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Tax on UK pension income for overseas residents

10/05/2023

UK tax is due on UK income regardless of whether an individual is UK resident or lives overseas. This includes income from wages, rental property, savings interest and pensions. 

A UK pension provider will therefore tax and report any pension income for an overseas resident under normal UK rules. Initially, this means that income will be taxed using the emergency tax code (currently 1257L) on a Week 1/ Month 1 basis (unless a P45 is provided). 

HMRC then assess the income that is paid and issue a new tax code as appropriate. Detailed information on how UK pension income is taxed can be found in the CWG2 guide to PAYE and NIC.

Double-taxation agreements

Most countries will tax their residents on income arising from overseas. This means that overseas residents can find that their UK pension income is taxed in both the country that they’re resident in, as well as in the UK.

Fortunately, the UK has agreed a ‘double-taxation agreement’ with many countries. Depending on the terms of the treaty, this can allow an overseas resident to:

  • Claim full or partial relief from UK tax
  • Claim a refund on UK tax already paid whilst resident overseas

The double taxation digest provides an overview of the territories with which the UK has a double-taxation agreement. It also includes high level details of the types of UK income on which relief can be claimed, such as pensions.   

Claiming under a double-taxation agreement

To claim under a double-taxation agreement, an overseas resident will need to complete a claim form. Australia, Canada, France, Germany, IrelandJapan, New ZealandNetherlands, South Africa, Spain, Sweden, Switzerland and the United States of America all have their own forms. For other territories, the standard claim form should be used.

Once the form has been completed, it should be sent to the tax authority in the country where the claimant is resident. They’ll confirm eligibility and either send the form to HMRC or return it to be forwarded on (using the address on the form).

How tax relief is provided on UK private pension income after a successful claim 

Once a successful claim is made under a double-taxation agreement, HMRC will issue the individuals UK pension provider with a ‘NT’ (No Tax) tax code. This will instruct the pension payer to stop deducting any UK tax from future pension income.

If the tax code is issued on a cumulative basis (not a ‘week 1/month 1’ basis), the pension provider will usually be able to repay any UK tax they have already deducted within that tax year alongside the next income payment.

Where the pension provider is unable to repay previously deducted UK tax, the individual will need to claim this back from HMRC directly. 

Comment 

Many people dream of retiring abroad and for those that manage to do so, sorting out their finances can be complicated. Often, individuals will need to get to grips with the tax situation in the country they have moved to, plus work out how their UK assets are affected.

Most UK ex-pats will rely to some degree on a UK pension. As well as looking into the taxation aspect, they will need to ensure that they have a suitable bank account that can receive UK pension income and understand how they convert this to their local currency. For those emigrating to Europe, this has become more complicated since Brexit, although there are a number of currency conversion services that may be able to help.       

Important Information

Please note this is for general information only and is based on LV=’s understanding of the relevant legislation and regulations and may be subject to change.

The tax treatment of benefits depends on individual circumstances, and may be subject to change in the future.

The use of this document is at your own risk, and the content should not be used for the provision of professional advice.

LV= accept no liability for any damages, losses or causes of action of any nature arising from your use of this document.