Paying Tax On Uk Pension If Uk Non-resident

[sinom]

On behalf of a retired friend of mine.

Basic situation

- Retired (early) about six years ago and has been living in Thailand. Pension is paid out of the UK. UK taxman deducts tax from the pension payments.

Is it neccessary to pay the tax and is there any way out of paying it?

any experiences / advice ?

thanks

[GuestHouse]

UK Pensions payments are taxed at source - only fair given that contributions to UK pensions are tax free (and the growth throughout the life of the pension has been on that tax free sum).

If your friend is already in receipt of his pension then there is nothing much he can do about the tax. If he has not received his pension yet he can elect to take a tax free sum of upto 25% of his pension fund - however this drastically reduces the long term payout value so he should take professional advice before doing so.

On the bright side, if he's paying tax, he is at least receiving his personal pension - more than very many UK retirees.

Also if he retired early he may not have paid up his state pension, I suggest he looks at that, as this may impact his total income.

[fletchsmile]

UK Pensions payments are taxed at source....

If your friend is already in receipt of his pension then there is nothing much he can do about the tax...

The first statement highlighted above by GH is only partially accurate. The second statement highlighted above by GH is dangerously inaccurate, and your friend could well end up losing out if he acts on it. Pensions are taxable. But:

1) State pensions are paid without tax deducted. Company and personal pension schemes are usually paid after tax is deducted. Hence first step would be to clarify what pensions he is talking about.

2) For people who pay low rates of tax, there are possibilities to claim back tax for certain types of pensions. Bear in mind also that there are personal allowances that can be set off, which are more favourable for older people.

3) If you don't pay tax you can get in touch with your pension provider and have retirement annuity payments paid without tax deducted. There are also procedures to claim back tax.

The following link is a good starting point for how they are taxed

http://www.direct.gov.uk/en/MoneyTaxAndBen...nce/DG_10027068

The following link is on reclaiming taxes

http://www.direct.gov.uk/en/MoneyTaxAndBen...ent/DG_10024687

It's a complex area, and too long for me to go thru all the ins and outs in a single post. But these are good starting points. They also have links to other pages, and give details of who to contact to take things further..

[billd766]

I am in receipt of 2 pensions at this time.

A military pension and a company pension.

I queried the UK taxman about paying tax as I am non resident and non domiciled in the UK.

The gist of the reply was that ANY pension earned in the UK is subject to income tax which is deducted at source provided that the pension exceeds the current tax threshold depending upon your personal circumstances, i.e if your pension is more than your tax allowance you WILL pay tax on it.

I queried my company pension scheme about taking 25% tax free and they told me that as I am already in receipt of the pension I could not do so and my instant reply was that I now planned to live another 50 years making me 123 when I die. It did raise a laugh but didn't change the result.

Next year I will be in receipt of my state benefit pension and will have to pay even more tax and get that frozen from the day I get it.

The UK, a good country to leave but the taxman has a long reach and he will get you one way or another.

[fletchsmile]

I am in receipt of 2 pensions at this time.

A military pension and a company pension.

I queried the UK taxman about paying tax as I am non resident and non domiciled in the UK.

The gist of the reply was that ANY pension earned in the UK is subject to income tax which is deducted at source provided that the pension exceeds the current tax threshold depending upon your personal circumstances, i.e if your pension is more than your tax allowance you WILL pay tax on it.

I queried my company pension scheme about taking 25% tax free and they told me that as I am already in receipt of the pension I could not do so and my instant reply was that I now planned to live another 50 years making me 123 when I die. It did raise a laugh but didn't change the result.

Next year I will be in receipt of my state benefit pension and will have to pay even more tax and get that frozen from the day I get it.

The UK, a good country to leave but the taxman has a long reach and he will get you one way or another.

Yes that's usually correct. Pensions are taxable. Again, I'd add for some people on low incomes their allowances may cover this, so they don't need to pay tax. For others their tax is reduced. Hence in some cases you can claim the tax back. Personal allowances are the most common, but there are other allowances.

I recall reading an article, can't remember where, saying that a fair number of people had effecttively overpaid tax on pensions. This is common where basic rate tax is deducted, but there were enough allowances so it shouldn't have been on part or all of the sum.

The 25% tax-free lump sum you mentioned unfortunately had to be made when you started to take your pension.

There are some good things about UK pensions. Flexibility and getting at your capital are not necessarily among them tho'. Tax is a complex area and may/may not be in people's interest to take them out.

BTW In terms of what you can do about it, it's also worth considering moving other more flexible forms of income offshore, hence ensuring your UK allowances are used against your pension income instead of others. eg bank interest which you can move offshore is a simple example, dividend income another etc.

Edited January 15, 2008 by fletchsmile

[briley]

As a minor point - is it worth moving shares out of the UK tax man's grasp unless you are on high rate tax?

AFAIK they have 10% deducted wherever you live and that is then the tax paid up to the high rate band.

[GuestHouse]

So Fletch, in one post pensions are not taxed and in the second they are?

Dangerously innacurate or dangerously confused?

My advice remains the same......

If your friend is already in receipt of his pension then there is nothing much he can do about the tax. If he has not received his pension yet he can elect to take a tax free sum of upto 25% of his pension fund - however this drastically reduces the long term payout value so he should take professional advice before doing so.

[fletchsmile]

So Fletch, in one post pensions are not taxed and in the second they are?

No please reread there are some nuances you are missing. In both post I say they are "taxable". Don't confuse with the word "taxed"

Dangerously innacurate or dangerously confused?

Yes you are

My advice remains the same......

If your friend is already in receipt of his pension then there is nothing much he can do about the tax. If he has not received his pension yet he can elect to take a tax free sum of upto 25% of his pension fund - however this drastically reduces the long term payout value so he should take professional advice before doing so.

Again the first statement is incorrect. There are things he can do about the tax. The pension is received and being paid as per OP, so the second statement is irrelevant. Even if relevant the 25% lump sum is actually a no-brainer for a non-resident. It's only a concern for UK residents where it's more tricky. Please also be aware not all schemes have this 25% lump free sum. It depends on the pension type, eg company, personal, RAC etc

Sorry if you're confused. Part of it could be your use of English, or the jargon. Try reading again. In both posts I have said pensions are "taxable". I have also said that some people don't pay tax or are low taxpayers. These people would be able to reclaim some/all of the tax. These two statements are not the same, so don't conflict. Also don't confuse the words "taxable" and "taxed". Something can be "taxable" but because of say allowances isn't effectively "taxed". Normally I wouldn't pick up on people's English, but this is one area where precise language is important.

eg someone with a taxable pension of only GBP 5,225 per annum and no other income could reclaim all the tax so that no tax is effectively paid and it is not taxed. There are various levels above that were all/part of the tax can be reclaimed. Someone 75yrs or older could claim GBP 7,690 subject to certain income levels.

Why is this important? One strategy is to minimize all other UK income, so that you leave the allowances for your taxable pension.

So in summary:

Yes he may be able to get some tax back. Yes he may be able to have his pension paid gross or at least with reduced tax. Check out the websites posted as a starting point. Minimize other sources of UK income as a tax strategy.

Edited January 15, 2008 by fletchsmile

[buffcoat]

To what extent if any does the double taxation agreement between UK and Thailand impact this position?

[sinom]

Thanks for all of the info and the links to the Uk gov website.

it appears that he will continue to pay tax on this private pension as he does not qualify in the "low income" bracket.

Will investigate further in Uk now he is a bit more informed

thanks again

[fletchsmile]

It's worth getting your friend to enquire what rate of tax the pension provider is deducting. Many used to simply deduct basic rate tax. It is possible that the amount of tax being deducted needs adjusting.

Note: this could be:

1) downwards if he has no other UK income, and below the threshold for paying higher rate tax. Remember the first 5k or so is free, and perhaps more than that depending on age. So deducting basic rate tax from the full amount is too much if he has no other income.

2) It could also need adjusting up if he is above the threshold for higher rate tax.

BTW Regulations did change so that pensions could be handled similar to PAYE, and the effective rate deducted at source instead of simply basic rate tax. Also people with more than one pension need to ensure correct rates overall are applied.

As a crude estimate, if he's under 65 and his total UK income including pensions is under GBP 40k he may be able to claim some tax back if basic rate tax is being deducted. NB UK income not including offshore income. (40k is approx higher rate band of tax threshold plus personal tax free allowance of 5k)

[TEFLMike]

Next year I will be in receipt of my state benefit pension and will have to pay even more tax and get that frozen from the day I get it.

Unless you do not tell them where you are living? Can you not have the money paid into a UK bank account and have a UK address for their records

[mickba]

I'm looking at taking a pension a little early (at 60).

Of course the tax free option is attractive (worth about £10k) and it is 'bird int hand', but my need is for income (I'm not expecting any manner from heaven unless one of my PBs comes up) and therefore I would need to make it yield more than it would in the fund. Unless I take it offshore then that yield is itself taxable of course.

Much as I would have liked to avoid paying any tax, the personal allowance of £5435 plus the start rate of 10% then basic rate 20% (if i've got that right?) means i would lose about £1400 pa or about 10% of gross (in my case) - bloody annoying but not a total disaster - of course the logic would be different if I had some other taxable income which put this all at basic or higher rate - but I haven't. Oh and if I make it to 65 then I get additional personal allowances which will help with the tax on my state pension.

I haven't carried the numbers forward but I'm thinking the full pension option might be best for me. The gross annual pension would still be comfortably above the minimum 65,000 baht/month for a retirement extension, but thereby lies my question:-

When it comes to providing proof of pension income, do they take it gross or net of tax at source?

Thanks in anticipation and any thoughts/corrections welcome.

Edited January 22, 2008 by mickba