British expats in Portugal may soon face paying bigger tax bills as the government considers shaking up non-habitual resident rules.The current regime allows expats to avoid, delay or pay reduced tax on investment income which is not exempt under the rules.

But policy leaks to the media in Lisbon suggest expats could soon face a new pension income tax.

No rate has been set yet, but the tax is expected to be charged at between 5% and 10% of pension income for new expats registering under the non-habitual resident rules.

Although the good news is expats already on the program in Portugal would not have their QROPS or UK pension income reduced, new expats would pay the tax from January 1, 2018.

Tax benefits for expats

The non-habitual resident program offers a range of financial and tax benefits to expats settling in Portugal.Unlike many similar schemes offered in other countries, the Portuguese program does not have a minimum investment requirement.

Income from pensions taken as a lump sum or regular payments is tax free, regardless of the source, while dividends, royalties and interest are also mainly exempt.

Expats in the program also pay no inheritance tax on their estates.

The program extends to the Atlantic island of Madeira, which is under Portuguese control.

The rumoured changes to the program remain unconfirmed by the government.

Portugal QROPS

The scheme was introduced in 2009 in a bid to attract wealthy and talented entrepreneurs to Portugal.Any expat can join the program, providing they have not been tax resident in Portugal during the previous five years, and tax residence is granted for 10 years.

Salaries or self-employed earnings are also taxed at the low rate of 20% under the scheme.

For British expats, Portugal lost QROPS status in April 2017, when the country’s four offshore pensions closed.

However, Portugal is a European Economic Area nation, so British expats can take up residence and transfer their UK pensions to a QROPS based in any other EEA nation without incurring the 25% overseas transfer charge.

That option includes Malta QROPS that offer flexible access on similar terms to UK pension freedoms.

Overview of the non-habitual resident program from PwC