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How is Your UK Pension Taxed Overseas?

May 22, 2024 | Advice, Europe, Financial Planning, North America, Pensions, Randal Stephens, Retirement, Tax

How is Your UK Pension Taxed Overseas?

May 22, 2024 | Advice, Europe, Financial Planning, North America, Pensions, Randal Stephens, Retirement, Tax

Navigating bureaucracy is often a challenge when living abroad, whether you’re dealing with matters in your new country or managing affairs back in the UK. A clear understanding and proactive approach can greatly help. This article explores the complexities of receiving UK pension income while living overseas, focusing on how to receive it without tax deductions by HMRC.

What Happens When I Receive Income from My UK Pension While Abroad?

When you receive income from a UK pension, your provider informs HMRC, which assigns a tax code to determine your tax liability. By default, unless specified otherwise, the standard tax code is 1257L, reflecting UK tax rates and providing a tax-free personal allowance of £12,570.

If you’re drawing the entire amount, the initial 25% of your pension, known as the pension commencement lump sum (PCLS), is tax-free in the UK. However, tax implications may vary based on the regulations in your country of residence.

Even if you withdraw an amount below the personal allowance, the pension scheme may still tax it as a regular monthly payment due to flexi-access rules. Seeking advice from a financial professional is recommended when considering pension drawdown.

How Can I Receive My UK Pension Overseas Without UK Tax?

Non-UK residents can apply to HMRC directly to get an NT code.

What Is an NT Code?

The NT code means “nil-tax,” which exempts specific income from UK tax. For non-residents, this exemption is possible if a double-tax agreement (DTA) exists between the UK and your country of residence. 

How Do I Get an NT Code?

Simply filling out a P85 form won’t guarantee an NT code. This form informs HMRC of your non-UK resident status but doesn’t automatically result in an NT code

Usually, non-UK residents with UK income who live in a country that has a DTA with the UK can apply for an NT code for pension income.

After confirming the DTA between your country and the UK, you should transfer your UK pension into the drawdown. Ensure that your pension provider can apply the NT code for income payments. A SIPP provider experienced with non-UK residents might be helpful.

If you’re still a UK resident and over 55, you might consider taking the PCLS, which is a 25% tax-free lump sum. However, be mindful of possible taxation in your destination country. After taking the PCLS, the remaining 75% can be put into drawdown.

Which Form Should I Use to Apply for an NT Code?

After taking the PCLS, the next step is to apply the NT tax code to your pension drawdown. With the 1257L code, you can withdraw up to £1040 monthly without UK tax. To obtain the NT code, complete the Double Taxation Relief form (DT Individual form) with your pension information. This form should be validated by your local tax authority to confirm your tax residency.

Once HMRC approves the form, they’ll instruct your pension provider to apply the NT code to your drawdown, allowing you to access your pension without UK tax withholding.

We are independent financial advisors who collaborate with UK pension providers specialized in assisting non-UK residents. Feel free to reach out for help with your UK pension or other financial planning needs as an expatriate.

Sources: ABRDN Techzone; Expat Advisors .com; Curtis Banks on PCLS; HMRC on Tax Codes; BritExpatFinance

Written by: Randal Stephens – Independent Financial Adviser

This communication is for informational purposes only based on our understanding of current legislation and practices which are subject to change and are not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.

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