Pensions Bulletin 2017/11 - Budget Special

New 25% tax charge on QROPS transfers

Although the Budget speech only mentioned “foreign pensions” obliquely, there was quite a sting in the tail in the announcement of a new overseas transfer charge of 25% on transfers from UK registered pension schemes to “qualifying recognised overseas pension schemes” (QROPS).

Further detail is provided in a suite of documents, comprising two policy papers, HMRC guidance and draft legislation that will be taken forward in the Finance Bill. One of the policy papers states that whilst the Government recognises that QROPS continue to have a legitimate purpose, “the QROPS regime is increasingly marketed and used as a way of gaining an unfair tax advantage on pension savings that have had UK tax relief”.

The tax will apply to certain transfers to QROPS requested on or after 9 March 2017. HMRC states that a “request” for these purposes must be a substantive request to the scheme administrator to take action, ie to have given the administrator an instruction to transfer £X or X% of the member’s pension funds to a named overseas pension scheme. HMRC emphasises that a casual enquiry is not a transfer request.

The overseas pension charge may be payable on transfers from both UK registered pension schemes and QROPS which have previously (on or after 9 March 2017) received a transfer of UK tax-relieved funds. There are the following exemptions:

• Both the individual and the QROPS are in the same country after the transfer
• The QROPS is in one country in the EEA (an EU Member State, Norway, Iceland or Liechtenstein) and the individual is resident in another EEA state after the transfer
• The QROPS is an occupational pension scheme sponsored by the individual’s employer
• The QROPS is an overseas public service pension scheme – an overseas government scheme as defined in the tax regulations and the individual is employed by one of the employers participating in the scheme; or
• The QROPS is a pension scheme established by an international organisation as defined in the tax regulations to provide benefits in respect of past service and the individual is employed by that international organisation

UK tax charges will apply to a tax-free transfer if, within five tax years, an individual becomes resident in another country so that the exemptions would not have applied to the transfer. UK tax will be refunded if the individual made a taxable transfer and within five tax years one of the exemptions applies to the transfer.

The scheme administrator of the registered pension scheme or the scheme manager of the QROPS making the transfer is jointly and severally liable to the tax charge and where there is a tax charge, they are required to deduct the tax charge and pay it to HMRC. This applies to scheme managers of former QROPS that make transfers out of funds that have had UK tax relief, if the scheme is a QROPS on or after 14 April 2017 and at the time the transfer to the former QROPS is received.

The significance of the 14 April date is that existing QROPS are set a deadline of 13 April 2017 to provide a written undertaking to HMRC that they wish to continue to have QROPS status and that they will operate the new tax charge – both in terms of information reporting and paying any tax charges that arise on onward transfers or changes in the member’s status. Failure to provide this undertaking will result in automatic loss of QROPS status with no right of appeal.

Payments out of funds transferred to a QROPS on or after 6 April 2017 will be subject to UK tax rules for five tax years after the date of transfer, regardless of where the individual is resident

Where tax liability arises it will be joint and several between the member and the scheme administrator/manager. Detailed procedures are set out in the HMRC guidance for reporting and settlement together with new member disclosure requirements.

HM Treasury raking in extra tax from “Freedom and Choice” regime

Buried on page 49 of the Budget policy costings paper is a rather astonishing paragraph detailing how much extra tax revenue the Government has received since the pension flexibility regime was introduced from April 2015.

In the Government’s own words this “was initially estimated to raise around £0.3 billion in 2015-16 and £0.6 billion in 2016-17 – estimates subject to considerable uncertainty. In the event, the measure has raised far more than anticipated – £1.5 billion in 2015-16, while our latest estimate for 2016-17 is £1.1 billion”.

So the Government is on course to receive an extra £1.7 billion in the first two tax years of the new pensions tax regime. The Government attributes this to different consumer behaviour than expected with individuals withdrawing their pension savings over shorter periods than anticipated. The Government also notes that it now expects the peak year of yield to be 2017/18 (raising £1.6 billion) rather than 2018/19.

Class 4 NICs to rise

Class 4 national insurance contributions paid by the self-employed will increase from 9% to 10% in April 2018, and to 11% in April 2019. This is in order to reduce the differential between the rates of NICs paid by employees and those paid by the self-employed, particularly given that since April 2016, the self-employed have been able to build up the same State Pension as employees. Further details are set out in a fact sheet.

Lifetime ISAs to go ahead from this April

The Budget documents confirm that the Lifetime ISA will be launched on 6 April 2017. This follows finalised regulations being laid before Parliament a couple of weeks ago (see Pensions Bulletin 2017/09).

Money purchase annual allowance reducing to £4,000

The money purchase annual allowance (MPAA), which applies in limited cases (see Comment), will reduce from £10,000 to £4,000 pa from 2017/18. A policy paper published on Budget day confirms the go-ahead on this change which the Government proposed in the Autumn Statement (see Pensions Bulletin 2016/47).

Following a short consultation, the Government has decided that there will be no other change to the way the MPAA operates, and has also clarified that the change will apply to those already in the MPAA regime. Appropriate clauses to effect the change will be introduced into the Finance Bill 2017 and a response to the consultation will be published on 20 March 2017.

Master trust tax registration

The Government is to amend the tax registration process for master trust pension schemes to align with the Pensions Regulator’s new authorisation and supervision regime. The intention is to help boost consumer protection and improve compliance.

Section 615 schemes – abolition legislation to be modified

It appears that the Finance Bill, which will effectively bring to an end the use of section 615 schemes from April 2017, is to be modified following the consultation on the draft clauses last December (see Pensions Bulletin 2016/49). The new clauses will “set out the position” for defined benefit section 615 schemes and clarify that all lump sums paid out of funds built up before 6 April 2017 will be subject to the existing tax treatment.

Tax advantages for most non-pension salary sacrifice benefits abolished

As announced at the Autumn Statement (see Pensions Bulletin 2016/47) and clarified via the draft Finance Bill clauses (see Pensions Bulletin 2016/49), the Government has now provided further confirmation that the income tax and NIC advantages of most benefits in kind provided through salary sacrifice (or other optional remuneration) arrangements will start to be removed from 6 April 2017.

Calls for evidence on taxation of benefits in kind and employee expenses

The Government is to issue calls for evidence on:

• Taxation of benefits in kind – to see whether the use of exemptions and valuation methodology for the income tax and employer NICs treatment of benefits in kind can be made fairer and more consistent

• Employee expenses – to better understand the use of income tax relief for employees’ expenses, including those that are not reimbursed by the employer

These calls for evidence will be published on 20 March 2017.

Pension Scams – Government will respond in the Spring

In the last Autumn Statement (see Pensions Bulletin 2016/47) the Government launched a (now updated) consultation on fighting pension scams. The Government has now announced that it will respond in full “later in the Spring”.

This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.