The Malta Tax & Customs Administration recently issued a comprehensive manual outlining the taxation framework for various types of pension income. This guide is essential for both residents and non-residents who receive pension income in Malta, as it clarifies the tax obligations and benefits associated with different types of pensions. Below, we delve into the key points highlighted in the manual.

 

Types of Pension Payments

Pensions in Malta can broadly be categorised into two types: contributory and voluntary contributory pensions.

Contributory Pensions
These are mandatory pensions funded through contributions from both employers and employees. These pensions are directly linked to employment income, with the amount of contribution proportional to the employee’s earnings and age. For the self-employed, contributions must be made three times a year—April, August, and December. Contributory pensions ensure financial security in retirement, with contributions deducted from the net earnings of employees and matched by their employers.

Voluntary Contributory Pensions
Voluntary pensions offer flexibility, allowing individuals to contribute at their discretion. Unlike mandatory pensions, these contributions are not linked to employment, enabling both employed and self-employed individuals to build additional retirement savings. Distributions from these pensions may be subject to taxation, depending on whether the payment is received as a lump sum or an annuity, and the tax status of the recipient at the time of distribution.

 

Taxation of Pension Income

The manual provides detailed guidance on how different types of pension income are taxed, with special considerations for retirees aged 61 and over.

Tax Rebate for Pensioners
Individuals aged 61 and above receiving pension income under Article 4(1)(d) of the Income Tax Act are eligible for a tax rebate. This rebate applies a special tax rate based on the taxpayer’s status—single, parent, or married—and is subject to annual caps as outlined in the Tax Rebate Pension Rules (S.L. 123.174). The rebate cannot be carried over or refunded, ensuring that pensioners’ tax obligations are calculated accurately, with standard rates reduced by the applicable rebate amount.

Tax Exemption for Pensioners
To alleviate the tax burden on pensioners, Malta has introduced a phased approach to exempting pension income from taxation. Starting from the basis year 2022, individuals aged 61 and over can benefit from a partial tax exemption, with 80% of their pension income exempt for the basis year 2025. From 2026 onwards, pension income will be fully exempt from taxation, subject to specified caps determined by future budgets. This exemption aims to support pensioners by reducing their tax liabilities significantly.

 

Overseas Pensions

Pensions earned from employment or residency outside Malta are also subject to taxation. All foreign pensions must be declared as taxable income in Malta, regardless of their origin. However, the impact of double taxation agreements (DTAs) between Malta and the source country must be considered. Malta has over 90 DTAs in place, ensuring that pensioners are not taxed twice on the same income.

Recipients of foreign pensions should comply with tax obligations in both Malta and the source country, maintaining all necessary documentation. Taxpayers are required to file a tax return in Malta, including detailed statements for each foreign pension received unless explicitly exempt.

 

Filing Requirements for Pension Income

Taxpayers receiving pension income must adhere to specific filing requirements to ensure compliance:

  • Tax Return Submission: All pension income must be reported in the annual tax return, including both domestic and foreign pensions.
  • Tax Payments: Taxes due on pension income must be paid promptly to avoid penalties.
  • Checking the Tax Balance: It is important to regularly check tax balances and ensure all payments are up to date.
  • Penalties for Late Filing: Late submission of tax returns or payments may result in penalties, emphasising the need for timely compliance.

For a comprehensive understanding of the guidelines and requirements, the full manual on the taxation of pension income can be accessed here.


For expert guidance on managing your pension taxation as well as further information or assistance, you can contact our tax principal at [email protected] or [email protected].