Taxing UK Pensions

Spain

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Taxing UK Pensions in Spain

Understand how UK pensions are taxed in Spain...

For residents of Spain, UK occupational and state pensions are taxed only in Spain. The state retirement pension is always paid gross but any other taxable pension will be taxed in the UK until you confirm to the UK authorities that you are registered and paying tax in Spain. Pensions are taxed in Spain at the progressive scale rates under general income. Each taxpayer can apply €2,000 as deductible expenses on earned income. 

In order to notify the UK tax authority that you are registered for and paying tax in Spain you should obtain a Certificado de residencia fiscal en España (tax residency certificate in Spain) from your local tax office. This certificate should be sent together with the relevant HMRC application form to:

  • HM Revenue & Customs PAYE
    At: BX9 1AS, United Kingdom
    Tel: +44 135 535 9022 (if calling from outside the UK) 
    Tel: 0300 200 3300 (if calling from the UK)   

The Spanish authorities will generally want the tax due on your UK pension to actually be paid for the first time (in May/June of the following year) before they will issue a Certificado de residencia fiscal. This might not be until almost 18 months after you have taken up Spanish residence. If this is the case, you will ultimately be repaid any PAYE tax deducted at source in the UK while you were actually resident in Spain. 

Government service pensions (for example, civil service, local authority, fire service, police, most teachers) remain liable only to UK tax and are not directly taxable in Spain. However, under the UK/Spain double tax treaty, the income is taken into account when determining the effective tax rate on your other directly taxable income. Depending on how they are administered, NHS pensions may or may not belong to this category. For example, they can be classed as a government service pension if paid by a local authority. 

If you transfer your government service pension to a private scheme, the pension will be taxable in Spain. You may be able to transfer out as long as you have not reached the age of 59 nor commenced receipt of the pension.  

Annuities

Annuities are taxed favourably in Spain as a proportion of the income is treated as non-taxable capital, and only the balance is subject to income tax. The taxable income element of the annuity is determined by applying a fixed percentage (between 40 percent and 8 percent) to the amount received, depending on the age of the beneficiary at the time the annuity vests. For example, a man under 40 years of age would have 40 percent of his annuity income taxed leaving the remaining 60 percent tax-free. For a man aged 70 or over, 8 percent of his annuity income is taxable with the remaining 92 percent tax-free. Annuity income is taxed as savings income, so at 19 percent on the first €6,000; 21 percent on income between €6,000 and €50,000 and then 23 percent on anything over €50,000 (for 2016).

The above tax treatment normally applies to annuities which have not been acquired as a result of inheritance, legacy or other means of succession, and where an employer has not contributed to the savings phase. 

For temporary annuities (an annuity paid over a set period of time) the relevant percentage applied to the income depends on the duration of the annuity i.e. for an annuity up to five years 12 percent is liable to Spanish tax leaving 88 percent exempt; for an annuity over 15 years 25 percent is taxed and 75 percent exempt.

The tax treatment of an annuity from a UK private pension is currently a grey area in Spain. This is because often in a private scheme the trustees have purchased an annuity on your behalf. If the pension is recorded on your self-assessment tax return in Spain as an annuity, it can be accepted as such, even though you did not purchase it directly. If you do not make a claim for the annuity treatment, or your claim is not successful, your pension income will be taxed as general income at the progressive scale rates.

Lump sums

Pension lump sums are fully taxable in Spain if received while you are a Spanish tax resident. So if you wish to protect a lump sum from Spanish income tax, you should receive it before you become a resident of Spain. Alternatively, if you believe you will qualify for the much reduced annuity taxation system, you may be better off not taking a lump sum at all and having a larger pension. 

The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.

Blevins Franks Tax Limited Leading international tax and wealth management advisers to UK nationals living in Europe. Email