UK private pension - taxation lump sum payment

[SilkeT]

Hello All,
UK citizen, resident in Germany, recipient of a UK private pension. The pension will be taxed in the UK based on the DTT rule that tax exempt pension contributions were made for more than 15 years. The annuity will however be included in the German tax declaration for the Progressionsvorbehalt.
My question relates to any lump sum payment, which will not be subject to UK tax. Will this lump sum payment also only have to be included in the German tax declaration for the purpose of the Progressionsvorbehalt or will it be subject to German taxation. My confusion arises because of the following language in Article 17(3) of the DTT "This paragraph shall not apply if that State does not effectively tax the pension...".
Has this been tested yet with the German tax authorities?
Thank You!

[GaryC]

Unfortunately, the amount will be taxed in full if you are tax resident in Germany. "Effectively taxed" in the UK means the payment has been "subject to" UK tax, i.e. it is taxable in the UK, even if no tax is ultimately payable because of some relief or allowance like the personal allowance.

A tax-free lump sum pension payment is what it says on the tin - tax free or tax exempt in the same way that ISA interest is tax exempt. The DTA therefore gives Germany the right to tax that amount as income. It is not subject to Progressionsvorbehalt as that applies to income that exempted under the DTA, which this is not, and so we turn full circle...

If you were minded to try to test it, I think you would need to show that all payments arise from the same underlying right, or contract, and that overall, the amounts arising from that contract are effectively taxed, albeit at an effective rate that averages the taxable and non-taxable elements, even though they are shown separately in said contract. Given that UK tax law exempts the payment from tax, I think the German FA may kindly and professionally, "show you the door".

[Emkay]

Unfortunately, the amount will be taxed in full if you are tax resident in Germany. "Effectively taxed" in the UK means the payment has been "subject to" UK tax, i.e. it is taxable in the UK, even if no tax is ultimately payable because of some relief or allowance like the personal allowance.

A tax-free lump sum pension payment is what it says on the tin - tax free or tax exempt in the same way that ISA interest is tax exempt. The DTA therefore gives Germany the right to tax that amount as income. It is not subject to Progressionsvorbehalt as that applies to income that exempted under the DTA, which this is not, and so we turn full circle...

If you were minded to try to test it, I think you would need to show that all payments arise from the same underlying right, or contract, and that overall, the amounts arising from that contract are effectively taxed, albeit at an effective rate that averages the taxable and non-taxable elements, even though they are shown separately in said contract. Given that UK tax law exempts the payment from tax, I think the German FA may kindly and professionally, "show you the door".

Ah, I’m in a similar situation with a soon to mature small UK private pension. @GaryC, sorry, I don’t quite follow your second paragraph despite your ‘tin’ reference. Yes I do remember those ads…something garden paint related?!.

For a round number example….my private pension sum is £20,000 at maturity soon.

25% of that is UK tax free no matter what my other UK earnings are above/below my personal UK tax allowance?

Is that 25% fully taxable here in DE or progressionsvorbehalt based on my husband’s income? I have no other personal income in DE this year?

If I take the full £20,000 pension payout….£5000 is UK tax free, I have to pay 20% tax on £15,000 in UK. My UK rental income is just at the UK allowance limit. Ca.£12,500. What more tax would I have to pay on this in DE? Would it be the full rate according to my husband’s tax bracket?

Your advice is, as always, very much appreciated….especially for the very confused such as me

[SilkeT]

Unfortunately, the amount will be taxed in full if you are tax resident in Germany. "Effectively taxed" in the UK means the payment has been "subject to" UK tax, i.e. it is taxable in the UK, even if no tax is ultimately payable because of some relief or allowance like the personal allowance.

A tax-free lump sum pension payment is what it says on the tin - tax free or tax exempt in the same way that ISA interest is tax exempt. The DTA therefore gives Germany the right to tax that amount as income. It is not subject to Progressionsvorbehalt as that applies to income that exempted under the DTA, which this is not, and so we turn full circle...

If you were minded to try to test it, I think you would need to show that all payments arise from the same underlying right, or contract, and that overall, the amounts arising from that contract are effectively taxed, albeit at an effective rate that averages the taxable and non-taxable elements, even though they are shown separately in said contract. Given that UK tax law exempts the payment from tax, I think the German FA may kindly and professionally, "show you the door".

Thank you, Gary. Do you happen to know how the German public health insurance would treat such a lump sum payment? I have a recollection that for the purpose of calculating Krankenkassebeiträge the health insurer would divide the lump sum payment by 120 and charge health insurance contributions on the going rate for 10 years on the resulting monthly amount.

[GaryC]

Unfortunately, the amount will be taxed in full if you are tax resident in Germany. "Effectively taxed" in the UK means the payment has been "subject to" UK tax, i.e. it is taxable in the UK, even if no tax is ultimately payable because of some relief or allowance like the personal allowance.

A tax-free lump sum pension payment is what it says on the tin - tax free or tax exempt in the same way that ISA interest is tax exempt. The DTA therefore gives Germany the right to tax that amount as income. It is not subject to Progressionsvorbehalt as that applies to income that exempted under the DTA, which this is not, and so we turn full circle...

If you were minded to try to test it, I think you would need to show that all payments arise from the same underlying right, or contract, and that overall, the amounts arising from that contract are effectively taxed, albeit at an effective rate that averages the taxable and non-taxable elements, even though they are shown separately in said contract. Given that UK tax law exempts the payment from tax, I think the German FA may kindly and professionally, "show you the door".

Ah, I’m in a similar situation with a soon to mature small UK private pension. @GaryC, sorry, I don’t quite follow your second paragraph despite your ‘tin’ reference. Yes I do remember those ads…something garden paint related?!.

For a round number example….my private pension sum is £20,000 at maturity soon.

25% of that is UK tax free no matter what my other UK earnings are above/below my personal UK tax allowance?

Is that 25% fully taxable here in DE or progressionsvorbehalt based on my husband’s income? I have no other personal income in DE this year?

If I take the full £20,000 pension payout….£5000 is UK tax free, I have to pay 20% tax on £15,000 in UK. My UK rental income is just at the UK allowance limit. Ca.£12,500. What more tax would I have to pay on this in DE? Would it be the full rate according to my husband’s tax bracket?

Your advice is, as always, very much appreciated….especially for the very confused such as me

If the pension is taxable in the UK - paid in for more than 15 years, got tax relief and the tax relief not clawed back - then 25% (£5,000) would be tax free and 75% (£15,000) would be taxable, so added to your rental income and taxed at 20%. Total UK tax £3,000.

The 75% would feed into Progressionsvorbehalt as it is exempted from German tax under the DTA. The 25% would be taxable in full as your income as it has not been "effectively taxed" in the UK. As it is fully taxed in Germany it would not feed into Progressionsvorbehalt. So, £15,000 would feed into progression and £5,000 would be taxed in full.

[GaryC]

Unfortunately, the amount will be taxed in full if you are tax resident in Germany. "Effectively taxed" in the UK means the payment has been "subject to" UK tax, i.e. it is taxable in the UK, even if no tax is ultimately payable because of some relief or allowance like the personal allowance.

A tax-free lump sum pension payment is what it says on the tin - tax free or tax exempt in the same way that ISA interest is tax exempt. The DTA therefore gives Germany the right to tax that amount as income. It is not subject to Progressionsvorbehalt as that applies to income that exempted under the DTA, which this is not, and so we turn full circle...

If you were minded to try to test it, I think you would need to show that all payments arise from the same underlying right, or contract, and that overall, the amounts arising from that contract are effectively taxed, albeit at an effective rate that averages the taxable and non-taxable elements, even though they are shown separately in said contract. Given that UK tax law exempts the payment from tax, I think the German FA may kindly and professionally, "show you the door".

Thank you, Gary. Do you happen to know how the German public health insurance would treat such a lump sum payment? I have a recollection that for the purpose of calculating Krankenkassebeiträge the health insurer would divide the lump sum payment by 120 and charge health insurance contributions on the going rate for 10 years on the resulting monthly amount.

Not my area on expertise but I recall having heard something along those lines. I am sure someone will know...

[Emkay]

Many thanks @GaryC