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Old Oct 27th 2017, 6:47 pm   #1
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Default Tax relief on UK pension income limited to 10%?

Background:
  • I have just received a reassessment of tax for 2016.
  • I drew GBP30,000 from my UK SIPP and paid GBP3,598 on the taxable element of GBP22,500 (after 25% tax-free element). Accordingly, on my return I put down the C$ equivalent of GBP3,598.
  • CRA have advised they will only allow GBP2,250, since "under the Canada/UK tax convention, the maximum amount of tax that can be charged is 10% of the gross amount of foreign pension".
  • So I have been levied an additional tax bill equal to the excess of GBP3,598 over GBP2,250.
  • In passing, I did in the past provide UK HMRC with a request for double taxation relief, but this was refused due to the nature of the pension arrangement (a SIPP).
Questions:
  1. Does anyone know if this is correct, being their experience too?
  2. Any ideas as to how this additional tax can be reduced/avoided? As a minimum, can I argue they should allow 10% x GBP30,000, since this is the gross amount? For a number of reasons, I would prefer to leave the pension in the UK, rather than transfer it to Canada.
Thanks.
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Old Oct 27th 2017, 7:47 pm   #2
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Default Re: Tax relief on UK pension income limited to 10%?

But if you have paid tax on it here as well as the UK I believe that you can reclaim it from the UK.
Not aware of this 10% limitation and will research that.
As far as I am aware there is no 25% tax free allowance here. Did they querry that?
Are you in receipt of your UK pension and paying tax (in the UK and claiming it back) and this was just a lump sum withdrawal of which in the UK you can take 25% tax free from your total pot.
As an aside do you know of a decent tax advisor in the Vancouver area who is knowledgeable about UK/Canada pension issues.

Last edited by eaglestorm; Oct 27th 2017 at 7:59 pm.
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Old Oct 27th 2017, 8:03 pm   #3
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Default Re: Tax relief on UK pension income limited to 10%?

Quote:
Originally Posted by eaglestorm View Post
But if you have paid tax on it here as well as the UK I believe that you can reclaim it from the UK.
Not aware of this 10% limitation and will research that.
As far as I am aware there is no 25% tax free allowance here. Did they querry that?
Are you in receipt of your UK pension and paying tax (in the UK and claiming it back) and this was just a lump sum withdrawal of which in the UK you can take 25% tax free from your total pot.
I stand to be corrected, but since I am a Canadian resident for tax purposes I don't think I can ask the UK to pay back any Canadian tax.
You are right that there is no 25% tax free allowance here. I declared and paid tax on the full gross amount of GBP30,000. This is only relevant for the UK tax calculation.
Yes, this was just a one-off lump sum withdrawal (to clear some debts), will not be retiring for a while!
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Old Oct 27th 2017, 8:43 pm   #4
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Default Re: Tax relief on UK pension income limited to 10%?

This seems really odd as you are being taxed twice on a portion of the amount you brought across which as far as I know not what the DT agreement between Canada and the UK says.
Did they give you a reference to the agreement as it is like wading through treacle to find an answer.
I ask as I was about to do the same to fund my kids University.I was also going to start drawing my pension next year but if that is the case then as an example at about 30,000 GBP pension you would start paying tax twice.

30,000 - pesonal allowance UK (approx 11,000 i think) = 19,000
tax UK 19,000 x 20% = 3,800

Cra will only allow 10% so a foreign tax credit of 3,000 so taxed again on 800

Doesn`t seem right.
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Old Oct 27th 2017, 9:56 pm   #5
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Default Re: Tax relief on UK pension income limited to 10%?

Quote:
Originally Posted by eaglestorm View Post
This seems really odd as you are being taxed twice on a portion of the amount you brought across which as far as I know not what the DT agreement between Canada and the UK says.
Did they give you a reference to the agreement as it is like wading through treacle to find an answer.
I ask as I was about to do the same to fund my kids University.I was also going to start drawing my pension next year but if that is the case then as an example at about 30,000 GBP pension you would start paying tax twice.

30,000 - pesonal allowance UK (approx 11,000 i think) = 19,000
tax UK 19,000 x 20% = 3,800

Cra will only allow 10% so a foreign tax credit of 3,000 so taxed again on 800

Doesn`t seem right.
That's why it is advisable to withdraw the 25% tax free sum BEFORE moving to Canada, if you are in the position to do so. (i.e. 55 years or older and yet to move to Canada)

Last edited by glendem4; Oct 27th 2017 at 9:58 pm.
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Old Oct 28th 2017, 8:00 am   #6
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Default Re: Tax relief on UK pension income limited to 10%?

Article 17:

Quote:
2. Annuities arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, such annuities may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the annuities the tax so charged shall not exceed 10 per cent of the portion thereof that is subject to tax in that State.
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Old Oct 28th 2017, 2:07 pm   #7
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Default Re: Tax relief on UK pension income limited to 10%?

In plain English does that mean

The U.K. Can charge up to 10% tax on a pension payment?
Which is way CRA will only allow a 10% foreign tax credit
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Old Oct 28th 2017, 2:23 pm   #8
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Default Re: Tax relief on UK pension income limited to 10%?

Some info ,can't find the reference
Which explains why a one off payment is taxed . It doesn't mention a 10% tax limit though


Monthly recurring pensions from the UK and payable in Canada are fully exempt from HMRC taxes at source in the UK.

However, they are fully taxable by CRA in Canada and should be reported in CAD as Other Pension Income from the Foreign Income menu.

This follows the UK-Canada tax treaty and applies to both UK State Pensions and private pensions.There is no exempt amount for UK Pensions received in Canada.

You may need to demonstrate Canadian tax residency in order to ensure no tax is withheld in the UK. CRA will not offer an exemption in Canada, nor a Foreign Tax Credit on a recurring pension. HMRC should assign you a tax code of NT on each UK pension.

Pension income from one-time payouts of commuted trivial pensions is not included in the specific treaty provisions for recurring pensions, so can be taxed by HMRC.
You can obtain a Foreign Tax Credit from CRA in this case.
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Old Oct 28th 2017, 7:09 pm   #9
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Default Re: Tax relief on UK pension income limited to 10%?

Thanks Steve.
2. Annuities arising in a Contracting State (UK) and paid to a resident of the other Contracting State (Canada) may be taxed in that other State (Canada). However, such annuities may also be taxed in the Contracting State in which they arise (UK) and according to the laws of that State (UK), but if the recipient is the beneficial owner of the annuities the tax so charged shall not exceed 10 per cent of the portion thereof that is subject to tax in that State (UK)."

So re-asking the question of eaglestorm in the next post , does that mean I can ask the UK to limit the tax to 10%?

Also, what is the definition of an annuity? If a withdrawal from a SIPP does not count, then that wouldn't help.
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Old Oct 28th 2017, 7:16 pm   #10
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Default Re: Tax relief on UK pension income limited to 10%?

Quote:
Originally Posted by eaglestorm View Post
Some info ,can't find the reference
Which explains why a one off payment is taxed . It doesn't mention a 10% tax limit though


Monthly recurring pensions from the UK and payable in Canada are fully exempt from HMRC taxes at source in the UK.

However, they are fully taxable by CRA in Canada and should be reported in CAD as Other Pension Income from the Foreign Income menu.

This follows the UK-Canada tax treaty and applies to both UK State Pensions and private pensions.There is no exempt amount for UK Pensions received in Canada.

You may need to demonstrate Canadian tax residency in order to ensure no tax is withheld in the UK. CRA will not offer an exemption in Canada, nor a Foreign Tax Credit on a recurring pension. HMRC should assign you a tax code of NT on each UK pension.

Pension income from one-time payouts of commuted trivial pensions is not included in the specific treaty provisions for recurring pensions, so can be taxed by HMRC.
You can obtain a Foreign Tax Credit from CRA in this case.
Thanks eaglestorm. So that means UK State pensions should not be subject to tax in the UK, so the issue will not arise.

The last paragraph just relates to trivial pensions.
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Old Oct 28th 2017, 7:52 pm   #11
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Default Re: Tax relief on UK pension income limited to 10%?

I believe you can apply for tax relief at source on most pension types. i have just downloaded the form.
For some reason they seem to be able to tax annuities up to 10%.I dont know why.
An annuity is a guaranteed payment which is purchased with funds from a sipp or pension plan.
Most people go with drawdown pensions so you draw a monthly payment but leave the funds still invested.
State and government pensions can be taxed initially but you can apply to have full tax relief in the UK.

One off withdrawals will be taxed(in the UK) but i still dont understand why you did not receive the full foreign tax credit.
Hope that helps
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Old Oct 28th 2017, 8:30 pm   #12
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Default Re: Tax relief on UK pension income limited to 10%?

Quote:
Originally Posted by eaglestorm View Post
I believe you can apply for tax relief at source on most pension types. i have just downloaded the form.
For some reason they seem to be able to tax annuities up to 10%.I dont know why.
An annuity is a guaranteed payment which is purchased with funds from a sipp or pension plan.
Most people go with drawdown pensions so you draw a monthly payment but leave the funds still invested.
State and government pensions can be taxed initially but you can apply to have full tax relief in the UK.

One off withdrawals will be taxed(in the UK) but i still dont understand why you did not receive the full foreign tax credit.
Hope that helps
I duly completed the DTT form, got the CRA to confirm I was a Canadian resident for tax purposes and submitted this to UK HMRC. They replied "No relief is due under the terms of the UK/Canada double taxation agreement for lump sum pensions". Good luck with whatever you're applying for.


Given the general trend from "defined benefit" pension plans producing a regular income to "defined contribution" plans producing lumps sums/drawdowns, this issue will become more and more common.


As to why the full foreign tax credit wasn't allowed, being limited to 10%, this seems to be due to Steve's quote.


https://www.gov.uk/government/upload...-_in_force.pdf DTT link (see Section 17).


I'm inclined to write to HMRC arguing that the UK tax deducted should be limited to 10%, otherwise the combined effect of the UK/Canada taxation would be to give a higher amount of tax than would be due in either country on its own, which is inequitable and surely not the intent of the treaty. I doubt this argument would be accepted, but I can't lose anything by trying.
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Old Oct 28th 2017, 10:26 pm   #13
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Default Re: Tax relief on UK pension income limited to 10%?

Good luck with that. Perhaps you should point out to the CRA that it was not an annuity payment but a lump sum payment and you were fully taxed on it in the UK. They seem to be taxing you as if it was an annuity.
In my case I will be taking monthly withdrawals from my drawdown pension and I know others who have been granted the full tax relief so I am hopeful that will be the case as well. Similar to monthly State pension payments being afforded full tax relief in the UK.
Anyway I must get outside as it’s a lovely sunny day. Same in Vancouver I guess!

ATB
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Old Oct 29th 2017, 9:53 am   #14
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Default Re: Tax relief on UK pension income limited to 10%?

Quote:
Originally Posted by eaglestorm View Post
Good luck with that. Perhaps you should point out to the CRA that it was not an annuity payment but a lump sum payment and you were fully taxed on it in the UK. They seem to be taxing you as if it was an annuity.
In my case I will be taking monthly withdrawals from my drawdown pension and I know others who have been granted the full tax relief so I am hopeful that will be the case as well. Similar to monthly State pension payments being afforded full tax relief in the UK.
Anyway I must get outside as it’s a lovely sunny day. Same in Vancouver I guess!

ATB
We must compare notes. I am moving for good on 10 November and will send in my P85 then. My income for now will be monthly withdrawals from a UK income drawdown plan as well. Expecting HMRC to issue an NT tax code but not sure who I will be taxed by in the period from November to April 2018 (less than 180 days in the UK this tax year)
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Old Oct 29th 2017, 8:14 pm   #15
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Default Re: Tax relief on UK pension income limited to 10%?

Quote:
Originally Posted by eaglestorm View Post
This seems really odd as you are being taxed twice on a portion of the amount you brought across which as far as I know not what the DT agreement between Canada and the UK says.
Did they give you a reference to the agreement as it is like wading through treacle to find an answer.
I ask as I was about to do the same to fund my kids University.I was also going to start drawing my pension next year but if that is the case then as an example at about 30,000 GBP pension you would start paying tax twice.

30,000 - pesonal allowance UK (approx 11,000 i think) = 19,000
tax UK 19,000 x 20% = 3,800

Cra will only allow 10% so a foreign tax credit of 3,000 so taxed again on 800

Doesn`t seem right.
You're right that GBP30,000 seems to be the break-even point, but I think the maths is a little different.

From the 30,0000, can deduct 7,500 (25% tax-free element) and 11,500 personal allowance, giving 11,000 subject to tax at 20% = 2,200.
CRA base 10% credit on taxable portion (after 25% tax-free), 10% x 22,500 = 2,250.
So no excess tax if amount less than 30,000 each year.

I will be querying with CRA why they only based credit on 22,500 when DTT wording is 10% of gross amount. If they concede should be based on gross amount, break-even pension amount increases to GBP46,000.
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