How to Avoid Double Taxation for Your UK Pension in Portugal

How to Avoid Double Taxation for Your UK Pension in Portugal

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Managing your pension when retiring abroad involves navigating complex tax rules. For British retirees in Portugal, obtaining an NT (Nil Rate) Tax Code is essential for efficient UK pension tax management and avoiding double taxation This guide explains what the NT Tax Code is, its significance for UK pension income in Portugal, and how to apply for one.

What is an NT Tax Code?

An NT Tax Code for UK Pensions ensures that pension withdrawals are paid gross, without UK income tax deductions. For UK residents, pensions exceeding the tax-free allowance of £12,570 p.a. (2024/25) are taxed under PAYE. However, if you reside in a country like Portugal that has a Double Taxation Agreement (DTA) with the UK, the NT Tax Code prevents you from being taxed twice.

Important Note: Although UK taxes are avoided, pension income must still be declared and taxed in Portugal under local rules. Consult a tax expert to align with Portugal pension tax planning requirements.

Why Do British Retirees Need an NT Tax Code for UK Pension in Portugal?

Retiring in Portugal offers benefits like mild weather and a favourable cost of living, but tax compliance remains a critical consideration. Here’s why the NT Tax Code matters for retirees:

  • Avoid Double Taxation: Without an NT code, UK pension providers deduct tax at source. This tax would need to be reclaimed while also paying Portuguese taxes.
  • Simplify Finances: Receiving gross payments allows for better financial planning.
  • Prevent Overpayment: The NT Tax Code avoids unnecessary deductions caused by emergency tax codes or PAYE rules.

How to Apply for an NT Tax Code

Step 1: Verify Your Tax Residency

Complete the appropriate Double Taxation Form to confirm you’re a tax resident in Portugal. Specific forms vary:

For Portugal and some other countries they are generic forms.

You’ll need details like your Pension Reference Number, which can be obtained from your pension provider.

Step 2: Submit Your Application to HMRC

See full guidance and access the latest forms at GOV.UK, click here.

If you’ve already left the UK, fill in form P85 online. If you haven’t already left the UK or don’t want to use the online system, download and fill in form P85.

The first step is now a series of questions which essentially take you through the UK Standard Residency Test, this is the UK a making sure that you are definitely no longer tax resident and therefore liable for UK taxes.

If you want to familiarise yourself with the SRT see the information on gov.uk, or click here.

Step 3: Processing Time

Expect a wait of 3–6 months for approval. Applying online minimises delays.

Step 4: Update Your Pension Provider

Once approved, the NT code appears in your Government Gateway account. Inform your pension provider to activate it.

Understanding UK Pension Tax in Portugal

Even after receiving your NT tax code, the initial pension withdrawal may still be taxed. This happens because the pension trustee must verify the NT code with HMRC before applying it. To avoid surprises, it’s recommended to test the system with a smaller withdrawal initially.

Each pension scheme requires its own NT tax code. If you hold multiple pensions, separate applications are necessary. However, consolidating these pensions into a single scheme may simplify tax management and administration.

It’s possible to withdraw up to £1,000 per month without an NT code and avoid UK taxation, provided no emergency tax code is active. However, such withdrawals do not exempt you from local tax obligations in Portugal, where your pension income must still be reported and taxed accordingly.

Eligible pensions for the NT tax code include UK Personal Pension Plans, Defined Contribution Schemes, and SIPPs (Self-Invested Personal Pensions), including International SIPPs. However, the NT code does not apply to QROPS (Qualifying Recognised Overseas Pension Schemes) as these should pay out on a gross basis.

By understanding these nuances, you can better manage your pension income, ensuring compliance with both UK and Portuguese tax regulations.

NT Tax Code: Essential step to avoid double taxation

Obtaining an NT Tax Code for UK Pensions is a vital step for British retirees in Portugal to avoid double taxation and simplify pension management. While the process requires patience, the long-term financial benefits make it worthwhile.

If you’re unsure about tax regulations, consult Ingenium Financial, experts in Portugal pension tax planning. We provide comprehensive, up-to-date and qualified guidance.  Ingenium Financial operate under a full EU licence (MiFID II), recognised by leading pension providers.

 

UK Pension Options in Portugal: New Rules Explained

UK Pension Options in Portugal: New Rules Explained

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The latest changes in UK pension options in Portugal can have a high impact on the approach you might choose to organise your financial matters  for the relocation.

UK Pension Options in Portugal: Key Impacts on British Expats 2024

With the recent UK Budget announcement, significant changes are underway for pension freedoms, especially impacting UK citizens living abroad. The 2024 updates alter how UK pensions, including Qualified Recognised Overseas Pension Schemes (QROPS) and Qualifying Non-UK Pension Schemes (QNUPS), can be managed and transferred, raising questions about inheritance tax and international pension mobility.

Have QROPS and QNUPS Been Stopped?

British retirees used to benefit from the European Union’s freedom of movement laws. It facilitated the transfer of UK pensions to EU countries like Portugal, Malta, and Gibraltar. However, following Brexit, this ease of transfer has been heavily restricted. The recent UK Budget changes mean that the Overseas Transfer Charge exemption, previously available for EU or Gibraltar transfers, has been REMOVED. This makes it more challenging for UK residents to transfer pensions to Malta or Gibraltar without a 25% tax charge, effective immediately from 30 October 2024.

QROPS and QNUPS were traditionally popular among UK citizens to avoid double taxation, gain currency flexibility, and benefit from certain tax advantages. However, recent restrictions mean UK residents and non-Malta/Gibraltar residents are limited in their use of these schemes.

Key Changes to UK Pensions in the 2024 Autumn Budget

The UK Autumn Budget includes changes that affect UK pensions, inheritance tax, and pension transfer options for expats. Here’s an overview:

  • Inheritance Tax on Pension Funds: Beginning in April 2027, unused pension funds will be included in estates for inheritance tax (IHT) assessment. This means that any unspent pension funds could be taxed up to 40% when passed to heirs.
  • End of the Overseas Transfer Charge Exemption: The 25% Overseas Transfer Charge exemption has been removed for UK residents transferring to EEA or Gibraltar-based QROPS. This is a significant change, as UK residents will likely face a tax charge if they attempt to transfer pensions to QROPS in Malta or Gibraltar.

Implications of the New UK Pension Rules

  1. Generational Wealth and Inheritance Tax: Previously, pensions were a way to pass wealth to heirs tax-free. Now, with unspent pension funds facing inheritance tax from April 2027, many individuals may need to revisit their estate planning strategies. This change could result in higher tax bills for heirs and reduce the appeal of using pensions as an inheritance vehicle.
  2. Changes to Tax-Free Cash Withdrawals: UK pensioners who transferred funds to QROPS could previously take advantage of larger tax-free cash allowances, particularly after the Lifetime Allowance was abolished in April 2024. Now, with the removal of the Overseas Transfer Charge exemption, this benefit is limited, especially for those not residing in Malta or Gibraltar.
  3. Income Tax on Pension Funds after Death: For beneficiaries of those who pass away after the age of 75, pension income is now subject to both inheritance tax and income tax. This effectively reduces the amount beneficiaries will receive and may necessitate a reevaluation of retirement income strategies.

Alternative Planning Strategies for UK Retirees

With these changes, it’s essential to consider other tax-efficient options for retirement and estate planning. Here are some steps to consider:

  • Estate Planning: Review how inheritance tax allowances, like the spouse exemption and the nil rate band, can be used to minimise IHT. Ensure that pension planning aligns with these allowances.
  • Alternative Investments: Given the tax implications of pensions, some may consider investing in Alternative Investment Market (AIM) or Business Property Relief (BPR)-qualifying assets. However, it’s important to note that the recent Budget also impacts these investments, so consult a financial adviser to discuss suitable options.
  • Non-UK Retirement Solutions: For those who can’t benefit from QROPS or QNUPS, other non-UK retirement savings and investment structures may offer tax efficiency while meeting retirement income needs.
  • Currently, anyone with a British “domicile” faces inheritance tax, or IHT, on their global wealth even if they live and die overseas, however the new system which replaces “domicile” with “residency” means most British living overseas for more than 10 years will not face IHT on their foreign assets. Therefore, despite the seemingly draconian step of including SIPPs in IHT assessment for those who plan well, this is a significant advantage. See separate full article here.

UK Pension Options in Portugal: Navigating Pension Freedom Post-Brexit

These regulatory changes, compounded by Brexit, mean UK citizens living abroad face a more complex landscape for pension planning. British retirees interested in transferring their pensions to a country with tax benefits, like Portugal, should seek advice from financial professionals experienced with international pensions and UK tax law to ensure compliance and tax efficiency.

Seeking Financial Advice

Contact Ingenium Financial for up-to-date pension advise and a variety of options. With full EU licence and chartered status, our Head Adviser provides high-value planning based on lean fee-policy.