UK tax on foreign state pension

[Amaryllis]

I'm a dual citizen and, during my entire working life, I paid national insurance contributions both in the UK and my country of birth. As a result I now receive state pensions from both countries. 

I didn't realise that the pension age in the other country is much lower than in the UK. As a result I received a lump sum to make up for the 5 years I had not claimed - over £20k.

How do I account for this in my tax return? I'm concerned that this will put me in a high tax bracket as I have other income. Is there any way around this, eg by spreading the lump sum over several tax years?

[Kantwebefriends]

The classic way to avoid income tax is to make contributions to a pension. That would be limited to £3,600 p.a. if you have no earnings.

AIUI, "earnings" means pay, plus income from holiday lets. "Earnings" does not include interest, dividends, pension payouts, rental income, ....

[UncleEbenezer]

How do I account for this in my tax return? I'm concerned that this will put me in a high tax bracket as I have other income. Is there any way around this, eg by spreading the lump sum over several tax years?

Can't help with the tax accounting side of it, but if that £20k is an unexpected windfall, perhaps invest it tax-efficiently? Either VCT or EIS tax breaks could serve you nicely.

The classic way to avoid income tax is to make contributions to a pension. That would be limited to £3,600 p.a. if you have no earnings.

AIUI, "earnings" means pay, plus income from holiday lets. "Earnings" does not include interest, dividends, pension payouts, rental income, ....

I don't think that's right. The £3600 limit is what you can claim "tax relief" on if you haven't paid tax. There's a much higher limit (usually £40k) on what you can claim relief on for tax actually paid. That's on all income, whether earned or unearned. Thus pension contributions work if you find yourself in the higher-rate tax bracket but by a margin of not more than £40k. The fly in the ointment is that that limit reduces to £4k once you start drawing a pension in the UK.

[Alaric]

That's on all income, whether earned or unearned.

Unearned income, which in this case includes pension income, doesn't entitle the recipient to make pension contributions.

It may be that HMRC would allow the back payment of foreign pension to be spread over previous tax years. That's worth checking anyway.

[Amaryllis]

"It may be that HMRC would allow the back payment of foreign pension to be spread over previous tax years. That's worth checking anyway."

That would be great if this is possible. How though? I guess I'll have to ring HMRC.... Sigh.

Or do any of you kind people know?

[genou]

You need to check the Double Taxation agreement between the other state and the UK to see where the foreign pension is taxable before you go any further. Or fess up where it is and I can check for you.

[Amaryllis]

Okay, I thought I would post the outcome in case anyone is interested.

I spoke to a very nice lady at HMRC's technical department who consulted with someone 'higher up', and I was advised to declare the entire sum in my 2019-20 tax return and write a letter asking for the 2018-19 portion to be spread back and adjusted in the 19-20 tax year.

Apparently this somewhat convoluted way of dealing with this is the only way of dealing with my 'unusual' situation.

[And yes, there is a double taxation agreement...]