UK Pension Income for Expats - Where do you Pay Tax and What is an NT Tax Code?

For international workers, holding assets in different countries can prove complicated. Different jurisdictions, with their own complex tax rules can be difficult to navigate. Drawing an income from a UK pension is no different.

A UK pension, including a Self-Invested Personal Pension (SIPP) is taxed at source in the UK. This means tax is deducted from any income withdrawals before the payment reaches the individual, using the PAYE system. The individual then receives the net payment to their bank account and any tax over paid must be claimed back through Self-Assessment, following the end of the UK tax year.

The UK has Double Tax Agreements with several countries which can help to clarify who has primary taxation rights on different assets held in either country subject to the tax treaty.

If you are resident in a country that has a Double Tax Agreement with the UK then you may be able to request that your income is paid gross, without UK tax. This could ensure you avoided the PAYE system but would require a change to your tax code with HMRC.

Changing Tax Status with HMRC – The NT Tax Code

You can apply to be treated as a non-resident directly with HMRC, completing the relevant form using the below link:

https://www.gov.uk/tax-uk-income-live-abroad/taxed-twice

It is essential to complete the corresponding form for your country of residence from the list provided on HMRC’s website.

A successful application to HMRC would result in a change to your tax code, with an ‘NT’ Tax Code, applied as a non-resident. Your pension trustee would receive confirmation from HMRC of the change and income should be paid gross, without any tax deducted.

However, it needs to be noted that for the change to apply, you must have already made an income withdrawal from your pension. Following receipt of your first income withdrawal, HMRC are notified that you are on the payroll with the pension provider, and they notify the pension trustee of any tax code changes.

The application process will take time, potentially several months, so it is important to plan well in advance of drawing income from a UK pension.

Receiving Pension Income

It is common for a nominal income payment (subject to the pension providers minimum) to be taken first, which notifies HMRC that you are on payroll. Once HMRC notify the pension trustee of the updated tax code, pension income is taken using your UK personal allowance.

The Personal Allowance for tax year 2021/22 is £12,570. However, this is applied on a pro rata basis for tax purposes. The current standard tax code for the current Personal Allowance is 1257L and an income payment of £12,570 would be taxed in the following way:

The Personal Allowance is added pro-rata over the course of the year, meaning a payment of £12,570 paid in the first month of the UK tax year (post 5^th April) would be eligible for 1/12th of the annual Personal Allowance (£1,047.50). This means that to receive an income payment equal to the UK Personal Allowance tax-free, the payment must be made in the last month of the tax year (March).

This article is meant for information purposes, and it is important to seek tax advice both in your country of residence and the UK before drawing income from a pension.

Managing assets in different locations is complex; Forth Capital have the knowledge and experience to provide a guiding hand on your financial journey. If you have found this article informative and require financial planning advice, please contact Forth Capital to review your pensions. We are happy to speak to any friends or colleagues who may also benefit from a financial review.