Tax advice on UK Private Pension lump sum & transfer to Aus

[ClareU]

HI,

I am hoping someone can please give me some guidance and answer a few questions regarding taking a lump sum in the UK and declaring the tax in the UK and AU.

I am a duel British/Australian citizen living in Australia since 2002. Having turned 60 I have a UK PP in the amount of 18,000 GBP to access. The money is only available as a lump sum or as an annuity so I want to take the full amount. I know that the first 25% of the value of the fund is tax free so I should receive 4,500 before being taxed. I am told that the remaining 75% will be taxed at 40% so that would leave me with an additional 8,100 GBP. I am assuming I declare this amount but converted in AU $ on my tax return, so around $22,000. My first question is: can I deduct from this, the amount that was in the fund before I became resident in Australia?

My next questions are: Once I receive the funds, do I apply to HMRC for a tax rebate on the basis that I should have been taxed on a lower income threshold? And also, if I then receive a rebate do I also declare that on my Australian tax return? Finally, can I offset all the tax I end up paying in the UK? I have not earned an income either here or in the UK for the last couple of years.

Hope this is laid out clearly enough to make sense, I am finding it pretty confusing!

Many thanks for any assistance you can provide!
 

[Marisawright]

Who told you that the first 25% value is tax-free?  Is that in the UK or in Australia?  I would look closely at the option for the annuity because the few people I know who've taken a lump sum have lost a massive amount of it.  

[ClareU]

The first 25% is free from UK tax. The remaining 75% is taxed at the higher rate of tax. The pension company have confirmed this.

[Marisawright]

1 hour ago, ClareU said:

The first 25% is free from UK tax. The remaining 75% is taxed at the higher rate of tax. The pension company have confirmed this.

....however the whole amount (18,000 GBP) will have to be declared as income in Australia.  It's treated as if you suddenly earned an extra 18,000 GBP on your salary that particular year.  It just gets added on, so you'll pay a high tax rate on the whole amount.

[Ausvisitor]

51 minutes ago, Marisawright said:

....however the whole amount (18,000 GBP) will have to be declared as income in Australia.  It's treated as if you suddenly earned an extra 18,000 GBP on your salary that particular year.  It just gets added on, so you'll pay a high tax rate on the whole amount.

Yes, whilst you would save some UK tax, when you then declare it in AUS, you are taxed as having received the whole 18k, you then offset the tax you paid in the UK (on the 14k) and pay the difference to the AUS taxman.

So assuming a similar tax rate between the two countries (which isn't exactly the case but it's not massively different) you would end up paying tax in the whole 18k, 75% of the tax amount to the UK, and the other 25% to the AUS tax service 

[Alan Collett]

2 hours ago, Marisawright said:

....however the whole amount (18,000 GBP) will have to be declared as income in Australia.  It's treated as if you suddenly earned an extra 18,000 GBP on your salary that particular year.  It just gets added on, so you'll pay a high tax rate on the whole amount.

No, that's not necessarily right.

Professional advice should be sought on strategy here.    IMHO.

Best regards.

[can1983]

12 hours ago, Alan Collett said:

No, that's not necessarily right.

Professional advice should be sought on strategy here.    IMHO.

Best regards.

professional advice might well wipe out the rest of the amount...... then there's no tax to pay woo hoo!

[Ken]

18 hours ago, ClareU said:

HI,

I am hoping someone can please give me some guidance and answer a few questions regarding taking a lump sum in the UK and declaring the tax in the UK and AU.

I am a duel British/Australian citizen living in Australia since 2002. Having turned 60 I have a UK PP in the amount of 18,000 GBP to access. The money is only available as a lump sum or as an annuity so I want to take the full amount. I know that the first 25% of the value of the fund is tax free so I should receive 4,500 before being taxed. I am told that the remaining 75% will be taxed at 40% so that would leave me with an additional 8,100 GBP. I am assuming I declare this amount but converted in AU $ on my tax return, so around $22,000. My first question is: can I deduct from this, the amount that was in the fund before I became resident in Australia?

My next questions are: Once I receive the funds, do I apply to HMRC for a tax rebate on the basis that I should have been taxed on a lower income threshold? And also, if I then receive a rebate do I also declare that on my Australian tax return? Finally, can I offset all the tax I end up paying in the UK? I have not earned an income either here or in the UK for the last couple of years.

Hope this is laid out clearly enough to make sense, I am finding it pretty confusing!

Many thanks for any assistance you can provide!
 

Under the terms of the double taxation agreement between the UK and Australia, Pensions of Australian residents are taxed in Australia not the UK so you should not have to pay any tax in the UK. That means you need to apply to HMRC for a refund. Unfortunately you can't just apply directly. You get the form from HMRC DT Individual Australia (publishing.service.gov.uk) but then have to send it to the ATO to be certified and they then send it to HMRC. The process takes months (and to slow things down further HMRC send the refund by cheque).

In Australia you have to declare the whole 18,000 GBP (converted to AUD) but only the growth since moving to Australia (called AFE - Assessable Foreign Income) should be taxable (so yes you can deduct the value in the fund when you became resident in Australia) and so is reported as income (section 20 of your tax return). The remainder is reported as Target Foreign Income (IT4).

You may well find that you need to lodge your Australian Tax Return before you receive the refund from HMRC. In that case you can report the tax paid and lodge an amended tax return when the refund is received. If the amounts of tax refunded by the ATO (and subsequently needing to be repaid when the amended return is lodged) are large they could charge interest.

You can do all this yourself but Professional advice to make sure this does apply in your circumstances is a very good idea - and normally a lot cheaper than @can1983 suggests!

PS: if you are able to delay receiving this income until July it will fall into next tax year and delay when you have to pay the Australian tax for a year (significantly improving your chances of having already received your UK tax back).

Edited June 7, 2022 by Ken

[Parley]

16 hours ago, Marisawright said:

....however the whole amount (18,000 GBP) will have to be declared as income in Australia.  It's treated as if you suddenly earned an extra 18,000 GBP on your salary that particular year.  It just gets added on, so you'll pay a high tax rate on the whole amount.

She says she has earned zero other income so will be on a very low tax bracket. First $18000 may be tax free too as tax free threshold.

Tax rate should not be too high i wouldn't think.

[ClareU]

Thanks so much Ken - that is very helpful and the exact advice I was after! I agree I should run all this by a professional, I just wanted to try and understand the process and I am not wanting to get out of paying any tax, but did want

to make sure that I didn't lose out on claiming anything back. Many thanks again for your help.

[ClareU]

22 minutes ago, Ken said:

Under the terms of the double taxation agreement between the UK and Australia, Pensions of Australian residents are taxed in Australia not the UK so you should not have to pay any tax in the UK. That means you need to apply to HMRC for a refund. Unfortunately you can't just apply directly. You get the form from HMRC DT Individual Australia (publishing.service.gov.uk) but then have to send it to the ATO to be certified and they then send it to HMRC. The process takes months (and to slow things down further HMRC send the refund by cheque).

In Australia you have to declare the whole 18,000 GBP (converted to AUD) but only the growth since moving to Australia (called AFE - Assessable Foreign Income) should be taxable (so yes you can deduct the value in the fund when you became resident in Australia) and so is reported as income (section 20 of your tax return). The remainder is reported as Target Foreign Income (IT4).

You may well find that you need to lodge your Australian Tax Return before you receive the refund from HMRC. In that case you can report the tax paid and lodge an amended tax return when the refund is received. If the amounts of tax refunded by the ATO (and subsequently needing to be repaid when the amended return is lodged) are large they could charge interest.

You can do all this yourself but Professional advice to make sure this does apply in your circumstances is a very good idea - and normally a lot cheaper than @can1983 suggests!

PS: if you are able to delay receiving this income until July it will fall into next tax year and delay when you have to pay the Australian tax for a year (significantly improving your chances of having already received your UK tax back).

Thanks so much Ken - that is very helpful and the exact advice I was after! I agree I should run all this by a professional, I just wanted to try and understand the process and I am not wanting to get out of paying any tax, but did want

to make sure that I didn't lose out on claiming anything back. Many thanks again for your help.

[NJA]

Hi Clare, I have a similar pension amount to yourself - are you seeking advice in the UK or Aus? If you could PM the details that would be great