If you have you’ve probably paid too much UK tax.
Non resident pension tax relief is available if you no longer live in the UK and pay tax on a UK pension, including the cash lump sum option. Government and state pensions are included in these arrangements. If you have left or are leaving the UK in the future taking time to check your tax position is definitely recommended.
Why would I overpay tax if I cashed in my UK pension?
When you cash in your pension it is often the case that you are taxed too much in the tax year you are paid your pension lump sum. Normally the first 25% of the pension lump sum is tax free under PAYE, with the remainder taxable at the taxpayer’s marginal rate. The tax code of BR (AKA emergency code) is often used which does not take into account your tax free personal allowance often resulting in an overpayment of income tax.
Does it matter what country I’m living in?
Yes, the UK government negotiates separate Double Taxation Agreements with each individual country. They are designed to benefit the residents of both countries by ensuring that tax is only paid once on certain things, like pension income. If you live in a country without such an agreement, you could end up paying tax in that country and the UK at the same time. They’re a great idea and really enable people to choose where they would like to live, without the fear of paying double tax bills.
As the agreements are specific to the UK’s relationship with each country, you do need to check the exact details that are relevant to wherever you have emigrated to.
Here is a current list of countries with double taxation treaties with the UK . It includes some details about the types of tax relief that are available.
What do I need to do first?
The most important first step is to clarify that you are UK non resident for tax purposes.
The regulations surrounding your tax status are complicated, with many moving parts to slot into place. There’s your domicile status, which is to do with where you live for the majority of time. Your residency status is impacted by the conclusion of your domicile status and the tax situation is calculated from there. Yes, it’s confusing and professional advice is highly recommended.
Will this mean I need to fill in a tax return?
If you are eligible for a non-resident pension tax rebate, you sometimes have to complete a self assessment tax return.
The good thing about this extra paperwork is that you can combine any other tax reliefs you’re entitled to at the same time. As a UK non resident you may be entitled to tax relief for a number of reasons. For example, paying UK income tax when you are not living in Britain, you earn income from letting property in the UK, overseas workday relief and secondment to Britain by a non-British employer.
All of these tax reliefs can be backdated for four UK tax years, so make sure that you make enquiries as quickly as you can. We don’t want anyone paying non resident tax on their pension payments if they shouldn’t be, or paying it at an unfairly high rate. Once is all sorted and you have received your legitimate tax rebate, your future pension tax situation will be resolved. So if you’re one of the many British expats that have cashed out their pension, look into your tax position as soon as possible.
