How to Apply for an NT Tax Code for Pension Income: A Step-by-Step Guide.

How to Apply for an NT Tax Code for Pension Income

"Taxes: the one thing you can’t escape, even when you escape the country! But what if I told you there was a way to stop paying UK taxes on your pension while living abroad? Welcome to the world of NT tax codes, where we make tax efficiency sound like an adventure."

For individuals living abroad and receiving pension income from the UK, applying for an NT (No Tax) Code is essential to avoid unnecessary tax deductions at source. This article provides a comprehensive guide to applying for an NT tax code and explains its importance for UK pension holders living overseas.

What Is an NT Tax Code?

An NT tax code is issued by HM Revenue & Customs (HMRC) to individuals who receive income from the UK but are tax residents in a country that has a Double Taxation Agreement (DTA) with the UK. The NT code ensures pension income is paid gross (without UK tax deducted at source), preventing the need to reclaim taxes through annual UK tax returns.

Simply put, it ensures that your pension is not taxed twice — once in the UK and again in your country of residence.

Within a UK pension, including a SIPP, your gross pension is subject to PAYE income tax unless you personally apply to HM Revenue & Customs (HMRC) for exemption on the grounds that you are non-resident. Should you wish to apply for an exemption, please contact HMRC for advice at the telephone number listed below. They will be able to confirm the correct form(s) you need to complete for your specific country of residence or go to the following link: https://www.gov.uk/tax-uk-income-live-abroad/taxed-twice

If exemption is granted, HMRC should provide your pension trustee with the appropriate written authorisation to amend your tax coding. We strongly advise double-checking this with HMRC directly before making a future withdrawal if you wish to receive the income gross of UK income tax. Thereafter, your pension payments will be made without deduction of UK income tax. You must have received an income payment from your pension first to register you to HMRC as being on the payroll.

Your pension trustee can therefore pay a nominal payment to you to register you as being on your pension scheme’s payroll and then make future payment(s) to you on receipt of the applicable tax code being received from HMRC. The first income payment under Flexi-Access under PAYE rules is taxed on a 0T month 1 tax code, also known as the emergency tax rate.

Until the NT code is received by your pension scheme from HMRC, it is prudent to limit any drawdown income to ￡1,000 maximum to avoid any income tax being deducted as they will most likely be under a 1250L Mth 1 code which entitles you to 1/12 of the UK personal allowance (￡12,570 in 2023). Please note that it is not unusual for completion of the exemption procedure to take months. If you are receiving other UK-sourced income, this might put you into a higher tax code.

Any overpayment of income tax, however, should be refunded to you in one of the following ways:

• Through the payroll (subject to receipt of HMRC authorisation within the same UK tax year as the tax has been deducted); or
• Directly to you by HMRC (contact details listed below)

Any queries regarding the calculation of your tax code should be addressed to:

Telephone number: 0300 200 3300

Telephone number (Overseas): 00 44 135 535 9022

Pay As You Earn and Self-Assessment HM Revenue & Customs BX9 1AS UK

When Do You Need an NT Code?

An NT code is required for most types of UK pensions, including:

• Personal Pensions or SIPPs: Essential if you want gross payments.
• Defined Benefit (Final Salary) Pensions: Required to avoid tax deductions.
• UK State Pensions: If this is your sole UK income, it may fall within the personal allowance and be tax-free; however, an NT code is still advisable to avoid emergency tax deductions.

For payments from a Qualifying Recognised Overseas Pension Scheme (QROPS), an NT code is not required as payments are typically made gross.

How to Apply for an NT Tax Code

Step 1: Taking an Income Withdrawal

The first stage is taking a small withdrawal via income to trigger a tax code, if you don’t have a P60 within 12 months (this would only be applicable if you were working in the UK).

Once the income has been taken, you can ask the UK pension scheme where you took the withdrawal from for the necessary documentation. Without this information, you won’t be able to complete the next steps.

Step 2: Filling in the "Country-Specific" or "Form DT Individual" & P85 Form

Here is a link to the UK Gov website: https://www.gov.uk/tax-uk-income-live-abroad/taxed-twice

If there is a form in your country of residence, please use the country-specific form. If not, please click on the standard claim form.

Please also complete the P85 form, which you can find here: https://www.gov.uk/guidance/get-your-income-tax-right-if-youre-leaving-the-uk-p85

Step 3: Registering for Self-Assessment (For Withdrawals Exceeding GBP 100,000)

If the withdrawal exceeds GBP 100,000 in the tax year, you need to fill in a self-assessment form instead of applying for an NT tax code. Once registered, you will receive a Unique Taxpayer Reference Number (UTR) for the following forms:

• Register for self-assessment: https://www.gov.uk/register-for-self-assessment/not-self-employed
• Complete SA100 either online or request paper format: https://www.gov.uk/self-assessment-tax-return-forms
• Complete the supplementary pages, SA109 (non-UK residents): https://www.gov.uk/government/publications/self-assessment-residence-remittance-basis-etc-sa109
• Complete the HS304 claim form to supplement the SA109 form: https://www.gov.uk/government/publications/non-residents-relief-under-double-taxation-agreements-hs304-self-assessment-helpsheet

Step 4: Submit the Relevant HMRC Forms

To apply for an NT code, you need to complete the DT-Individual form, available on the HMRC website. This form is specifically for residents of countries with which the UK has a Double Taxation Agreement.

Download Form DT-Individual from HMRC

Ensure you fill in all sections accurately, including your UK pension details and information about your residency status. Once completed, send the form to your local tax authority in your country of residence to complete their portion.

Send your completed form to HMRC at:

Pay As You Earn and Self Assessment HM Revenue and Customs BX9 1AS United Kingdom

To avoid delays, consider using a tracked mailing service.

Step 5: Wait for HMRC to Process Your Application

Once submitted, HMRC will review your application. If approved, they will issue an NT tax code. Processing times can take up to 12 weeks or more, depending on workload and the complexity of your case.

Step 6: Provide the NT Code to Your Pension Provider

Once you receive the NT code, inform your pension scheme administrator or provider. They are responsible for applying the code to ensure your future pension payments are made gross, without UK tax deductions.

Be proactive and follow up with your provider to confirm the NT code has been implemented correctly.

Common Challenges and Tips

• Delays in Processing: HMRC processing times can be lengthy. Be patient and plan accordingly.
• Pension Providers’ Compliance: Some pension providers may not be familiar with NT codes. Ensure you communicate clearly and confirm their understanding.
• Declaration in Your Country of Residence: An NT code does not exempt you from taxes in your country of residence. You must still declare and pay any applicable taxes on your pension income there.

Why It Matters

Having an NT tax code ensures you are not taxed twice on your pension income. It eliminates emergency tax deductions in the UK and streamlines the process of receiving your pension income gross. This is particularly important for expatriates relying on their pension income for living expenses in their country of residence.

A Word of Caution

There have been instances where pension providers fail to apply the NT code correctly, continuing to deduct tax at source. This underscores the importance of working with providers familiar with expat-specific requirements and tax codes.

Final Thoughts

"Imagine sipping sangria on a sunny Spanish beach or enjoying French wine in a countryside villa, knowing your pension income is coming in tax-efficiently. Sounds good, right? That’s the beauty of an NT tax code — it’s the financial passport to your dream expat life. So, take charge, get the code, and keep more of what’s yours where it belongs: in your pocket."

Written by Dion Angove, EU Regulated Financial Planner!

Email - [email protected]

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