How Is My UK Pension Taxed Abroad?
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We’re passionate about providing free, high quality and up-to-date financial information to Expats around the world.
IN THIS ARTICLE, YOU WILL LEARN THE FOLLOWING:
How UK pensions are taxed abroad
The rules for UK residency
What an NT code is
How to claim your state pension abroad
How Double-taxation agreements work
Best practise for retiring abroad
Understanding the tax implications of your UK pension while living abroad is one of the most important issues faced by British expats around the world.
Failure to comply with international pension rules could lead to unexpected costs, tax bills and complications.
Whilst it can be a complex issue, it needn't be daunting when empowered with the right knowledge and guidance
Taxation for UK Residents Living Abroad
Your taxation status plays a significant role in determining the amount of tax you'll pay on your pension.
If you're considered a UK resident for tax purposes, your pension income will be taxed in the UK at the marginal rates of national income tax. Income tax on payments from pensions can be up to 45%, depending on the size of your income.
Generally speaking, if you live abroad and have the correct paperwork, you aren't required to pay UK tax on your pensions. However, simply moving abroad and becoming an expat doesn't automatically make you exempt from being classed as a 'UK resident' for tax purposes.
Statutory Residence Test UK
HMRC uses statutory residence tests to determine your status, which considers factors such as how much time you spend in the UK each year and if you have a home there.
The statutory residency tests used by HMRC (Her Majesty's Revenue and Customs) in the United Kingdom are used to determine whether a person is a UK tax resident, non-resident, or partially resident. Here's a brief overview of the key tests:
Automatic Overseas Test: If you meet any of the three automatic overseas tests, you are considered a non-UK resident for tax purposes. These tests include being in the UK for fewer than 16 days in the tax year (or 46 days if you were not UK resident in the preceding three tax years), having a full-time job abroad, or having no UK home.
Automatic Residence Test: If you meet any of the automatic residence tests, you are considered a UK resident for tax purposes. These tests include being in the UK for at least 183 days in a tax year or having a UK home where you spend at least 91 consecutive days, with at least 30 of those days falling in the tax year.
Sufficient Ties Test: If you do not meet the automatic tests, HMRC considers your ties to the UK, including family, accommodation, work, and more, to determine your residency. If you have significant ties to the UK, you may be considered a UK resident.
Split Year Treatment: In certain cases, HMRC allows individuals to be treated as UK residents or non-residents for part of the tax year if their circumstances change during the year.
These tests help determine an individual's tax obligations in the UK, including income tax and capital gains tax. However, make sure to consult with HMRC or a tax advisor to assess your specific situation and residency status accurately, as tax residency can have significant implications on your expat retirement planning.
Double Taxation Agreements
Thankfully, being an expat doesn't mean being taxed twice on the same income. With double taxation agreements (DTAs) between the UK and many other countries, you can avoid this scenario. These agreements ensure that any tax already paid in one country can be offset against any tax due in another.
The details of DTAs vary from country to country. Some agreements stipulate that the country where the pension originates has taxation rights; others say it's where the recipient resides. In some cases, both countries share taxing rights.
To utilise a double taxation agreement:
You must declare all your UK income to both UK and foreign tax authorities.
Apply for partial or full relief from UK tax on that income (see NT Code below).
If you qualify, HMRC will reduce or remove your UK tax based on the agreement with your country of residence.
Note, failing to report your income correctly could lead to penalties from both HMRC and foreign tax authorities.
As always, seeking advice from regulated professionals experienced in offshore financial planning can help you navigate these issues with greater peace of mind.
NT Code Explained (No Tax Code)
In the UK, an NT (No Tax) code is a tax code issued by HMRC to individuals who are not liable to pay UK income tax on their income. This code is used to ensure that an individual's earnings or pension income are not subject to UK tax when they are living abroad.
The NT code helps prevent Expats from paying UK income tax on money that is received from pensions while they are non-UK tax residents.
Without an NT code, your UK pension will likely automatically deduct UK tax from your pot. Claiming tax back from HMRC is an incredibly tedious process, and can take several months.
The NT Code acts as a signal to your pension provider that you are not subject to UK taxation, meaning funds from your pension pot are paid out gross and self-declared in your country of residence.
To apply for an NT code, individuals usually need to demonstrate to HMRC that they are non-resident for UK tax purposes. This typically involves providing evidence of their non-resident status, such as proof of residence in another country, the absence of significant ties to the UK, and other relevant documentation.
In most cases, HMRC will require a signed and stamped form from a chartered accountant or local governing authority to process the NT code.
Having an NT code is essential for individuals who are living abroad and want to ensure that they are not unnecessarily taxed by the UK government on their worldwide income. It simplifies the tax process and ensures that they are only liable for taxes in the country where they reside or earn their income.
However, individuals should always consult with a regulated professional or HMRC directly to ensure they are using the correct tax code and complying with all relevant tax regulations.
Tax Implications of Receiving a UK Pension Abroad
The tax implications when you get a pension and reside abroad hinge on various factors. Primarily, it's essential to know that income tax (not capital gains) is usually due on payments from pensions. This includes both private and state pensions, with the amount of income tax owed dependent on your total income for the year.
Above we have covered the NT code, DTAs and the statutory residence tests. With this information, you should find yourself in a position where tax is self-declared as income in your country of residence.
Note, income tax and personal allowances vary depending on residence and personal circumstances.
Different methods exist for paying taxes on pensions received abroad. You might pay through self-assessment or directly through your pension scheme depending on your situation.
Claiming State Pension Overseas
Claiming your State Pension while living overseas is not as complicated as it might initially seem. To claim your state pension abroad:
Check Your Eligibility: Ensure that you've reached the official State Pension age. You can use the online tool provided by the UK government to check when you can retire.
Claim Your Pension: Apply for your pension online or by phone. You'll need your National Insurance number and date of birth to hand when you claim.
Choose Your Payment Method: The Department for Work and Pensions (DWP) will pay your pension into a bank account in the country where you live or a bank or building society in the UK.
Decide on Payment Frequency: You can choose to receive payments every four or 13 weeks. However, if your State Pension is under £5 per week, you'll be paid once a year in December.
Once you've set up your State Pension payments, it's essential to report any change of circumstances to the International Pension Centre promptly. Such changes may include moving house, getting married, or if your partner dies.
Note: The amount of State Pension you get can increase each year but only if you live in:
The European Economic Area (EEA)
Gibraltar
Switzerland
Countries with social security agreements with the UK (not all countries have these - check with the UK government's website for an up-to-date list)
Best Practise When Taking Your UK Pension Abroad
UK pension taxation for expats isn't simple. A solid understanding of tax residency, double taxation agreements, residency tests and NT codes will make things easier.
Further understanding of how to claim state pension overseas and reporting changes to the relevant authorities will also aid the process.
Being aware of the above will help you stay ahead of any potential tax liabilities and maximise your retirement benefits.
Our advice to our clients is to diligently prepare and follow the framework provided. With careful and considered planning, the process is manageable.
For more information, do not hesitate to contact us at info@thewealthgenesis.com or schedule an initial consultation by using our online form.
The Wealth Genesis and our team of expert advisers can help with all things related to expat finances, with specialism in investment and international pension planning
FAQs
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No, however it might be a good idea to consider your options depending on your UK Provider.
Some UK pensions will only offer a lump sum payment, or fixed draw-down. In these scenarios, it’s often advisable to consider transferring to an International SIPP or QROPS. -
Typically, it takes between 3-6 months to complete the process and have the funds in your new international pension.
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We are currently seeing average waiting times of 3-6 months for Expats to receive tax rebates.
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In almost all countries, the procedure follows the same framework - tax on UK pensions is paid via self-assessment (providing you have received the payment free of UK tax!).
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In most cases, you can! Make sure to check with a regulated professional or chartered accountant, and do your research into the double-taxation agreements in place for your country of residence.
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The International SIPP can offer great flexibility and income options when compared to traditional UK Pensions. See our guide here, for the full verdict.
