The Free Guide to Pension Tax Relief: QROPS, QNUPS & SIPPs
Pension tax relief in the UK has become a major issue for Brits wishing to move or retire abroad. Almost 1 in every 10 people from the UK now lives abroad permanently. In this ever changing landscape, how can British expats and people who have worked in the UK take advantage of their new status and avoid paying UK taxes?
Fortunately, changes in pension regulations means that you can now avoid most UK taxes on your existing UK pension schemes by transferring them abroad. As you are not using any of the services in the UK anymore and you have paid your dues whilst you worked there, why should you continue to pay UK taxes?
Here is the breakdown of the top destinations for Brits living abroad from the BBC’s Brits Abroad project:
An estimated 5.5m British people live permanently abroad. The emigration of British people has happened in cycles over 200 years. The trend is now rising again: some 2,000 British citizens moved permanently away from the UK every week in 2005.
When are you non-resident for UK Income Tax?
You’ll be treated as non-resident from the day after you leave the UK if you can show:
• you left the UK to go abroad permanently or your absence and full-time work abroad lasts at least the whole tax year
• your visits to the UK are less than 183 days in a tax year and average less than 91 days a tax year over a maximum of four consecutive years
What do I need to do when I leave the UK?
Your Tax Office will give you form P85 ‘Leaving the United Kingdom’ to get any tax refund you’re owed and work out if you’ll become non-resident. If you still need to complete a tax return after you leave they’ll let you know.
BRITS ABROAD: THE TOP COUNTRIES
Country name Resident Britons
United States 678,000
New Zealand 215,000
South Africa 212,000
What are the choices for Brits moving abroad?
(1) Leave it where it is and continue to pay UK taxes for services you don’t use.
(2) Transfer it to a SIPP, QROPS or QNUPS and avoid most UK taxes.
What taxes do I pay at the moment on my UK pension?
Income Tax on UK Pension Schemes
£0 – £7,475* 0% (this will be 20% for higher rate tax payers in the near future*)
£7,275 – £35,000 20%
£35,000 – £150,000 40%
*From the 2010-11 tax year the Personal Allowance reduces where the income is above £100, 000 – by £1 for every £2 of income above the £100,000 limit. This reduction applies irrespective of age. Furthermore, the personal allowance will be reduced to zero in the near future for higher rate income tax payers. The allowance is higher for ages 65-74: £9,940 and 75+: £10,090. But, remember you will be drawing your state pension then.
Dividends Tax on UK Pensions
What is dividends tax?
This is tax on the income from UK company shares, unit trusts and open ended investment companies (OEIC’s).
£0 – £35,000 10%
£35,000 – £150,000 32.5%
Capital Gains Tax (CGT) on UK Pensions
Normally you wouldn’t pay GCT on your UK pension unless the plan owns property.
What is Capital Gains Tax (CGT)?
Capital Gains Tax is a tax on the gain or profit you make when you sell, give away or otherwise dispose of something that you own, such as shares or property.
You do not pay CGT on your main residence, car, UK gilts (bonds), lottery winnings or personal belongings less than £6,000.
If you have multiple properties, you will pay capital gains tax when you sell them. You can avoid this through a transfer to a QNUPS. You can set up a QNUPS even if you never retire abroad… more on this later. Most who have multiple properties will be taxed at 28%.
You don’t get taxed on the first £10,600.
CGT Tax rates:
• 18 per cent and 28 per cent tax rates for individuals (the tax rate you use depends on the total amount of your taxable income, so you need to work this out first)
• 28 per cent for trustees or for personal representatives of someone who has died
• 10 per cent for gains qualifying for Entrepreneurs’ Relief (if you are a sole trader or partner in a company).
Not everyone pays Inheritance Tax. It’s only due if your estate – including any assets held in trust and gifts made within seven years of death – is valued over the current Inheritance Tax threshold (£325,000 in 2011-12). IHT is 40% on the amount over this threshold.
If you are an expat living abroad with UK wife: Threshold is £650,000
If you are an expat living abroad with wife who is not from the UK: Threshold is £380,000
If you are single or divorced and living in Spain: Threshold is £325,000
Above this threshold, you pay 40% tax on your estate and assets.
What return would I get on a UK Pension?
State pensions and most final salary schemes are linked to the rate of inflation. New regulations now mean that your pension will increase by the CPI (Cost Price Index) rather than RPI (Retail Price Index). This is lower as it excludes housing costs such as mortgages and council tax.
The affect on your pension means that it will likely increase by about 2.5% rather than 3.5% per year. The target rate is 2%
The Telegraph stated that10m older people get £207m less next year than they would under the current system.
CPI Table (1996-2010)
This is the table for annual rate of CPI since 1996 when they first officially started measuring it. The average over the 13 year period puts it at just below 2%.
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