New UK–Cyprus Tax Treaty Affects Expats with Government Pensions
Retired in Cyprus? Watch your tax bill
British retirees in Cyprus receiving pensions paid in respect of government service might see a tax increase under the revised DTA between Cyprus and the UK.
On March 22, 2018, Cyprus and the United Kingdom signed a new double taxation agreement (DTA).
Once it has been ratified by both parties, it will replace the current agreement, which dates back to 1974. The new agreement will enter into force next year.
The new DTA is based on the 2014 OECD Model Convention for the avoidance of double taxation on income and capital. While introducing standards on exchange of tax information, it also aims to bring Cyprus-UK DTA in line with DTAs the UK has with other countries.
Retired Expats Might Be Affected
One of the changes concerns taxation of pensions paid in respect of government service (e.g., pensions paid to retired civil servants or military personnel).
Under the 1974 agreement, all pensions, including those payable in respect of government service, are taxed only in the country in which the recipient is resident.
This provision is unique for UK-Cyprus DTA and is the reason why Cyprus is (or rather used to be) the place where retired Brits could enjoy a low tax rate (or, in some cases, no rate at all) on their government pension.
Under the new agreement, however, pensions payable in respect of national or local government service will be taxable only in the country from which they are paid. It means government pensions will be taxed in the UK according to the UK tax rates.
The new tax agreement will have impact on pensions received by retired UK civil servants including armed forces personnel, NHS staff, teachers, local government employees, police forces, etc. living in Cyprus, whose pensions will be taxed by HMRC.
Those Britons whose income falls below the taxable band in both countries, won’t be affected – they will pay no tax in Cyprus or UK.
While others with large pensions and those with HMG (Her Majesty’s Government) pensions and other income that is taxed in the UK (for example, from UK property rental) will pay more tax.