How UK pensions are taxed 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 attractive 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 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 is 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 received 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 advantageous 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 €5,000 being exempt, or
2. At the scale rates of income tax, along with your other worldwide income. The first €22,000 is exempt, as follows:

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 – Form DT‑Individual. 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

Under the terms of the 2019 UK/Cyprus double taxation treaty, UK government services pensions are only taxable in the UK. This matches the treatment applied to British expatriates living in most other countries). The interim period where you could elect to pay tax in Cyprus ended 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. Note, however, that the UK will now impose the 25% Overseas Transfer Charge on the pension funds transferred. This makes the QROPS option much less attractive than it used to be – but for some it is worth taking the tax hit, when weighed against the amount of UK tax their heirs could pay.

This is because UK pension funds become subject to UK inheritance tax from April 2027, and UK assets always remain liable. When you add the income tax UK-resident beneficiaries could potentially pay when taking the benefits, the combined tax could reach 67%.

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 €22,000. And there is no local inheritance tax in Cyprus.

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 which 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 rate of 5%. Again, you will most likely be exempt for your first 17 years of residence.

Rental income is subject to income tax at the scale rates.

Cyprus tax planning opportunities

What types of investment you own and how you hold them can make a considerable difference to your tax liability in Cyprus – some arrangements are highly tax efficient here/there.

Likewise, Cyprus can offer opportunities to improve the tax position on your pension capital, if you take specialist cross-border tax and pension advice.

As always with pensions and retirement savings, it is especially important to take regulated, specialist cross-border advice before making decisions. Ensure 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 50 years. Besides our UK office, we’ve had an established office in Paphos for 23 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.

Get in touch today.