If you’re retiring to Portugal, how will your UK pensions be taxed there?  Other than government service pensions, your pension income will be liable for Portuguese tax, with the treatment varying according to the type of pension.  Understanding the rules helps you plan ahead, avoid unwelcome surprises, and take the opportunity to establish the most tax-efficient option for you.

Written by Jason Porter of Blevins Franks

You’ve worked hard to build your pensions up for a secure and enjoyable retirement.  Your pension funds obviously play a key role here, so when embarking on your retirement journey it’s important to review all the options for your pensions carefully.

Take the time to weigh the pros and cons of each option to establish which best suits your circumstances, objectives and risk tolerance. This includes understanding the tax implications, and retiring in Portugal involves navigating two different tax regimes and how they interact. It is highly advisable to take specialist, cross-border advice covering pensions and taxation.

Once you become a tax resident in Portugal, most UK pension income (including lump sums) becomes taxable there and is no longer liable for UK tax.  The one exception is government service pensions.

So, how are UK pensions taxed in Portugal?  Much depends on what type of pension and, in some cases, how the contributions were made.

Government service pensions

Pension income arising from UK government service is not taxed in Portugal at all. The income remains fully taxable in the UK under the usual income tax rates and personal allowance.

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.

UK State Pension

Once you are a tax resident in Portugal, your UK State Pension is taxable only in Portugal and at the scale rates of personal income tax. Rates start at 13.5% for income up to €7,703 and reach 48% for income over €81,199.  You benefit from a deduction of up to €4,104.

Portugal Income Tax Rates 2024

Income band	Tax rate
Up to €7,703	13.25%
€7,703 – €11,623	18%
€11,623 – €16,472	23%
€16,472 – €21,321	26%
€21,321 – €27,146	32.75%
€27,146 – €39,791	37%
€39,791 – €51,997	43.5%
€51,997 – €81,199	45%
Over €81,199	48%

Occupational pensions

Likewise, occupational pensions are generally taxed as general income in Portugal.

In some cases, where the pension fund includes employee/personal contributions, a more beneficial tax treatment could potentially apply to that element, but you need personal advice as this is not straightforward.

Personal pensions

This is where it gets confusing and the treatment depends on how you made your contributions. Portugal has a traditional view of what constitutes a pension. In the UK, you can have a retirement annuity contract, a SIPP, SSAS, or defined benefit or defined contribution occupational schemes, and they are all treated as pensions for tax purposes. In Portugal, in order to be taxed as a pension, there must be an employer contribution (since pension income is effectively deferred employment income).

Personal contributions are taxed differently from employer contributions, as follows:

• The capital element (the contribution) is not taxed and should be returned tax-free.
• The growth element is treated as investment income, so that you can opt for the fixed 28% rate.

Personal pensions without employer contributions can be considered a savings scheme and receive the favourable tax treatment applied to life assurance policies.

However, most UK nationals have a mix of employer and personal contributions and cannot distinguish between the elements. Therefore, it is highly likely that all their UK pension income will be taxed at the scale rates.

Pension lump sums

This is one tax trap many Britons moving to Portugal fall into.  The UK rules allow you to take a 25% ‘pension commencement lump sum’ tax-free.  But if you take this lump sum after becoming a resident in Portugal, it is taxed there in the same way as other pension income – there is no tax-free element.

Pension treatment under non-habitual residence (NHR)

If you registered as a non-habitual resident before 31 March 2020, foreign source pension income is generally tax-free.

If you registered from April 2020 until the scheme closed to new applicants, your foreign pension income is generally taxed at 10%.

UK government service pensions always remain taxable in the UK.

Learn more about making the most of your NHR status before it runs out.

Your other retirement savings

Investment income is taxed at a flat rate of 28% in Portugal.  This covers interest and income from capital investments such as shares, securities and bonds.  You can opt for the scale rates of income tax if that works out cheaper.

Life assurance contracts, where you hold your choice of investments within its ‘wrapper’, can provide significant tax advantages in Portugal.  Take specialist wealth management advice to establish if these arrangements would suit your objectives and circumstances and how you could benefit from them.   Some British expatriates opt to cash in their pension to reinvest the proceeds in these arrangements, but first, carefully evaluate if this is a suitable option for you.

There can also be attractive tax options for residents in a position to encash their pension, making it comparable to NHR benefits.

Reviewing your pension arrangements

If you are a resident of Portugal and have a UK pension, review your pension arrangements and establish what is best for your current and future circumstances.

Pensions are not always set in stone, like you they might benefit from moving abroad and you need to regularly review your objectives. That could mean changing your investment profile, reassessing your risk tolerance, or developing an alternative strategy that embraces your overall financial situation.

Far too often, pension decisions are taken in isolation based on options provided by UK pension companies who are oblivious to your needs and the tax implications of living in Portugal. Blevins Franks can provide integrated advice covering pensions, investing, and cross-border tax and estate planning for both countries.

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.