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Pension Christmas present from HMRC

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).