Fore 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. There is an abatement of between €2,652 and €4,080 available against such income when calculating the taxable income.
In order to notify the UK tax authority that a tax payer is registered for and paying tax in Spain they should obtain a certificado de residencia fiscal NEN - España Convenio from the local tax office.
This certificate should then be sent to:
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. 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 new UK/Spain double tax treaty, which has been in force since 1st January 2015, 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. If paid by a local authority it may be a government service pension, but even then, for the purposes of the relevant double tax treaty it may not be.
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 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% and 8%) 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% of his annuity income taxed leaving the remaining 60% tax-free. For a man aged 70 or over, 8% of his annuity income is taxable with the remaining 92% tax-free. Annuity income is taxed as savings income, so at 20% on the first €6,000; 22% on income between €6,000 and €50,000 and then 24% on anything over €50.000 (for 2015).
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 fund.
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% is liable to Spanish tax leaving 88% exempt; for an annuity over 15 years 25% is taxed and 75% 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.
Pension lump sums are taxed in Spain if received while you are Spanish tax resident. So you could take a lump sum before you become a tax resident of Spain or, if you believe you will qualify for the much reduced annuity taxation system, an option could be to commute the lump sum into higher pension income as this may be a better option. The taxable amount is calculated as the difference between the capital received and the contributions you made and this will be taxed at the savings income rates which are20% on the first €6,000; 22% on income between €6,000 and €50,000 and then 24% on anything over €50.000 (for 2015).
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 is advised to seek personalised advice.
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