Managing your UK pension schemes becomes a lot more complex when you relocate to Madeira, Portugal. A new Double Taxation Convention between the UK and Portugal came into force in January 2026, changing how British expats are taxed on pension income. You need to understand these rules because most UK pension income is now taxable in Portugal rather than the UK once you become a Portuguese tax resident. On top of that, the various types of pensions, State Pension and private pensions, require careful planning to avoid double taxation and optimise your tax position. In this piece, we’ll walk you through Portugal’s 2026 tax rates and explain how different UK pension schemes are treated. We’ll also provide practical steps to manage your retirement income in Madeira as quickly as possible.
How UK Pensions Are Taxed in Madeira, Portugal
Understanding Portuguese Tax Residency
Relocating to Madeira triggers Portuguese tax residency rules that apply nationwide. You become a tax resident if you spend more than 183 days in Portugal during 12 months or maintain a habitual residence that suggests an intention to remain. Once you establish residency, you face worldwide income reporting obligations. This means you must declare every UK pension payment, rental income, dividend and employment earnings on your annual Modelo 3 tax return, filed between April and June following the tax year.
The residency test operates on a calendar year basis. This creates planning opportunities when combined with the UK’s April 6 tax year start. If you establish residency on December 31 by maintaining a habitual residence in Madeira, you’re a resident for that entire calendar year.
The UK-Portugal Double Taxation Treaty (2026)
The UK and Portugal signed a new Double Taxation Convention on September 15, 2025, which entered into force on December 29, 2025. For Portuguese tax purposes, the treaty applies from January 1, 2026. UK income tax and capital gains tax will apply from April 6, 2026.
Article 17 of the treaty grants Portugal exclusive taxing rights over private pensions paid to Portuguese residents. The UK can no longer tax these payments. Government service pensions for the civil service and the armed forces remain taxable only in the UK under Article 18. Most NHS pensions do not qualify as government pensions under the treaty.
What This Means for Madeira Residents
Madeira applies its own regional Personal Income Tax brackets that are much lower than those of mainland Portugal. The minimum rate in Madeira is 8.75%, while the top marginal rate is 33.6%. Mainland rates range from 12.5% to 48%.
A pension-specific deduction of EUR 4,587 applies in 2026. Pension income below this amount is not subject to Portuguese tax. Retirees with annual pension income between EUR 20,000 and EUR 40,000 see meaningful savings from Madeira’s regional reduction. Progressive rates still apply at higher income levels, but entry brackets remain much lower than mainland equivalents.
Tax Treatment of Different UK Pension Types
Different types of UK pension schemes face distinct tax treatments when you’re resident in Madeira. You can structure withdrawals better and avoid unexpected tax bills if you understand these differences.
UK State Pension
Portugal taxes your UK State Pension at progressive income tax rates ranging from 12.5% to 48%. You can request that HMRC pay this pension gross, eliminating UK withholding tax. Reporting becomes simpler since you declare the full amount on your Portuguese tax return without claiming foreign tax credits.
Private and Occupational Pensions
Your country of residence taxes private and company pensions. Portugal claims primary taxing rights for Madeira residents. The tax system treats occupational pensions as regular income and applies progressive rates. A more beneficial tax treatment could apply to the contribution element if your pension fund has employee or personal contributions, though this requires individual assessment.
Government Service Pensions
The UK taxes government service pensions in full, while Portugal does not. This category covers civil service, armed forces, local authority and certain police and fire brigade pensions. NHS pensions do not necessarily qualify as government service pensions and are subject to private pension rules.
SIPP Withdrawals and Lump Sums
Portugal taxes foreign pension accounts only when you distribute income. Funds that remain in your SIPP are not subject to Portuguese tax and require no declaration. Portugal classifies income under its own tax law when you withdraw, not UK classifications.
The tax system treats periodic payments such as monthly drawdowns or annuity payments as Category H pension income. It taxes them at progressive rates up to 48% (in the Autonomous Region of Madeira, the maximum tax rate is 33,6%). These payments are subject to a flat 10% rate under the Non-Habitual Resident regime.
Lump sum withdrawals receive different treatment. Portugal may classify these as Category E capital income rather than pension income. Taxation then applies only to the positive difference between the amount received and your total contributions invested. The UK’s 25% tax-free lump-sum rule does not apply in Portugal. Portugal taxes this lump sum as regular pension income with no tax-free element if you take it after becoming a Portuguese resident.
Portugal’s Tax Rates and Allowances for 2026
Income Tax Brackets for Pension Income
Portugal applies nine progressive tax brackets to pension income for 2026. Rates start at 12.5% for income up to €8,342 and climb to 48% for income exceeding €86,634. The 2026 State Budget increased bracket thresholds by 3.51% to account for inflation and reduced rates on the 2nd to 5th brackets by 0.3 percentage points.
Madeira maintains much lower regional rates. The entry rate is 8.75% for income up to €8,342, while the top marginal rate is 33.6% for income above €86,634. Married couples filing jointly have their taxable income divided by two before the progressive rates apply, then multiplied by two to determine total tax due.
Pension-Specific Deductions
The first €4,104 of pension income is exempt from IRS. This deduction applies when you file your annual tax return. Income below this threshold creates no Portuguese tax liability and gives relief to lower-income pensioners.
Solidarity Surcharge on Higher Incomes
Taxable income exceeding €80,000 is subject to an additional solidarity surcharge. The rate is 2.5% on income between €80,000 and €250,000, and rises to 5% on income above €250,000. This surcharge is added to your marginal IRS rate and has remained unchanged since 2013.
NHR Status: Does It Still Apply?
The Non-Habitual Residents regime closed to new applicants on December 31, 2023. You retain all benefits for your full 10-year term if you got NHR status before January 1, 2024. Foreign pensions are taxed at a flat 10% rate under NHR. Those who became residents in 2024 could still register by March 31, 2025, provided they met specific criteria, including having signed employment contracts or property agreements by October 10, 2023.
Practical Steps to Avoid Double Taxation
Applying for an NT Tax Code from HMRC
Contact HMRC’s International Pension Centre to request an NT (No Tax) code, which instructs your pension provider to pay gross amounts without UK tax deductions. You’ll need a Certificado de Residência Fiscal from the Autoridade Tributária as proof of Portuguese tax residency. Processing takes 12 to 16 weeks, so apply before you draw UK pensions income. The NT code only applies after you’ve triggered a PAYE record by taking a small original withdrawal.
Filing Your IRS Tax Return in Portugal
Declare all UK pension income on your annual Modelo 3 tax return, filed between April 1 and June 30. Failure to report creates penalties and interest charges.
When to Take Your 25% Tax-Free Lump Sum
Crystallise your 25% tax-free lump sum before establishing Portuguese tax residency. This benefit disappears once you become a resident in Madeira, and Portugal taxes the full amount as regular pension income.
Transfer Options: QROPS vs International SIPP
A transfer to a QROPS outside the EU/EEA triggers a 25% overseas transfer charge. International SIPPs provide lower costs, broader investment choice and multi-currency flexibility without the transfer penalty.
List of UK Pension Schemes You Can Transfer
Personal UK pensions, defined contribution schemes, and SIPPs qualify for transfer. Check HMRC’s official QROPS notification list before you initiate any overseas transfer.
Conclusion
Managing your UK pensions in Madeira requires careful planning, especially with the 2026 treaty changes. We’ve outlined how different UK pension types are taxed and explained Madeira’s lower regional rates. You’ll also find practical steps to avoid double taxation. Take your 25% tax-free lump sum before establishing Portuguese residency. This is your most important action. Portugal taxes the full amount as regular income after you become a Madeira resident. Timing makes a substantial difference to your retirement finances.
This article is for informational purposes only and does not constitute legal, tax, or financial advice. While every effort has been made to ensure the accuracy of the information provided regarding the 2026 UK-Portugal Double Taxation Convention and Madeira’s regional tax rates, tax laws are subject to frequent change and individual interpretation. You should consult with a qualified tax professional or financial advisor who specialises in cross-border retirement planning before making any decisions regarding your pension or residency status.
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