How UK pensions are taxed in Portugal

Welcome to the Atlas Bridge Wealth guide to pension planning in Portugal - 2025.

This guide explains how UK pensions are taxed when you become resident in Portugal. It breaks down the treatment of State, occupational, government, and personal pensions under the UK–Portugal Double Taxation Agreement, including the powerful 85/15 Category H rule that can reduce effective tax to as little as 3–4%. It also covers the NT (No Tax) code process, lump-sum withdrawals, voluntary UK National Insurance contributions, and common planning mistakes to avoid. Written in clear, practical language, it’s designed to help UK expats make informed decisions before taking or restructuring their pensions.

Disclaimer: The tax rules are subject to change and interpretation by the Portuguese Tax Authority. This guide is for informational purposes only. We urge you to seek tailored, individual advice.

Atlas Bridge Wealth Advisory: Understanding UK Pension Taxation in Portugal (2025 Guide) For British expatriates moving to Portugal, mastering the interaction between the UK-Portugal Double Taxation Agreement (DTA) and Portuguese domestic tax law is crucial. Once you establish Portuguese tax residency, the taxation of your worldwide pension income generally shifts from the UK to Portugal.

The way your pension is taxed depends heavily on its classification. We categorise UK pensions

for cross-border purposes as follows:

* UK Government Service Pensions

* UK State Retirement Pensions

* Occupational Pensions

* Personal Pensions (including SIPPs/SSASs)

We will come on to each of these later in the guide, analysing what you can and can't do for

each category.

Part 1 - General Principles of Pension Taxation in Portugal

Tax Residency and Worldwide Income

• Standard Residents: If you are a standard Portuguese tax resident, your worldwide income

(including foreign pensions) is subject to the Portuguese progressive income tax (IRS) scale

rates (ranging from 12.5% up to 48% in 2025, plus solidarity surcharges).

• NHR Status (Existing Beneficiaries): If you secured Non-Habitual Resident (NHR) status

before the regime closed, your foreign pension income may be subject to a flat rate of 10%

(post-April 2020 registrants) or a full exemption (pre-April 2020 registrants) for the remainder of

your 10-year period.

• The NHR is Closed: New residents in 2024/2025 do not qualify for the NHR regime's benefits

on foreign pensions. Of course, NHR2.0 does exist but applies to a slightly different

demographic.

Currency and Exchange

• UK pensions are always calculated in Sterling (£).

• While some providers pay to foreign bank accounts, many do not. We strongly recommend

working with a commercial foreign exchange specialist to manage regular, timely transfers and

secure preferential exchange rates, mitigating currency risk.

Avoiding UK Tax at Source (Form DT-Individual)

To prevent your UK pension from being taxed twice (once by the UK via PAYE, then again in

Portugal):

1. DTA Precedence: The UK-Portugal DTA gives Portugal the sole taxing rights over most private pensions.

2. The Process: You must complete HMRC Form DT -Individual and submit it to the Portuguese

Tax Authority (AT) along with a Portuguese Certificate of Residence. The AT will certify the form

(or provide a separate Certificate of Residence), confirming your Portuguese tax status.

3. Outcome: Once HMRC receives this certification, they instruct your pension provider to pay

your pension gross (NT tax code), without deducting UK tax.

4. Timing: This process can take several months. Any UK tax mistakenly deducted during this

period can be reclaimed via your Portuguese tax return, though the repayment process can be

slow.

Part 2 - Taxation by Pension Type

UK Government Service Pensions

• Rule: These pensions are always taxable only in the UK under the DTA's 'Government function' article, even if you are tax resident in Portugal.

• Taxation: They remain subject to UK income tax and are exempt from Portuguese income • Common Types: Armed Forces, Civil Service, Police, Fire Brigade, and certain local authority

pensions. (Note: NHS pensions generally do not qualify as Government Service).

• The HMRC website publishes a full list of pension types, identifying which are government or

non-government for the purposes of the DTA in various countries across Europe.

* UK State Retirement Pension

• Rule: The UK State Pension is taxable only in Portugal once you are a Portuguese resident.

• Taxation: It is subject to the Portuguese progressive IRS scale rates (up to 48%+), unless you

fall within the NHR regime.

• Deduction: The State retirement pension is paid to you gross (i.e. with no tax deduction at

source), although sometimes it can be taxed indirectly if you have another source of income

subject to PAYE (check your tax code carefully). You are eligible for the standard annual

deduction for pension income (indexed yearly, €4,349 in 2025).

Occupational and Standard Personal Pensions (The Default)

• Types: Pensions primarily funded by an employer or through pre-tax contributions (e.g.,

standard Defined Contribution/Defined Benefit schemes, or SIPPs where employer contributions were made).

• Taxation: These are generally treated as deferred employment income (Category H).

• Default Treatment: 100% of the income (periodic payments) is taxable at the full Progressive

Portuguese IRS Scale Rates.

Post-NHR Context: The Stakes Are Higher (2025 Tax Year)

With the Non-Habitual Resident (NHR) regime closed, the difference between a successful claim and a denial of the 85% exemption is substantial.+351 913 324 177

2025 Progressive IRS Rates:

Lowest Bracket: 12.50% (up to €8.059)

Mid-Bracket Example: 31.40% (€22,306 to €28.,400)

Highest Bracket: 48.0% (over €83,696)

Part 3 - The 85% Exemption Rule: The Niche Opportunity

In Portugal, there are two possible tax treatments of personal pensions. One is as an

occupational pension (see above). Where payments are made into an occupational pension

scheme, the income will always be treated as an occupational pension. Where contributions into a personal scheme have been made only by your employer (i.e. no personal contributions have been made at all), it is also considered to be an occupational pension.

In other circumstances, personal pension income may be treated as annuity income. As with

other aspects of the Portuguese tax code, this was drafted in a way that assumes a 'closed' tax system, i.e. it does not deal with a situation where the annuity is coming from outside Portugal, although the same principles should apply, even though UK pensions are not the same as

Portuguese pensions.

If, in the case of a personal pension fund to which only you have contributed, you can argue that your pension is in the form of an annuity (and even a drawdown pension could be so presented).

In this instance, only a percentage of the pension income is subject to tax in Portugal, with the

balance being completely tax-free. An annuity purchased individually (or which has not qualified for a Portuguese corporate tax deduction when purchased or contributed to) may be divided

into capital and income when paid, and the capital element of the payment is exempt from tax in Portugal. If the capital element cannot be determined, it may be necessary to involve an actuary in deciding the appropriate split.

However, if both an employee and employer contributed to the personal scheme, where the two sets of contributions cannot be distinguished, the whole amount is likely to be treated as

occupational pension income. Where an employer's contributions can be distinguished (e.g. by

an actuary), the income relating to the employer's contributions is taxable as occupational

pension, and the individual's contributions may be split into the 'capital' and 'income' elements,

with the income element being taxable and the capital element being tax-free.

Overall, the position is not clear because UK pension products do not fit neatly into the

Portuguese tax system. If only you have contributed personally to your pension fund, it is likely

that you can claim 'long-term savings' treatment on the income, which is taxed more

benevolently than standard pensions. Some Portuguese tax inspectors differentiate between

Portuguese and non-Portuguese pensions because of how they are funded, but this is not

considered to be the correct treatment as the double tax treaty signed between Portugal and the UK takes precedence over domestic law. Advice should be sought if you wish to withdraw your personal pension income.

The capital ‘exemption’ rule (often called the 85/15 rule) only applies to certain capital-funded

schemes and is subject to complex interpretation.+351 913 324 177

The Warning: Do Not Self-Declare

Claiming the 85% exemption without rock-solid documentation and expert backing can lead to

an audit, denial, and severe back taxes and penalties on the previously untaxed 85% of income.

Action Plan for Prudent Expats

1. Assume the Worst: Budget for your UK pension to be taxed on 100% of the income at

Portuguese progressive rates.

2. Focus on Alternatives: Utilise Portuguese-Compliant Investment Bonds (Life Insurance

Contracts) for new capital, which offer reduced long-term effective tax rates (as low as 11.2%

on gains after holding for longer than 8 years).

3. Lump Sum Rule: Ensure the 25% Pension Commencement Lump Sum (PCLS) is taken

BEFORE establishing Portuguese tax residency, as it is fully taxable afterwards.

4. Expert Validation: If you believe your product qualifies for the 85% exemption, seek specialist

Part 4 - The Critical Tax Trap: Pension Lump Sums

This is the most common and costly mistake made by new expats.

• The UK Rule: In the UK, you can generally take 25% of your pension pot tax-free (Pension

Commencement Lump Sum, or PCLS).

• The Portugal Rule: Portugal does not recognise this tax-free element.

o If you take a lump sum (including the 25% PCLS) while a Portuguese Tax Resident, the entire

withdrawal is considered ordinary income and is taxable at your applicable Portuguese rates

(up to 48%).

• Action: If you plan to take any significant lump sum, you must do so before officially

establishing Portuguese tax residency.

Part 5 - Other Retirement Planning Factors

NI Contributions (Voluntary)

• Earnings in Portugal do not enhance your UK State Pension entitlement.

• It may be worthwhile to pay voluntary Class 2 or Class 3 National Insurance (NI) contributions

to ensure you reach the 35 qualifying years needed for a full UK New State Pension. Check your current NI record with the UK's International Pension Centre.

The Need for Restructuring

• UK investment wrappers (like ISAs) lose their tax-advantaged status upon residency in

Portugal.

• We strongly recommend reviewing and restructuring your investment portfolio into

Portuguese-compliant investment vehicles (e.g., Portuguese Compliant Investment Bonds)

which offer powerful tax deferral and a low long-term tax rate on gains.+351 913 324 177

We provide the cross-border expertise necessary to navigate the post-NHR tax complexities and ensure your financial plan is both compliant and efficient.

We help you:

• Determine the correct Portuguese tax classification for your UK pension assets.

• Implement the 85/15 Financial Philosophy to balance lifestyle and security.

• Structure your wealth using the most tax-efficient vehicles available today.

Contact Us Today to Schedule Your Consultation:

Disclaimer: The tax rules are subject to change and interpretation by the Portuguese Tax

Authority. This guide is for informational purposes only. We urge you to seek tailored, individual

advice.

Atlas Bridge Wealth Advisory: Ensuring Compliance. Maximising Efficiency. www.atlasbridgewealth.com