Tax in Spain for UK pensioners

Are you a Spanish tax resident?

Spanish law and tax advisers describe three main tests. You are generally tax resident if:

• you spend more than 183 days in Spain in a calendar year (short absences can count as time in Spain unless you prove residence elsewhere);
• the main centre of your economic interests is in Spain; or
• your spouse and dependent minor children habitually live there (a presumption you can rebut).

PwC’s tax summaries note that residents are generally subject to Spanish personal income tax on their worldwide income. A residence visa lets you live in Spain; tax residence depends on days, family, economic ties and treaty rules, so the two can differ.

Spanish income tax on pensions

Pensions are taxed as general income on a progressive scale. PwC explains that the scale is the sum of a state rate and a rate set by each autonomous community, so exact rates vary by region, and its published scale can be used as a guideline.

Source: PwC Worldwide Tax Summaries. PwC notes that final tax depends on the region and that in some regions the headline rate reaches 54%. Personal allowances and deductions reduce the amount taxed. Check the scale for your region.

Savings income, such as interest, dividends and gains, is taxed on a separate and generally lower scale. Non-residents are taxed only on Spanish-source income and at different rates.

How UK pensions are treated

The UK and Spain have a double taxation agreement. The Spanish tax agency’s summary for residents with UK income says:

• pensions from previous private-sector employment fall under Article 17 and are generally taxed only in Spain;
• pensions paid for government service fall under Article 18 and are generally taxed only in the UK, unless the person receiving them has Spanish nationality, in which case they are taxed only in Spain.

Tax advisers generally treat the UK State Pension like other Article 17 pensions, so it is taxed in Spain if you are Spanish resident. A UK government service pension is exempt from Spanish tax but still counts when Spain works out the rate that applies to your other income.

In practice, the UK may keep deducting tax at source from a private pension until HMRC is satisfied that you are resident in Spain and taxed there, so applying for relief under the treaty is an extra step. The State Pension is paid without UK tax deducted. GOV.UK’s guidance on tax treaties is a starting point, and an adviser can help with the forms.

The Beckham Law: why it is not usually for retirees

The Beckham Law, formally the special regime for workers displaced to Spain, is often quoted for its flat 24% rate on Spanish-source employment income up to €600,000, for up to six years.

The key point for retirees is the entry test. Descriptions of the regime from Spanish tax advisers and law firms say it applies to people who move to Spain because of work: an employment contract with a Spanish employer, a posting letter from a foreign employer, or similar work-linked situations such as certain directors, entrepreneurs and remote employment. The person must also not have been Spanish tax resident in the previous five years.

Other taxes to ask about

Spanish residents can also face a net wealth tax and inheritance and gift taxes whose rules differ by region. Property purchases carry their own transfer taxes. These depend heavily on your assets and where you live, so we do not give figures here. Raise them with an adviser before you move, particularly if you hold a large pension pot or property in the UK.

Questions to settle before you move

1. How many days will you spend in Spain each year, and will your family live there?
2. Which of your pensions are private-sector and which are government service pensions?
3. Will you apply to HMRC so UK tax is not deducted at source on private pensions?
4. What will the Spanish scale in your region mean for your total income?
5. Do wealth or inheritance taxes affect your estate?

Common questions