Tax on UK pensions in Cyprus

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03.07.24
Tax on UK pensions in Cyprus

How much Cyprus tax will you pay on your UK pensions and retirement savings?  If you’ve recently retired there or are aiming to do so, it’s important to understand how Cyprus taxes pension income so you can make the most of this beneficial tax regime.

There are so many reasons why we recommend Cyprus as a country to retire in.  The lifestyle, weather, social life, nature, choice of properties etc all contribute to very enjoyable retirement years. There are financial benefits too. Cyprus has a very beneficial taxation regime and, since pensions play such a large role in providing for your golden years, this article focuses on how the income is taxed in Cyprus.

Which UK pensions are taxed in Cyprus

Once you become a tax resident in Cyprus, your worldwide income becomes liable to Cyprus taxation, either to income tax or, in the case of interest and dividends, to defence contributions.   Most types of UK pension income are taxable there and no longer subject to tax in the UK.  This includes:

  • UK state pension
    
    
  • Occupational and personal pensions
    
    
  • Annuities

The only exception is income from government service pensions, which remains subject to UK tax (see below).

Cyprus tax on foreign pensions – the special 5% rate

Cyprus offers a very beneficial tax regime for foreign pension income, including UK pensions.   The income can be taxed in one of two ways, and you can choose whichever method is most advantageous each year –

  1. A fixed rate of just 5%, with the first €3,420 being exempt, or
    
    
  2. At the scale rates of income tax, along with your other worldwide income. The first €19,500 is exempt, as follows:
Income tax scale rates
Total taxable income 2024 tax rate
Up to €19,5000%
€19,501 - €28,00020%
€28,001 - €36,30025%
€36,301 - €60,00030%
Over €60,00035%

Receiving pensions without UK tax

The UK state pension is generally paid gross, so you simply declare and pay tax on it in Cyprus.

Otherwise, UK pension and annuity companies normally deduct tax at source and you need to arrange for them to pay it gross to avoid double taxation.  In order for them to do this, you need to prove that you are resident in Cyprus and paying tax there.

HM Revenue & Customs has a form for this purpose – Cyprus Individual DT. You can download it from the HMRC website and then file it with the Cyprus  tax authorities to certify it for you. Once HMRC receive it they advise your pension provider to pay your income gross and reimburse any tax deducted at source in the interim.

UK government service pensions

While previously (up to 2018) income from UK government service pensions was taxed in Cyprus, the same as other foreign pension income, this changed when a new UK/Cyprus double taxation treaty came into force on 1 January 2019.

Since then, government services pensions became taxable only in the UK (to match the treatment applied to British expatriates living in most other countries).   For an interim period, you could elect to pay tax in Cyprus instead of the UK – but this option is scheduled to end on 31 December 2024.

Government service pensions are civil service or local authority pensions. They may also (but not always) be teachers, police and fire brigade pensions. NHS pensions don’t necessarily count as government service.

QROPS

Moving your pension funds out of the UK into a Qualifying Recognised Overseas Pensions Scheme (QROPS) can provide benefits to UK nationals living in Cyprus.  If this option suits your circumstances and objectives, the advantages can include currency options, flexible access, more investment choice and diversification, estate planning flexibility and protection from future UK regulation changes.

From a Cyprus tax point of view, income from QROPS is taxed the same as for UK personal pensions, as described above – you can choose between the 5% rate or paying the scale rates of income tax on your overall income over €19,500.

Lump sums

Pension lump sums are not taxed in Cyprus.

You can therefore opt to take your 25% UK pension commencement lump sum either when you are still UK tax resident or after you have moved to Cyprus, it does not make a difference from a tax point of view.

Other retirement savings

When it comes to your non-pension retirement savings,  the tax treatment depends on the type of income.

Capital gains made on the sale of shares and other securities are not taxed in Cyprus.  (One exception is unlisted shares of companies that own real estate in Cyprus since gains made on Cyprus property are subject to tax).

Interest income, such as from bank accounts, is not subject to income tax but instead liable to the Special Contribution for Defence (‘defence contributions’ or ‘defence tax’) at a rate of 17%.  However, this only applies to individuals who are resident and domiciled in Cyprus.  Since most UK nationals will not become domiciled in Cyprus until living there for 17 years, during this period your interest earnings are tax free.

Dividends are also subject to defence contributions at 17%.  Again, you will most likely be exempt for your first 17 years of residence.

Rental income is subject to both income tax on the net income and defence tax on gross income, the latter at 3%.

For more information on tax in Cyprus, download our free guide.

Cyprus tax planning opportunities

What types of investments you own and how you hold them can make a considerable difference to your tax liability in Cyprus – some arrangements are highly tax efficient there. Likewise, there may be opportunities to improve the tax position on your pension capital.

As always with pensions and retirement savings, it is especially important to take regulated, specialist cross-border advice before making decisions.  You need to ensure that the options you choose are suitable for your personal circumstances, objectives and risk tolerance, and that you are not placing your savings at unnecessary risk.

Blevins Franks has been advising UK nationals moving to and living in Europe for almost 50 years. In addition to our UK office, we’ve had an established office in Paphos for 20 years now. We are regulated to provide investment and UK pensions advice in both the UK and Cyprus and will talk you through all the options for your funds as a resident of Cyprus, including the tax implications and planning opportunities.

Contact Blevins Franks now.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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