Do I pay UK tax on my UK Pension?
How are UK Pensions taxed
Most UK pensions had an element of tax relief when you paid premiums into your policy which allowed your policy to have more money and therefore more growth. However when you hit retirement age the UK government would like that back.
All UK pensions are taxed at source, so any income you take after your pension commencement lump sum (PCLS) is taxed at standard UK income tax rates.
Pension Commencement Lump Sum
Once known as your Tax Free Cash, this applies to the first 25% of your pension pot. From a UK perspective this 25% is 100% tax free. You pay no tax on this when you take it out. You do not have to take the full 25% in one go, you can normally take it in tranches (depends on your pension provider, the Self Invested Personal Pension definately allows for this flexibility) It is worthwhile to note that the moment you take £1 from your pension, the pension institution "crystalizes" the 25% setting it aside, regardless of future performance. What do we mean by this, this example may help:
Your pension is worth £100,000. At age 55 you decide to take some of your pension. You opt to take £5,000. The pension institution will Crystalize your PCLS at £25,000 (25% of the £100,000). Let's say a year goes by and you have had phenominal growth in the policy and it is now worth £120,000. Even though you only took 5% of your pension out in income a year ago, you are not now entitled to the 20% on the new value. (which would be £24,000). You would still only be entitled to £20,000 tax free, as this was "Crystalized" when you took your first £1 from the policy.
If you are or were a UK National at one stage in your life then you are entitlied to a personal allowance in the UK. In the 19/20 tax year it is £12,500, keep an eye on the HMRC website for future changes to this.
This personal allowance is your tax free allowance from income tax in the UK. If your UK state pension equates to £5,000 per annum, then in theory you could take £7,500 from your UK pension and not pay any tax in the UK. If you take any amount beyond the £12,500 then you pay UK income tax.
Emergency Tax Rates
When you take any income from your pension, there is a fairly good chance that your pension institution will hold back tax based on emergecy tax rates and potentially not even take into account your personal allowance. They see the Expat status of the client and they assume the worst case scenario knowing that if it is incorrect you can take it up with HMRC and request a refund.
Reclaiming UK Tax paid on pension income
There are two forms that can be utilised for this, the first is the R43 form which can be found on the HMRC website here. This form can be submitted to HMRC and they usually investigate and refund within 21 days.
The alternative form serves two functions and is explained in the next section.
Mitigating UK Withholding tax
There is a simple way to avoid all the headaches with HMRC and UK tax. The NT Tax code. There is a way to fundamentally wipe your UK Tax Code for UK pension purposes only so that the tax paid on any income you take only is declared and paid in the US. Basically all income from your UK pension is paid gross of tax. This same process allows you to reclaim any tax which you have over paid on any income you have taken.
It doesn't work for every country as the Dual Tax arrangement is not as solid in other countries but it does work for the US and Canada. There are some specific forms and there is a process to follow. We believe it would be better to explain this in more depth via a free consultation. Feel free to contact us if you want to know more, we would be happy to assist you.