How Are UK Pensions Taxed In Portugal?
LEARNING OBJECTIVES
We provide high quality, relevant and up-to-date financial advice to British Expats living in Portugal.
IN THIS ARTICLE, YOU WILL LEARN THE FOLLOWING:
Key changes to the NHR regime
How UK pensions are taxed in Portugal
How your tax-free lump sum is treated in Portugal
Best solutions for British Expats
If you're planning on retiring in Portugal, it's essential to gain an understanding of how your UK pension will be taxed.
The amount you’ll pay may depend on the type of pension you’ve received, or how the contributions were made. This can be complex, so navigating the differences between the Portuguese and UK tax systems will help you make the most of your pension pot.
Our guide will highlight all the key considerations for tax-efficient retirement planning for Portugal.
Key Changes To The NHR Tax Regime In 2024
Whilst the Non-Habitual Resident (NHR) regime was a major tax-efficient incentive for expats moving to Portugal, it closed for new applicants in January 2024.
If you secured NHR status before this change, the benefits may continue until December 31, 2033.
Be aware that UK government service pensions are excluded from these benefits and are taxed in the UK.
Tax On UK Government Service Pensions
If you received a UK government service pension, the payments will be exempt from Portuguese tax.
Instead, these types of pensions are taxed in the UK, at the standard income tax rates.
Tax On UK State Pension In Portugal
If you are a tax resident of Portugal you will be taxed on your worldwide income, and this will include any income from a UK state pension.
This type of pension income will be taxed at the standard Portuguese income tax rates.
Tax On Occupational Pensions
Occupational pensions, often provided by employers, are typically taxed as general income in Portugal.
If you made any personal contributions to your occupational pension, a more favourable tax rate may apply. The distinction between employer and employee contributions is important for determining the treatment of the pension.
Seek advice from a tax specialist to help you optimise your tax plan based on the specifics of your occupational pension.
Tax On Personal Pensions In Portugal
In Portugal, personal pensions are taxed under either your NHR tax rate, or under Portuguese income tax laws if your NHR has expired. For the pension to be treated as such under Portuguese tax law, employer contributions must be part of it.
As most UK pensions contain a mix of both employer and personal contributions, usually the income from these pensions will be subject to Portugal’s standard income tax rates.
Portugal Income Tax Rates 2024
The Portuguese income tax rates for 2024 peak at 48% as a marginal rate for income received over €81,199 per annum. For a full breakdown of income tax rates in Portugal, see our country guide here.
Tax-Free Lump Sum In Portugal
In the UK, pension holders can take a tax-free lump sum (known as a pension commencement lump sum, or PCLS) when they first access their retirement savings, typically up to 25% of the total pension value.
Note, your pension commencement lump sum is tax-free in the UK, not Portugal.
Be aware that if you take this lump sum after becoming a Portuguese tax resident, it will be taxed as income. To retain the tax-free benefit, it’s imperative to take this lump sum before relocating to Portugal.
Investment Income And Capital Gains Tax In Portugal
Portugal applies a 28% tax rate on most investment income, including gains from interest, stocks, shares, and bonds. Capital gains tax is also applied at a 28% rate on profits from asset sales, although only half of the gain on real estate is taxable.
Note that Portugal has a blacklist of tax havens, and any gains from investments held in these jurisdictions are subject to a penal tax of 35%.
The Portuguese Bond | A Tax Efficient Option
For UK expats in Portugal, the Portuguese bond is a tax-friendly savings and investment account that combines life insurance benefits with investment opportunities.
This solution allows qualified UK expats to benefit from a reduced tax rate of just 11.2% after holding the bond for eight years. For many expats and retirees, the Portuguese bond can offer substantial tax savings on investment income.
Speak to one of our advisers to see if this option is suitable for you.
Advice For UK Expats Retiring In Portugal
Navigating Portuguese tax laws can be difficult, especially when it comes to your retirement funds. The right planning will ensure that you preserve your hard-earned savings, so it’s important to work with a tax advisor who understands the complexities of both the UK and Portuguese tax systems.
