NT tax codes and tax on UK pensions abroad
If you are an expat with a UK pension scheme and hope to take an income soon, there is action you need to take before entering drawdown. Being an expat usually increases the bureaucratic burden both in the UK and where you are resident, so we've explained in this article how to be prepared, avoid nasty surprises and potential delays.
Every country has different pension regimes so always seek tax advice locally to understand tax rules on income from a UK pension scheme, including the 25% PCLS (pension commencement lump sum - aka tax free lump sum), as it may be tax free in the UK but could be subject to tax where you live now.
On receipt of income from your UK pension, your scheme informs HMRC and a tax code is applied to confirm what you pay. Unless HMRC or your pension are told otherwise, the default 1257 tax code is applied which refers the current tax-free allowance of £12,570 and means you pay tax at UK rates.
Regardless of whether your PCLS was taxed where you live, the remainder of the crystallised fund will likely taxed either at source or locally and you are responsible for finding out which applies to you. Even if a flexi-access payment is taken, your scheme may see it as a monthly income payment and over-tax you. Under the 1257L tax code a cumulative monthly amount of £1,047 (£12,570÷12) can be taken before being taxed at source and higher amounts will incur higher tax deductions.
Can I take pension income without UK tax?
After taking 25% PCLS the remaining 75% will be taxable. It is possible to receive income without being taxed at source using a ‘NT tax code’ from HMRC. NT indicates ‘nil-tax’ and facilitates tax exemption on certain types of income. This is beneficial for British non-resident expats who are liable for tax in other countries with double-taxation agreements (DTA) with the UK, that apply lower taxes on overseas pension income such as schemes on offer in Portugal, Cyprus and Italy. Many Middle Eastern countries where zero tax applies could also allow tax-free income.
A common error is believing that completing HMRC's P85 form telling them you are leaving or have left the UK is enough to receive your UK pension tax free. This is inaccurate as you may still be on the 1257L tax code and many countries also require additional paperwork.
If your tax code is 1257L and your PCLS has been taken, the next steps should be as follows:
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confirm your resident country has a DTA with the UK and what tax is paid on pension income
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confirm with your UK pension provider that they'll help you as an expat, allow you to start pension drawdown and make payments using your NT tax code (if they won't help, our team can advise on pension transfers to a suitable provider accustomed to working with expats)
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enter pension drawdown and have your NT tax code applied (remembering how much you can take before tax - a nominal amount is usually sufficient)
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complete either the Double Taxation Relief form, DT Individual form or use the links below to access additional forms for any of the following countries: Spain, France, Netherlands, Sweden, Germany, Switzerland, Ireland, New Zealand, Japan, USA, South Africa, Australia, Canada
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submit the form to the local tax agency to be officially stamped, confirming you are tax resident there and they (or you) should send the forms to HMRC (doing it yourself can avoid delays)
Receiving your pension tax-free
Once HMRC has completed your request they will notify your pension provider of the NT code, and you can then receive your pension drawdown without tax being deducted at source. Always be sure to satisfy your tax obligations locally to avoid complications with the authorities.
When seeking expat financial advice, always be sure to check you are dealing with firms that have licences in place and are fully regulated to provide pension and investment advice. The offshore market is littered with firms offering advice that is paid for by commissions from product providers, leaving investors at risk of sub-standard investments, liquidity issues and a lot of inconvenience.
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If you would like guidance on transferring your pension from firms possessing both MiFID and pension licences, and the credentials to give you the best possible levels of advice and protection, get in touch today and we’ll be happy to help.