While prior to March 2020 it was possible to move to Portugal and pay 0% tax on a pension through Portugal’s Non-Habitual Resident Tax Regime (NHR), that amount has now changed to 10%. This basically means that if you move to Portugal and you have a €20,000 annual pension, under the NHR scheme you’ll pay €2,000 tax on that pension.
Along with pensions (both public and private), this classification also includes annuities, *IRAs, *Roth IRAs, and *US Social Security Income for those from the US and Lifetime ISAs for those from the UK. Although pensions is a vague term, anything that that gets withdrawn after retirement is generally treated as a pension and subject to 10% tax under the NHR rules.
*These are investment wrappers that are specific to the US.
What is NHR?
The NHR Tax Regime is a 10-year incentive that’s designed to make Portugal more financially attractive to certain individuals including entrepreneurs, freelancers, and pensioners. You don’t have to join the NHR scheme to move to Portugal, and isn’t the same as obtaining residency — it’s simply a tax regime that you can opt into if you meet the conditions (the main one being that you haven’t been habitually resident in Portugal over the previous 5 years).
Is NHR worth it for pensioners?
If you don’t join the NHR scheme, you’ll pay standard tax rates. The Portuguese tax system has a number of bands which go as high as 48%. It’s definitely more financially favourable to join the NHR scheme for that initial 10-year period, if you move to Portugal.
That if is important.
If you’re planning on moving to Portugal and spending more than 183 days there, that normally means that you should become resident in Portugal (and consequently tax resident there too).
However, if you are only planning on spending some of the year in Portugal, it may not make financial sense to become resident in Portugal as a pensioner. If you don’t need to become resident in Portugal because you’re not going to be spending enough time here, it may make sense to remain tax resident where you are (or choose somewhere else).
In the UK, for example, people have a tax-free allowance of £12,500. That means that if someone has a pension of £15,000, they would only pay tax on £2,500 (which works out to £500). In Portugal, under the NHR scheme, you would be taxed on the whole amount (which works out to £1,500). Similarily, Americans living in Portugal will pay tax on social security income that they might not pay in the US.
But, tax isn’t everything
While it’s possible that you might end up paying more tax in Portugal than in your home country, that doesn’t necessarily mean that you’ll be financially worse off by moving to Portugal. Those taxes, for example, allow you to use the public healthcare system here in Portugal, which wouldn’t be an option.
Even if you plan to use private healthcare for the majority of your hospital visits, it’s worth noting that private health insurance is much cheaper in Portugal than it is in the US.
Then there’s your lower cost of living, cost of property, and all of the other things that are cheaper in Portugal. It’s something you need to think about.
What happens after 10 years?
After 10 years, the “tax holiday” ends and you go onto standard Portuguese tax rates should you decide to stay in Portugal. Taxes aside, many people return home after 10 years in Portugal as it’s not uncommon for people to decide that they want to be closer to friends, family, and home comforts as they get older.
Annual income | Portuguese income tax rate |
|---|---|
up to €7,112 | 14.50% |
€7,113-€10,732 | 23% |
€10,733-€20,322 | 28.50% |
€20,323-€25,075 | 35% |
€25,076-€39,967 | 37% |
€39,968-€80,882 | 45% |
€80,883+ | 48% |
Thank you. This is very well explained. We were wondering why people were calling it a tax holiday when really is isn't.
It depends, and it definitely was very appealing when it was a flat 0% tax. Some people will be better off, others would be better off in their home countries.
If your main goal is tax reduction, there are probably better places. If you're looking for a change in lifestyle, however, Portugal is worth considering.
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Thank you.
Hi James,
Your website is very useful, much more than the commercial services! Thanks for sharing your experience and knowledge.
Do you know if pension of UN retirees will be taxable in Portugal? In most countries, UN pension is not taxed, so wondering how Portugal would treat it. I and my wife plan to spend some time of the year (less than 6 months) in Portugal once I retire from the UN.
Under the NHR visa do I understand that my U.S pension derived via the City of San Francisco as a police officer, will be taxed at 10%. After ten years will I be taxed 48%? Also within the first ten years do I still pay the 24% to the U.S IRS? (federal tax)
Hi K. Johnson,
I would speak to an accountant and get them to confirm this.
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Under the US-Portugal tax treaty it is taxable in both the US & Portugal, and the US will tax it precisely as it does today, less the foreign tax credit for any tax paid in a foreign jurisdiction. As it is not foreign earned income the foreign tax credit is the only tax abatement available to a US citizen, which as a former police officer is a relatively safe assumption to make about you. The US would tax at the 35% withholding rate for a non-resident alien if you were to renounce your citizenship as I understand it, so basically the US government will get it's cur regardless & as I understand it California will attempt to take it's cut for some time after you leave the state regardless of your new residence as well. But what do I know, I'm just a NY attorney.
"*IRAs, *Roth IRAs, and *US Social Security Income for those from the US"
401(k) was not on the list but I imagine it applies to it too?
So Portugal will still tax Roth IRAs even though they are supposed to be tax-exempt distributions? I can see that as US tax being 0 but PT still seeing it as taxable income. Sad.
I was told by the state of Washington DRS that they would not tax it if I weren't a US citizen and they would direct deposit if my bank had a branch in the US.
Does anyone know if Portugal PIT applies to a US state public civil service pension (fire or police)? I can only find whereas private pensions are taxed PIT. Also, would it be safe to assume the 10% NHR PIT would not apply similarly? I have read where they don't tax civil service pensions. Its hard to get an answer from a tax advisor in Portugal unless you pay $$$. Maybe there are some expats from the US who are on a police or fire pension...
Roth IRAs are based on US law, not Portuguese law. Some countries in Central Europe maintain the tax free status for Roth, like Lithuania.
Unless the following provision (downloaded today from the US Department of State) has been superseded, this is my understanding:
CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE PORTUGUESE REPUBLIC FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE
PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME (1994)
Article 20, Paragraph 2(a) grants an exclusive taxing right for any pension paid in consideration for past governmental services to
the Contracting state (or political subdivision or local
authority thereof) to which such services were rendered.
In other words, your government pension will be taxed solely by the US, not by Portugal. I could be wrong, as I'm no lawyer.