The first thing to do is to find out the real nature of the German pension. Is it a state pension; a pension from a German employer following disability; or a private pension taken out by the individual in the event of disability?
You will also have to understand what triggered the payment, for example, accident at work.
In broad principle UK tax legislation (taken into the tax credits rules) follows to treat foreign income as if it were the UK equivalent. So if it were a state DLA type payment it would be exempt too. There are also exemptions for particular types of disability event pensions.
The worst situation would be if were treated as an ordinary foreign pension; but even in this case you would get a 10% deduction which applies to all foreign pensions.
If you want to find out the facts and then post them to our website; we'll track down the applicable tax/tax credits rule. www.litrg.org.uk
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