How a Pension is taxed overseas & Double Taxation

Figures vary but more than 200,000 people emigrate overseas each year and the tax on UK pensions is potentially confusing but vital in financial planning.

If you emigrate to live abroad you should review the rules of residency. If your permanent home is abroad then you should consider the implications of non UK residence.

Non UK residence will mean that you will only be charged to UK income tax on your UK source income.

Overseas income is totally exempt from UK income tax. UK tax legislation also allows exemption from UK tax for various forms of UK income that is received by non UK residents.

If non UK resident and in receipt of UK interest or dividends you should able to receive them free of UK income tax after completing the appropriate forms.

Pension income is treated in a similar way. Unless you inform HMRC of your non UK residency, UK income tax will be deducted from your pension income at source. So long as the UK has a double taxation agreement with your new country of residence you may be able to receive the pension income without UK tax deductions. The income tax becomes payable in your new residence which can be beneficial.

Double tax treaties:

Double tax treaties essentially create a fair taxation regime so you only pay tax on pension income (and various other factors of the taxation system) in one country. This prevents two countries taxing the same income.

Most double taxation treaties make a distinction between government service pensions and non-government service pensions and how they are taxed.

Government Service Pensions.

Most treaties such as France, Portugal & Spain state:  

Where a pension is in respect of: - ‘services rendered to the UK government or a local authority, it is taxed in the UK. There would then be no tax in France, Portugal or Spain on the pension unless you were a national and resident of that country.

 Governmental pensions:

These are pensions paid in for pensionable employment with HM Forces, Civil Service and Foreign and Commonwealth Office are all regarded as Government Service Pensions. Similarly any local authority pensions fall within this category.

National Health Service Pensions are not regarded as Government service pensions for the purposes of most Double Taxation Agreements.

The state pension is usually taxable in the UK but many Double Taxation Agreements allow you to claim exemption from UK income tax for the state pension. 

Where Pensions are taxed:

Some countries that allow you to be exempt from UK income tax even on UK government service pensions are:

• Australia
• New Zealand
• Cyprus

UK state pension:  where the UK state pension is taxed

As you'll see in most cases the state pension can be taxed in the overseas country of residence. 

Claiming UK exemption

If you want to claim relief from UK income tax deducted at source on pensions you'll need to complete a claim form that is available from HMRC.