If you are a non-tenant of the UK, you do not have any UK tax on overseas pensions, i.e., pensions from outside the UK. UK pensions are spared from UK tax. According to the double tax treaty, the country where you are residing can tax your pension income. Different conditions and terms are set with different countries in the double tax treaty.
Our tax consultants have explained everything in detail to help you pay less tax on UK pensions.
If you were a former local authority or a government employee living abroad, your pension would be taxed in the UK. But if you become a permanent resident of any foreign country, the right to tax the pension can be shifted from the UK to the country you are residing.
What is a Government Pension?
The state pension is not a government pension. Government pensions are paid to former employees:
- Any UK public body or local authority like Council pensions and Police pensions.
- The UK Government officers, e.g., the Civil Service.
Government Pensions – What the Tax Treaties Say
UK government pensions will be spared from UK tax if you reside in the following countries:
Albania, Australia, Argentina, Canada, Fiji, Cyprus, the Isle of Man, Netherlands, Guernsey, Jersey, Papua New Guinea, Tunisia, and New Zealand. For instance, if you are a resident of the Isle of Man, your UK government pension will be taxed in the Isle of Man.
According to the double tax treaty, UK government pensions are spared from UK tax if you are a national and resident of a foreign country. These states include Bahrain, Belgium, Barbados, Bosnia-Herzegovina, Bolivia, Bosnia-Herzegovina, Bulgaria, Botswana, China, Denmark, Croatia, Ethiopia, Estonia, Finland, France, Georgia, Ghana, Germany, Guyana, Iceland, Ireland, Indonesia, Italy, Jordan, Japan, Kazakhstan, Kosovo, Korea, Kuwait, Lesotho, Latvia, Libya, Lithuania, Malaysia, Montenegro, Macedonia, Moldova, Malta, Mexico, Mongolia, Norway, Poland, Pakistan, Oman, Russia, Qatar, Serbia, Saudi Arabia, Slovakia, Sweden, Singapore, Slovenia, Spain, South Africa, Switzerland, Taiwan, Thailand, Tajikistan, Turkmenistan, Trinidad & Tobago, Turkey, Ukraine, Zimbabwe, Uganda, Uzbekistan, USA, Vietnam, and Zambia.
For example, if you live in Germany and are a German national, then the UK Government pension will only be taxed in Germany.
Occupational Pensions and State Pensions
When you become a non-resident, different tax treaties state that private sector state pensions, occupational pensions, and other pensions are spared from UK tax. This means they are only taxed in foreign countries where you reside now.
Tax Treaties – Beware the Fine Print
Tax treaty differs in the tax treatments of pension income. The OECD tax model states that: “Pensions and another kind of payment (remuneration payment) funded to an occupant of a Contracting State related to earlier employment shall be chargeable (taxable) only in that State.”
This is a standard rule found almost in every UK tax treaty. If this clause is present, any person with a UK pension residing in any other country will be taxable to that country. If any tax is paid in the UK, it can be refunded. Pension payment includes traditional pension, annuities, and other payments (remuneration payments) consisting of lump sums and non-periodic payments from pension schemes.
The term “in concern of past employment” means articles that do not cover employment-related pensions. For example: Person who worked independently and performed personal services like contractors. Various UK double tax treaties consist of this term, and the rest extended this scope of the article to cover all the ranges of pensions.
People who belong to money purchase (defined contribution) pension schemes will use the “Flexi-access drawdown” after retirement instead of buying an annuity. This tells that they can withdraw much money from their pension whenever and how much they need. These uneven lump sum earnings will be taxed under a double tax treaty.
Social Security Pensions
In double tax agreements, “Social security pensions” (like the UK state pension) fall under the “Other Income” article. This other income article is usually taxed in the occupant’s country. Still, many tax agreements like the UK’s treaty with Germany describe that pensions are taxable in the state that makes payments. Many private pensions are not covered in the core pension article. In these cases, the revenue will be taxed under the “Other Income” article. The rest will be taxable in the state where you are residing.
Applying for Tax Treaty Exemptions
Private pensions will be deductible by the pension source (the provider) under PAYE terms. The Work and Pensions department does not subtract tax from the state pension but taxable income.
The PAYE tax deducts your occupational or private pension so that your (tax-free) personal allowance is allotted against your state pension. This also helps to lessen personal allowance for your other income. If you enjoy more than one private pension, your allowance is allotted with another allowance taxed at 20% using an introductory rate (BR) code.
If you are permitted to get free of tax UK pensions, you can claim tax deductions stopped. You need to complete the DT-Individual form if you want to request a refund or tax deduction from HRMC. The following countries’ tax offices will stamp your form and return it to you to hive to HMRC:
- South Africa
- United States of America
HMRC will issue your pension provider an NT tax code if they accept your request. This allows your pension provider to make tax-free pension payments.
If you are 55+ age, you can withdraw from your pension as much as you want. There are two methods you could do this:
- (UFPLS) Uncrystallised funds pension lump sum
- Flexi-access drawdown
With this uncrystallised funds pension lump sum (UFPLS), you can take your whole pension score as in one go or take a sequence of smaller lump sums. Every lump sum will have a 25% tax-free portion, the rest taxed as pay if you’re a UK resident.
With flexible-access drawdown, one quarter that is 25% of your pension savings can be taken as tax-free cash. Flexi-access drawdown lets you take your tax-free amount on its own, deprived of any extra taxable income. The residual 75% continues to rise tax-free in your drawdown fund until you extract it. You can extract as many earnings whenever and how much you like. If you are a resident of the UK, all of these removals from the remaining 75% are fully taxed.
State Pensions – Further Issues
Though state pension is taxable, UK income tax gives you relief below in double tax treaties. Your state income can also be excused from UK tax under the “disregarded income.” This permits you to enjoy tax-free dividends, interest, state pensions, and different sorts of income.
You get yearly growths if you reside in:
- Countries having a social security contract with the UK.
- Switzerland and the European Economic Area (EEA).
If you live outside these premises, you would not be eligible for any rise in your state pension. But, if you return to reside in the UK, your state pension will be increased to current levels.
Voluntary National Insurance Contributions
When you live in foreign countries, you can create voluntary national insurance aids to make up for your state insurance score holes. This will permit you to collect a better state pension.
There are two kinds of voluntary contributions: Class 2 and Class 3.
- Class 2 contributions are much cheaper: £159. You can pay them if you are self-employed or employed abroad and worked in the UK instantaneously before departure.
- In class 3 contributions, you must have lived in the UK for three years before you paid contributions or paid a set amount in national insurance contributions for at least three years.
If you spent time in EEA countries or turkey, these conditions might help you out.
Though your pension may get rid of UK tax, it is also vital to consider the foreign tax implications. Any person may give less tax or more tax than they would in the UK. It depends upon where you choose to live. Couples may cut their tax bills by shifting to a nation that has lesser tax rates or allowing them to split their pension income. It is also denoted as combined valuation.
Pension Lump Sums
UK inhabitants can take 25% of their pension investments as a tax-free lump sum. In certain nations, these expenses are taxable. Though this is not tax-efficient, it may be better to take your lump sum before you leave the UK.
Pension Contributions when Non-UK Resident
You can continue contributing to a UK pension scheme and relish tax relief for a restricted period if you become a non-UK resident. However, rules say that tax relief is available as long as you join the pension scheme in the UK. But you can remain to make UK pension offerings for up to five tax years next to the tax year in which you become a non-UK resident.
Double Tax Treaties and Pension Contributions
If you are working for country A, you cannot contribute to the pension of country B and enjoy tax relief in country A. Still, the UK’s tax treaties permit non-UK residents to contribute to UK pension schemes and get tax relief while residing in the country they are working. This scheme is for those who do not plan to emigrate forever and wish to keep their retirement savings.
Schedule a free 15-minute consultation session for more information on paying taxes at IBISS & CO. We are leading chartered accountants and tax consultants serving clients from London and Walsall. Contact us now to schedule your appointment.