorised' payments are taxed if the member is or was UK resident in any of the five previous tax years, and to the extent contributions have been funded out of UK earnings. 

Any such 'unauthorised' payments are attributed to UK remuneration in priority to earnings before or after the UK assignment.   For example, if an employee wants to take a loan from her pension scheme to help put her children through college, all or part of the loan may be treated as an unauthorised payment if any contributions were paid while she was on UK assignment and if she was UK resident in any of the five previous tax years.

Assignees in the UK before 6 April 2006

Individuals in the UK pre-A-Day benefiting from the current regime will continue to receive the same relief after A-Day, although the reporting requirements after leaving the UK will also apply to them if they claim relief for contributions after A-Day.

However, if you have not obtained corresponding approval for all current relevant overseas plans, HM Revenue and Customs are expecting to receive all applications by 5 April 2006. There appears to be no basis for this deadline but, to avoid additional complications, it would be preferable to comply where possible.
The cost of doing nothing

If claims are not made for assignees' contributions after A-Day, there will be no deduction from employees' taxable income for their contributions and no corporation tax deduction for the employer for its contributions. Of course, where assignees are tax equalised in the UK, both of these costs fall to the employer.

Employer contributions will not be taxable on the employee in any case, so it is worth considering whether the process is required at all for non-contributory schemes where there is no recharge of employer contributions to the UK company.

UK assignees abroad – hypothetical tax policies

The new pension's regime allows UK resident individuals to make tax-relieved annual contributions of up to BPS 215,000 to their fund. This could translate into considerable costs to the business where a hypothetical tax policy is in operation for individuals on assignment from the UK and reflects current UK pension contribution limits.

For example, an assignee may decide to make a large, one-off contribution to the pension plan for which they would expect to receive a UK hypothetical tax deduction. In this case their assignment net income would increase significantly, resulting in an associated gross-up cost for the company in the host location.

Employers operating such policies need to consider whether they want to be as generous as to preserve for individuals the same tax benefits they would have received had they remained in the UK, or whether they want to amend their tax policy to protect against such extraordinary costs arising.

European cross-border regulations

On a related note, the recently-published UK regulations require that from 30 March 2006, occupational pension schemes which retain cross-border members must register with the UK Pensions Regulator and must become fully-funded by 22 September 2008 – for all members, not just the cross-border ones. 

Many UK-defined benefit pension schemes have substantial deficits and as a consequence are seeking to remove their cross-border members.  These would include UK scheme members on assignment in other EU member states who are on long-term assignments or have become locally employed.  Employees who remain habitually employed in the UK and are seconded abroad for no more than five years do not count as cross-border employees.

April 2006

For more information you can contact Phil Crossman, Senior Manager, Deloitte Tax LLP at pcrossman@deloitte.co.uk or Philip Paur, Director, Deloitte Tax LLP at ppaur@deloitte.co.uk.

Subject: Tax relief for expatriates, cross-border pensions