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Pension Christmas present from HMRC

Amendments to the 2018 Double Taxation Convention between the UK and Cyprus allow those in receipt of Government service pensions to choose whether to pay tax on that pension to the UK or Cypriot authorities.

Cyprus: Pension Christmas present from HMRCCHANGES to the revised Double Taxation Convention between Cyprus and the United Kingdom earlier this year resulted in changes to the tax arrangements for some UK nationals living in Cyprus.

The revised convention changed the way that UK government service pensions are taxed. It meant that government service pensions which are currently taxed in Cyprus will become taxable in the UK from 1 January 2019.

This change impacts the pensions received by retired UK civil servants, armed forces personnel, NHS staff, teachers, local government employees, police etc. whose pensions will be taxed by HM Revenue & Customs (HMRC).

I’ve received the following good news from the British High Commission:

Amendment to the 2018 Convention

The UK government has agreed with the government of Cyprus to amend the 2018 convention in respect of government service pensions. The amendment will allow individuals to choose which basis of taxation they want to apply to their government service pensions. This choice can be made from 1 January 2019 and will expire on 31 December 2024.

What you need to do

If you want your government service pension to be taxed in the country in which you are resident.

You must make an election to the tax authority of the country that is paying the pension. So, if your pension is paid by the UK, you must make an election to HMRC.

You can make an election at any time after 1 January 2019. Your election will apply to all pension payments received for the whole of the year in which your election is made, as well as to pension payments received in every year afterwards until 31 December 2024. So, if you make an election on 30 December 2020 it will apply to all pension payments you receive from 1 January 2020 until 31 December 2024.

Your election must be in writing and should state:

“I elect for my government service pension to be taxed in accordance with the 1974 Double Taxation Convention between the UK and Cyprus. I understand that this election will continue to apply until 31 December 2024 or until I revoke it.”

You should also include your full name and address, your UK Unique Taxpayer Reference (UTR) or National Insurance Number and your tax reference in Cyprus.

You can revoke your election at any time after you have made it. If you revoke the election the 2018 Convention will apply to all pension income received for the whole year in which the revocation is made.

Elections and revocations made to HMRC will automatically be shared with the Cyprus Ministry of Finance (and vice versa).

If you want your government service pension to be taxed in the country that pays the pension

You do not need to make an election. However, you may need to notify the relevant tax authority of your taxable income. So, if you are a Cyprus resident in receipt of a UK government service pension, you may need to let HMRC know about your pension income. Failure to notify HMRC of your income may result in interest and penalties being charged.

Welcome relief

This change will be welcomed by the many retired armed forces personnel resident in Cyprus who sent me angry emails, demanding to know why the UK was discriminating against those who served their country in the public service.

The change will also be welcomed by those receiving more modest government service pensions who will be better off the change takes them out of the tax systems in Cyprus and the UK.

Further reading and guidance

Government service pensions under the UK/Cyprus Double Taxation Convention (further information and guidance).

Readers' comments

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  • Brian Douglas Clark says:

    Hi, Thanks I am aware that this is not something made up, It seems AFPS queries, Equiniti, plus the people at the HMRC who passed me to two other experts today all believe that as you say this is a win win situation for some military pensioners but suggested I get confirmation in writing from the PAYE self assessment address. I will let you know the reply I get from HMRC.

    Ed: Thanks Brian

  • Brian Douglas Clark says:

    I contacted HMRC today and as yet they are not aware of any amendments, and were not sure of the facts as to if you decide to pay tax in UK for your Military pension? that is below the UK personal allowance, and also elect to receive your old age pension plus any private pensions that are below the Cyprus tax threshold. That you will be able to benefit by paying no tax to either UK or Cyprus. They told me to write a letter to PAYE Self assessment listed in your article.

    Ed: You will note that the letter is on the assets.publishing.service.gov.uk website – it’s official, not something I made up. I suggest you contact the Forces Pension Society – they should know about the change. You’ll find their contact details at Contact the Forces Pension Society.

    Here’s the announcement from the British High Commission in Nicosia.

    Regarding your personal tax arrangements you should seek professional advice as I doubt the PAYE people in the UK will have any knowledge of the Cypriot tax system. PWC publish a guide to the Cyprus tax system – Tax Facts and Figures.

  • Alan Burke says:

    I am confused. Many English retirees have the OAP, a gov. service pension (Police, teachers. etc) and possibly other income from investments. The OAP falls below the 19,500 Euro Cypriot tax level. If one’s other income falls below the UK lower tax level; Does this mean that no tax payment is required by either country?

    Ed: Yes. But you have to elect to pay tax on your UK State Pension as income on your Cyprus tax return.

  • Peter Davis says:

    Well this is good news. I was under the impression that my Government pension, along with other people who get a UK Government pension was going to be taxed in the UK, regardless.

    I didn’t realise that there was an opt-out provision.

    Ed – Initially you would have paid tax on your government funded pension to HMRC. HMG announced this amendment on 14 December.

  • Janet Lambert says:

    I infer from the British Commissioner’s advice that this is some kind of transitional arrangement and that after 2024 UK taxation rules will apply by default (unless they make further changes in the interim period, of course). Is that your understanding?

    Ed – Yes – that’s my understanding.

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