How to retire to Portugal – and pay just 10pc tax

Portugal is the ultimate mainland European destination for sun-seeking pensioners who want to minimise their taxes – yet it hasn’t always been the most popular choice.  

Only 11,000 British pensioners lived in Portugal in May 2020, compared with more than 106,000 retirees who’d flocked to Spain, according to figures from the DWP.

The sun-soaked Iberian country has generous tax incentives, cutting pension taxes by more than half for Britons who relocate there.

On the healthcare front, all legal residents have access to government-subsidised medical treatments, much like in Britain. Expats have the same coverage as locals.

But there are a number of requirements any hopeful relocator would have to meet before getting the green light. 

Here, Telegraph Money explains everything you need to know about relocating to Portugal, from taxes and visas to pensions and property prices.

How much money you will need to retire to Portugal

Most countries in the European Union require proof that non-EU expats can maintain a certain level of income if they were to move there. 

Pensioners typically have to show that a combination of their savings accounts, private pensions, state pension, dividends and rental income meet the minimum requirement.

Portugal is no exception, but the bar is much lower compared with neighbouring countries. 

British pensions must be able to match the Portuguese minimum wage, which in 2023 is €760 per month. 

A retired individual arriving from abroad would only need to have an annual income or savings of €9,120 (£7,930), or €13,680 (£11,895) for a couple, for each year they live in the country.

Once they have a visa from the Portuguese consulate in Britain, they have four months to convert this into a two-year residency permit, which in turn is followed by a further three-year permit. 

After five years they can apply for a permanent residency permit, and could even get a Portuguese passport.

Jason Porter, of the financial adviser Blevins Franks, added: “The current UK full new state pension is worth £10,600 per year, which exceeds the D7 Passive Income Visa requirement for a single person in its own right, as will two state pensions for a couple.”

Getting the right to move: sort out your visa

Since Brexit, anyone planning to move to the EU must apply for a long-stay visa if they want to spend more than 90 days in a European Union country. 

For Portugal, you must apply for a local tax number, known as a Portuguese NIF number, and open a bank account in advance – though you may already have this if you have bought a property in Portugal.

There are two visas pensioners can apply for. 

The first is called the D7 Passive Income, which can be submitted at the nearest Portuguese embassy or consulate. This costs €90, and is valid for four months, during which time the applicant must replace this with the two-year residency permit at a cost of €160.

This visa requires proof of accommodation – either a signed lease agreement or confirmation of a property purchase – and evidence that the person applying has enough cash to look after themselves. 

You also need confirmation of private medical insurance – unless the applicant has an S1 from the UK, which confirms the NHS will cover any Portuguese medical costs. 

You can apply for an S1 if you have made NI contributions for the minimum of 35 years and you have reached UK state pension age. 

The private medical insurance can be cancelled either when an S1 is issued, or when you have confirmation you have access to Portugal’s universal health system, which is normally after you have been issued with your two-year residency permit.

The second type of visa, the “Golden Visa”, is more expensive but allows you to gain flexible residency rights in exchange for investing a substantial amount in local property or in the economy. 

However, the most common route – acquiring single or multiple properties worth €500,000 or more – is in the process of being discontinued. 

While other investment options for this visa are likely to remain, experts think they will involve backing Portuguese businesses, which might not be as popular. 

All you need to know about Portuguese tax rules

Portugal has some of the most attractive tax rules for foreign pensioners. On arrival they can apply for Non-Habitual Residence (NHR) status, which confers certain tax benefits. 

Pension income is only taxed at a flat rate of 10pc as long as it is sourced from abroad. In most cases, income from a pension is taxable where the pension scheme holder resides, so in this case, Portugal rather than Britain. 

The only exception is government employee pensions, which always remain taxable in Britain, regardless of where you might live.

This means British retirees moving to Portugal who qualify for Non-Habitual Residence would pay significantly lower taxes than if they remained in Britain. 

For example, someone with a state pension and other income which uses up all their personal allowances, would pay 20pc tax on £30,000 of pension income. This would only be 10pc if they moved to Portugal. 

These savings are much higher for higher-rate taxpayers, who cut their bills by three quarters. 

Any new arrival – a person who hasn’t been resident in Portugal in the last five years – can obtain NHR status for 10 years.

Mr Porter said: “Portugal has a very attractive tax system for retirees. The 10-year NHR tax rules mean UK nationals only pay 10pc tax on their pension income and no tax whatsoever on dividend income from outside Portugal. 

“There are also some interesting tax breaks around other savings and investment structures which make the post 10-year NHR period in Portugal very tax efficient as well.”

While Portugal has no wealth tax, it does have additional property tax, which is charged on top of council tax. 

This is on properties worth more than €600,000 per person, or €1.2m per couple. Over these values, 0.7pc would be payable up to €1m (or €2m for a couple). Beyond this the charge rises to 1pc up to €2m (€4m for a couple), then 1.5pc thereafter.

While there is strictly no inheritance or estate tax in Portugal, there is something commonly called “Stamp Duty”, which is charged at 10pc on assets passed to beneficiaries. 

But in most cases, there will be no Stamp Duty payable, as any inheritances passed to a spouse, child or parent are exempt from the charge. It is only beyond this lineal line that the charge might apply. 

However, the actual succession rules in Portugal may result in assets going to family members you may not wish to inherit immediately.

Under Portuguese law children, whether from a current or previous relationship, are classified as “reserved heirs”, which means they are entitled to a certain portion of the deceased’s estate. This rule supersedes the current spouse.

Since 2015 it has been possible to set this rule aside, by using the new European succession regulations, which allow people to elect for the inheritance rules of the country of their nationality to apply in their will. 

This means you can opt for British succession rules by writing a Portuguese will covering Portuguese assets, including the wish for the law of nationality to apply.

Buying property in Portugal

Portuguese property has been much cheaper than in Britain on average, but popular tourist destinations can be costly. 

The most expensive properties are in the Lisbon region, at €3,081 per sq. metre on average over one year to March 2021.

Meanwhile, properties in Lagoa in the Algarve cost €1,361 per sq. metre, on average.

This article was first published on July 23 2023, and has since been updated.