Tens of thousands of British retirees living abroad are receiving substantial state pensions without having to pay UK income tax. A significant number of expats in the European Union are benefitting from a tax exemption, despite earning pensions far above the tax-free personal allowance threshold of £12,570.
This situation, which has sparked debate over tax fairness, is a result of the complex relationship between UK tax residency rules and international double taxation agreements. As more retirees look to make the most of their pension income, the issue raises important questions about how pensioners are taxed based on their location.
Expat Pensioners Benefit from Residency Rules
Around 42,000 British pensioners residing in the European Union receive state pensions that exceed the UK’s personal allowance but avoid paying tax to HMRC due to their non-residency status.
According to the Department for Work and Pensions (DWP), these expats are exempt from UK income tax thanks to double taxation treaties between the UK and their host countries.
The state pension system is notably complex, with retirees able to boost their income through additional earnings-related elements and voluntary deferrals. Some individuals are receiving up to £35,500 annually through a combination of the old state pension and add-ons like Serps (State Earnings-Related Pension Scheme).
These generous payouts are not subject to UK tax because these retirees are no longer considered UK tax residents.
Contrasting Tax Outcomes for UK-based Retirees
Back in the UK, the situation for pensioners is markedly different. As the state pension rises through the government’s triple lock mechanism, which guarantees an increase based on inflation, wage growth, or 2.5%, many UK-based pensioners are now paying tax on their pensions.
The frozen tax threshold — which has been unchanged since 2021 — now places millions of pensioners above the £12,570 tax-free allowance.
According to tax experts, the disparity in tax treatment between pensioners living in the UK and those living abroad is significant. David Denton, a tax expert at Quilter Cheviot, explained that retirees receiving pensions in the EU might pay less tax or none at all compared to their UK counterparts, even with identical income levels.
This situation has led to criticisms of the current pension tax system, with some pointing out the unfairness of the frozen thresholds, which now closely align with the full state pension amount.
