Taxing UK Pensions Abroad and NT Tax Codes
If you are an expat, have a UK pension scheme and are now looking to take an income, there are things you need to know and need to do before entering drawdown. Being overseas usually increases the bureaucratic burden both in the UK and where you live, and this article highlights how to plan ahead, be prepared and avoid unwanted surprises and delays.
Every country has its own pension rules and we always recommend seeking tax advice locally to determine the tax implications on income from a UK pension scheme. This also includes on your 25% PCLS (pension commencement lump sum - aka tax free lump sum), as it can be paid tax free in the UK but could be subject to taxes where you live.
When you receive income from your UK pension, your scheme provider informs HMRC and a tax code is applied to determine what you pay. Unless HMRC or your scheme are informed otherwise, the default tax code applied is 1257L (referencing the current tax-free allowance of £12,570) meaning you’ll pay tax at UK marginal rates.
Although your PCLS would have been paid tax-free in the UK and regardless of whether it was taxed where you currently live, the remainder of the crystallised fund will likely be subject to tax either at source or locally and you are responsible to understand which applies to you. Even if you take a payment under flexi-access rules, your scheme may assume it was a monthly income payment and tax you accordingly. Under the 1257L tax code you can take a cumulative monthly amount of £1,047 (£12,570÷12) before you are taxed at source, higher amounts will incur tax deductions.
Can I Take My Pension Without UK Tax?
Once your 25% PCLS has been taken the remaining 75% will be taxable. It is possible to receive income without being taxed at source by requesting a ‘NT tax code’ from HMRC. NT indicates ‘nil-tax’ and means individuals can be made exempt from tax on certain income. This works well for non-resident expats who are liable for tax in other countries with double-taxation agreements (DTA) with the UK, but that apply lower taxes on overseas pension income, such as the current offerings in Portugal, Cyprus and Italy. Residents of many Middle Eastern countries where zero tax applies could also benefit.
There is a common misconception that by simply completing a P85 form informing HMRC you are leaving or have left the UK that you can receive UK pension tax free. This is incorrect as you may still be on the 1257L tax code and there are many countries that require additional specific forms completing.
If you are on 1257L and assuming your PCLS has been taken, the next steps should be:
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confirm your country has a DTA with the UK and what tax rates apply to pension income
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confirm with your UK pension provider that as an expat, they’re happy to assist you, allow you to enter drawdown and make payments using your NT tax code (if they can't assist you, we'll help transfer your scheme to an ‘expat friendly’ provider accustomed to working with non-residents)
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activate pension drawdown to have your NT tax code applied (see notes above on how much you can take before being taxed - a nominal amount will usually suffice)
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complete either the Double Taxation Relief form, DT Individual form or use the following links to access the relevant forms if you are resident in any of these countries: France, Spain, Netherlands, Sweden, Switzerland, Canada, Ireland, New Zealand, Japan, Germany, USA, South Africa, Australia
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submit the form to the local tax authority for an official stamp confirming you are tax resident in that country, and check whether you or they need to forward the forms to HMRC (as doing it yourself may help avoid delays)
Receiving Tax Free Income
Once HMRC approves your request they will notify your pension provider the NT code can be applied, and you can then enjoy flexi-access drawdown without tax being deducted at source. However, always be sure to satisfy your obligations locally to avoid complications with the tax authorities.
As always when you take expat financial advice, be sure to check that the firm you are dealing with has the correct permissions in place and are fully regulated to provide investment and pension advice. The offshore market is still awash with advisory firms working on a commission basis, putting investors at risk of poor performance, limited liquidity and lot of inconvenience.
If you would like to speak with a fully qualified and regulated advisor, get in touch today and we'll get you the help you need.