Everything you will have done during your life to make provision for your retirement will need to be reappraised if you are thinking of moving to Portugal. In most cases, this will be time well spent, as Portugal is not only attractive from a living perspective – it also has many attractions from a tax and financial point of view as well.
This should never be left until after you have relocated - certain financial changes will need to be made before a move and others soon after you have arrived. And in particular, when it comes to the Portuguese and UK rules, these would normally coincide in your favour, as well as the wording in the UK/Portugal Double Tax Treaty which in many cases offers up significant tax savings around pension income.
You will need to make sure you have satisfied the Portuguese visa and residency permit requirements which, since Brexit, need to be applied for before you leave. You will also need to make sure you are regarded as Portuguese tax resident and not still UK tax resident.
Pensions in the UK
UK pension rules were significantly revised in 2015 with the introduction of ‘Pension Freedoms’ – a widening of the rules around pension fund investment choices and the form in which you could take your pension (including annuity, cash withdrawal, retirement income products, or a combination of all of these).
The 25% tax-free lump sum commutation available in the UK is not reflected abroad, so if this is what you want then make sure you take this before you leave.
Portugal and UK pensions
The Double Tax Treaty between the UK and Portugal follows the OECD template, with both company and private pensions deemed taxable where you reside, not where the pension is located. The opposite of this is UK government and local authority pensions, which always remain taxable in the UK and not Portugal.
Pensions taxable in Portugal are taxed at normal income tax scale rates between 14.5% and 48%. But there is a special tax regime available to UK nationals called the Non-Habitual Residence (NHR) regime, where you only pay a fixed 10% tax rate for the first 10 years of residence.
Non-Habitual Residence (NHR)
Portugal’s NHR regime offers new residents (and anyone who has not been Portuguese tax resident in the previous five years) a preferential tax system for the first ten years of residence. Application should be made by no later than the end of March following the year in which you took up residency in Portugal, to lock in these significant benefits. Miss this deadline and you may not qualify for NHR.
Under NHR, most foreign income, certain capital gains, interest and dividends can be taken tax-free in Portugal. Key exceptions are UK government service pensions and rental income, which remain taxable in the UK. Non-habitual residents employed or self-employed in Portugal in certain ‘high added value’ professions can also benefit from a flat 20% income tax rate.
Since 2020, NHR includes a flat 10% tax on foreign pension income and withdrawals (including regular withdrawals or a single lump sum commutation of the whole pension fund). However, those who secured non-habitual residency before April 2020 can continue to receive most UK pension income tax-free for the remainder of their ten-year period.
This can apply even if the income is not actually taxed in the home country. For example, UK dividends (excluding gains on UK shares) escape Portuguese taxation under NHR because they are taxable in Britain under the UK/Portugal Double Tax Treaty. In practice, however, the UK’s ‘disregarded income’ rules can eliminate a UK tax liability on non-residents. As a result, you could end up paying no tax – in either country – on UK dividend income.
Tax on foreign pension income
As the UK/Portugal Double Tax Treaty states UK government service and local authority pensions remain taxable in the UK, these pensions cannot benefit from the NHR rules.
People of any nationality (including non-EU/EEA citizens) can potentially qualify for NHR and the 10% tax for 10 years on pension income or lump sum(s) if they have not been resident in Portugal within the previous five calendar years.
This could apply to company Defined Contribution schemes or Self-Invested Personal Pensions, or their offshore cousin, Qualifying Recognised Overseas Pension Schemes (QROPS).
There is a lot to take in and be aware of and these are really only examples. Good planning can ensure you minimise the tax that impacts you and it helps to do so with specialists in this area. Blevins Franks have advisors based in the UK and Portugal so please complete the form to download our Guide to ‘Pensions and the implications for your retirement in Europe’. If you are seeking advice and guidance as you plan your move, please complete the enquiry field on this page or contact us via blevinsfranks.com.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.
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