If you’re a resident in the UAE, you will have probably become accustomed to earning a tax free salary in the sunshine, receiving your full pay cheque without any deductions.
For those you left behind in the UK, the highest rate of income tax they’ll pay on their salary in the UK is now 45%.
Income payments from a UK pension are also subject to the same income tax rates as employment income. However, if you’re resident in the UAE, it is possible to withdraw money from your UK pension, without having to pay any income tax in the UK.
Once you reach age 55, normal UK pension rules allow 25% of your pension to be paid tax free, with the remaining 75% subject to income tax in the UK.
However, thanks to the tax treaty signed between the UK and United Arab Emirates, which came into force on 25 December 2016, payments received from a UK pension plan by a resident of the UAE, will only be subject to tax in the UAE. As the UAE does not tax personal income, it means you will not pay any tax on the payments from your UK pension.
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Temporary Non Resident Rules
Although at the time of receiving your payment, you are a non-UK resident and therefore not subject to UK income tax, if you move back to the UK, you could be caught by the temporary non resident rules.
If you return to the UK within 5 years of moving abroad, and had been a UK resident in at least 4 of the 7 tax years before you moved abroad, then you will be regarded as having been a ‘temporary non resident’.
Certain income payments and capital gains made during periods of temporary non residence will be subject to tax on your return to the UK. This includes any flexible drawdown payments taken from your UK pension. There is an example of how this works in the scenario below:
David leaves the UK in August 2013 and becomes resident in Dubai. He is 56 and decides to withdraw all of the money from his self invested personal pension (SIPP) under the new pension freedom rules. His SIPP is worth £100,000 so he receives £25,000 (25%) as his tax free pension commencement lump sum and £75,000 as a flexible drawdown income payment. Due to the tax treaty between the UK and the UAE, the income payment is not subject to income tax in the UK.
Due to unforeseen circumstances, in December 2016, David returns to live in the UK and becomes UK resident again. This means that for his time spent in the UAE, he was a temporary non resident and the flexible drawdown income payment of £75,000 now becomes subject to UK income tax in the tax year that he returned to the UK.
Tax on UK Public Sector Pensions
Pensions paid by certain public sector pension schemes, such as the NHS Pension, will always be taxed in the UK. Most of the UK’s tax treaties will ensure that these pensions are not taxed twice.
It is also no longer possible to transfer your pension benefits from unfunded public sector pension schemes, such as the Teachers’ Pension, to a pension scheme that allows flexible withdrawals.
However, pension benefits held in the Local Government Pension Scheme and certain Civil Pension Schemes can still be transferred to a flexible pension arrangement, such as a SIPP.
At MyExpatSIPP, we have years of experience of helping UAE residents to access their UK pension without paying any UK tax.
Pensions are not automatically paid tax free if you’re resident in the UAE, there is a process to go through and forms to complete with HMRC in the UK and the Ministry of Finance in the UAE.
We can guide you through this process and ensure you don’t pay any unnecessary tax.
Speak to us about your pension and the benefits of transferring to MyExpatSIPP.