This article takes a look at the relaxation of the rules concerning ongoing contributions to persona...
This article takes a look at the relaxation of the rules concerning ongoing contributions to personal pensions and stakeholder schemes when a policyholder moves abroad.
Before the changes in the tax regime, it was possible to continue contributions after moving abroad only if the policyholder was subject to UK tax including seafarers who qualify for the 100% foreign earnings deductions or by using the provisions of carry back and carry forward of unused tax relief.
The new tax regime for personal pensions and stakeholder schemes provides an individual with the opportunity to continue to fund their pension contract while they are no longer resident in the UK.
They will continue to receive basic rate tax relief on their contributions even if they are not a UK taxpayer. If they are a higher rate UK taxpayer, they will be eligible to reclaim the balance of relief from their tax office either by completion of form PP120 or the relevant section of their self-assessment return.
If the policyholder continues to be subject to UK tax, they may continue to fund their pension irrespective of their residency status. If they are no longer a UK taxpayer, they may only continue to contribute for up to five tax years after leaving the UK tax, but they must have been resident and ordinarily resident in the UK in the tax year in which they started the pension or have had net relevant earnings. The following three scenarios help to explain the opportunities for the continuation of contributions after moving abroad.
Where a policyholder moves abroad but is continuing to pay UK income tax and has net relevant earnings, they or their employer may continue to contribute to their personal pension or stakeholder scheme. They may continue to pay up to the earnings threshold, currently £3,600 a year, or more, based on the relevant percentage of their net relevant earnings from a suitable basis year. For example: Mr Blue was born on 1 April 1961 and had earnings of £30,000 in 2000/01. He took out his stakeholder policy in April 2001 satisfying the residency test.
In January 2002, he is posted to work abroad for his company for an indefinite period and continues to be subject to UK income tax. Between them, Mr Blue and his employer contribute the maximum allowable (£6,000) to his stakeholder plan using his earnings from 2000/01 (the chosen basis year).
If Mr Blue continues to remain subject to UK tax, he may continue to fund his stakeholder scheme and amend the basis year if he wishes to continue to fund in excess of the earnings threshold.
If, at any point after being abroad for more than five tax years, Mr Blue is no longer subject to UK tax his contributions must cease.
In this second scenario, we consider the position where the policyholder moves abroad and ceases to have any net relevant earnings.
A policyholder may continue to contribute to the personal pension or stakeholder policy throughout the relevant tax year in which they leave the UK, and for the following five tax years. So let us consider the example of Mr Green, assuming he is no longer subject to UK income tax after moving abroad.
Mr Green was born on 1 April 1961 and has a salary of £30,000 in the tax year 2000/01 (which he uses as his basis year, but of course he could choose any year from 1996/97). In April 2001 he takes out a stakeholder pension.
In January 2002, he moves abroad to work but is not subject to UK tax and consequently has no net relevant earnings. During the tax year 2001/02, he may continue to contribute to his stakeholder policy.
The tax year 2002/03 is deemed as his break year (the first year in which he has no net relevant earnings the break year can be no earlier than the tax year 2001/02 and he can thus continue to use the basis year of 2000/01.
But under the cessation of earnings rules, he may choose any tax year from 1996/97) to justify contributions for a further five tax years above the earnings threshold. If he is still abroad after five years, his contributions must cease.
In the final scenario, Mr Brown took out a personal pension in the tax year 1990/91 and continued to contribute to it until moving abroad during the tax year 1998/9.
He is no longer subject to UK income tax. Under the new tax regime, it will be possible for Mr Brown to recommence contributions for the tax years 2001/02 to 2003/04.
This scenario will be especially useful for those individuals that have moved abroad within the last five years and had ceased their personal pension contributions. It will provide them the opportunity to maximise their contributions and at the same time receive basic rate tax relief on the payments.
Tim Kehoe is a member of the Technical Advisory Service at NPI
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