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But changes in pension legislation which came into force on April 6 mean that those leaving the UK need to be very careful about their future contributions to pensions and the opportunity to obtain tax relief, if there is a possibility that they might return to the UK to work or retire and draw a pension. Tax relief is available on the pension contributions of relevant UK individuals. To be treated as such, the individual must be under 75 and meet at least one of the following criteria:
They have relevant UK earnings chargeable to income tax for that tax year.
They are tax resident in the UK at some time during that tax year.
They or their spouse/ registered civil partner have for that year general earnings from overseas Crown employment subject to UK tax.
They were tax resident in the UK both at some time in the five tax years immediately before that year and when they became a member of the pension scheme.
Prior to A-Day, an individual could have paid a contribution based on their earnings in the current tax year or any one of the previous five tax years. This was known as the basis year rule and it would have allowed someone to base a contribution on the last year’s earnings and to carry on making the same contribution for another five years.
The basis year rule ended with the changes that came in on A-Day. Now an individual can contribute as much as they like but tax relief is limited to a contribution of 100 per cent of their relevant UK earnings or the basic amount of £3,600, whichever is the greater.
If an individual moves abroad, then the first three of the above conditions are unlikely to be met too often. It is the fourth point that is of most relevance and its wording is interesting. Examples will illustrate the important points.
Assume that neither Ian nor Nicole will qualify under any of the first three conditions in the years after the tax year during which they became non-resident.
First, consider the situation for Nicole, who started her pension plan on April 1, 2006 (in the 2005/06 tax year) when she was 51 and her UK earnings were £50,000. Nicole moved to France a few days later on April 5.
Prior to A-Day, Nicole could have contributed £15,000 (30 per cent of £50,000) and, if the A-Day changes had not happened, she could have carried on contributing a percentage of her 2005/06 earnings of £50,000 every year up to and including 2010/11and obtained basic-rate tax relief through relief at source.
However, things have changed after A-Day. Nicole is still a relevant UK individual as she was resident in the UK at some time during the previous five tax years and when she became a member of the pension scheme. Now she can contribute 100 per cent of her relevant UK earnings or £3,600, whichever is the greater, with tax relief. Unfortunately, her relevant UK earnings for this tax year are nil, so the maximum tax-relievable contribution she can make is only £3,600. The tax relief will only be available if the registered pension scheme she contributes to operates relief at source.
Nicole needs to be made aware of this change as she may think that tax relief is still available on a contribution of £15,000.
If Nicole, for some reason, wants to carry on paying £15,000, then technically she could (if she can find a provider who will accept non-relievable contributions) but she should only be paying £3,600 net of basic-rate tax and anything above this should be paid gross.
Ian left the country on the same day as Nicole and has a short-term contract to work on oil rigs off the coast of Dubai. Unlike Nicole, Ian did not see an IFA before he left the country and did not start a pension. Ian thinks that he will be able to make a contribution from his new high tax-free salary as he has a friend who has told him that this will be OK if at some time in the five tax years preceding the tax year in question he was resident in the UK.
Unfortunately, his friend was not aware of the second part of the eligibility criteria: “and were resident in the UK when they became a member of the pension scheme”.
As Ian did not join when he was resident in the UK, he fails all the eligibility criteria and will not be a relevant UK individual. He can, of course, contribute if he wishes but will not be entitled to any tax relief whatsoever.
It is clear that sound advice is necessary before leaving the country. For instance, if Ian does not leave for Dubai until, say, August, he would be able to obtain tax relief in 2006/07 on a contribution of 100 per cent of his 2006/07 relevant UK earnings or £3,600, whichever is the greater. But for contributions to continue to be eligible for tax relief for another five years, Ian needs to be resident in the UK when he becomes a member of the pension scheme. In other words, the pension plan needs start before he leaves in August.
It is important to understand the level of tax-efficient contributions that can be made and, clearly, the key to being able to get the best out of the system is to effect the pension before leaving the UK.
It is also interesting to note that it is not possible to change provider after leaving the country as the wording “when they became a member of the pension scheme” appears to preclude this.
The moral is that advisers should tell their clients who are contemplating leaving these shores for a number of years that action before leaving could be very much to their advantage. There is, of course, opportunity for advisers with this change as particular professions can be highly internationally mobile – oil rig workers, the teaching profession and nursing. to name a few.
There is one final note of caution. Advisers will need to check the impact, if any, of contributing to a UK pension plan on the tax position of their clients in their new country of residence.