If you’ve moved abroad and are receiving pension income from a UK-based pension scheme, you might be eligible to have your pension paid without UK tax deductions at source.
This is done through applying for a No Tax (NT) code from HMRC. Receiving your pension income gross could be especially helpful if you’re living in a country with a more favourable tax regime and a Double Taxation Agreement (DTA) with the UK that gives the taxing rights of your pension to your host country.
Here’s why applying for an NT code can be beneficial and a detailed step-by-step guide on how to apply.
Why Apply for an NT Code?
1. Avoid Double Taxation
Many countries have DTAs with the UK to prevent double taxation. If you live in one of these countries, you may be eligible only to be taxed in your country of residence on your UK pension income. An NT code ensures you’re not paying UK tax unnecessarily.
2. Improved Cash Flow
If your pension is paid gross, you’ll receive the full amount upfront, allowing you to manage your finances more effectively. You will be responsible for paying any income taxes due to your pension in your country of residence.
3. Tax Efficiency
By not overpaying tax in the UK, you avoid the cumbersome process of reclaiming overpaid tax from HMRC, saving time and administrative headaches.
Who is Eligible for an NT Code?
To qualify for an NT code in respect of your pension, you must:
- Be a non-resident of the UK for tax purposes.
- Have a pension income from a UK pension scheme.
- Be residing in a country with a DTA in the UK that allows pensions to be taxed only in your country of residence.
Step-by-Step Process to Apply for an NT Code
1. Confirm Your Tax Residency Status
Establish your tax residency status in your new country by checking its local regulations and ensuring you meet the conditions for non-residency in the UK under the UK Statutory Residence Test.
2. Apply to your pension provider to make a nominal withdrawal from your SIPP/Pension.
This one-off, small taxable payment will effectively see you go into income drawdown. The Pension scheme will make the nominal income payment, which creates a PAYE record. This first income payment will need to be logged with HMRC onto the relevant form.
3. Complete the Relevant Forms for HMRC
Depending on the country you now reside in, you’ll need to complete the appropriate Double Taxation Relief form. For most countries, this is Form DT-Individual, available on the HMRC website. You can find the form here: DT Form for HMRC
The Member completes the HMRC Double Taxation Treaty Relief application ‘Form DT-Individual’, including the PAYE details of the pension scheme withdrawal and answers all relevant questions. Guidance notes are provided for different countries. Be sure to complete the parts relevant to you and your country of residence.
4. Obtain Certification from Your New Tax Authority
You will also need proof of tax residency from the local tax authority in your country of residence. They’ll need to certify your tax residency status. In some cases, this will be in the form of an official stamp on the DT form. Others will provide their own documentation, which you will need to enclose along with your DT form. Remember that each country has its own rules for proving tax residency. For example, in the UAE you must request a tax residency certificate from the Federal Tax Authority. In doing so, you must prove you have spent the requisite time in the UAE to be eligible for tax residency (usually 183 days). This also involves extra admin as you must obtain an entry and exit certificate. Different countries have different requirements for proving tax residency and this proof should also be submitted to HMRC.
5. Submit the Form to HMRC
Send the completed and signed form to HMRC at the address provided in the form’s instructions. Include your National Insurance number and pension scheme details. Including a copy of your identity card or residency card for your country of residence is also advisable.
6. Await Confirmation from HMRC
HMRC will review your application and, if approved, issue an NT code to your pension provider. This allows your pension income to be paid gross. Please note the approval process is slow, and you can expect to wait at least 12 weeks, if not longer.
7. Notify Your Pension Provider
HMRC will usually contact your pension provider directly. However, following up with your provider to ensure they’ve received and applied the NT code is wise. You should also be able to check online if you have a Government Gateway account with HMRC.
8. Monitor Your Tax Position
Keep records of your application and any correspondence with HMRC and your pension provider. Review your tax position annually to ensure continued compliance in both the UK and your country of residence.
Key Considerations
- Timing: The process can take several weeks, so apply as soon as possible after establishing residency abroad if you intend to draw pension income and your country of residence has a DTA in place that gives the taxing rights to your new host country
- Regular Reviews: If your residency status changes, inform HMRC immediately to avoid potential penalties or tax liabilities.
- Pensions Excluded from NT Codes: Lump sum withdrawals, such as the PCLS or tax-free cash, may still be subject to UK tax. Ensure you understand the tax treatment of each element of your pension.
Common Pitfalls and How to Avoid Them
- Delays in Certification: Some tax authorities can take time to provide certification. Follow up promptly to avoid delays.
- Incomplete Forms: Double-check that all form sections are completed accurately. Missing information can lead to rejection or delays.
- Misunderstanding Tax Rules: Work with a financial adviser to ensure compliance with UK and local tax regulations.
Final thoughts
Applying for an NT code for your UK pension income is a straightforward process, but it requires careful attention to detail and a clear understanding of tax residency rules.
If you’re unsure about the process or need assistance with tax residency status, working with a qualified financial planner can save you time and ensure peace of mind. Reach out today to discuss your circumstances and get tailored advice for your cross-border wealth management needs.
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