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We will be retiring to Benidorm later this year and seeking residency via a NLV. As our income will mainly be from UK Government Pensions and military pensions, do we pay Tax on them in the UK, Spain, or both?
Spanish residents, are liable for tax in Spain on worldwide income.
If some of your pension income is from UK government service it will be taxed in UK however any tax paid there will be offset against your liability in Spain which will be calculated on gross income and then the UK tax paid deducted from the sum due.
Posted: Tue Apr 4, 2023 2:53pm
Super helpful member
Your crown pensions are not liable to tax in Spain, they will be taxed in the UK.
HOWEVER, they need to be declared on your Spanish tax return (in a box specially for crown pension proceeds) because even though they are not liable to tax, they are taken into account as income when setting your tax bands for the tax you DO have to pay in Spain.
Here's a ficticious example to illustrate what I mean. The tax rates are ficticious too.
Let's say you have an annual income of €10k in crown pension payments and another €8k in other income sources. Let's further assume that the Spanish tax rates are set at 20% for the first €10k of income, and 25% for the next €10k.
You might say to yourself, OK, my crown pension isn't taxed in Spain, so the only income taxable is the other €8k, which falls into the first tax band at 20%, so I will pay €1600 tax.
Wrong! The Spanish tax authorities will say this guy has a total income of €18k. He isn't liable to tax here in Spain on the first €10k because it comes from UK crown pensions, so we move on to the remaining €8k of the €18k which falls into THE SECOND TAX BAND at 25%. So tax payable is €2k.
Of course, we haven't taken into account personal allowances and there are other complexities concerning the applicable tax rates, but the principle I want to get over is that crown pension income is not taxed here but it has an effect on your Spanish tax band.
Herefordjack wrote on Tue Apr 4, 2023 2:53pm:
Your crown pensions are not liable to tax in Spain, they will be taxed in the UK.
HOWEVER, they need to be declared on your Spanish tax return (in a box specially for crown pension proceeds) because even though they are not liable to tax, they are taken into account as income when setting your tax bands for the tax you DO have to pay in Spain....
Read more...
...
Here's a ficticious example to illustrate what I mean. The tax rates are ficticious too.
Let's say you have an annual income of €10k in crown pension payments and another €8k in other income sources. Let's further assume that the Spanish tax rates are set at 20% for the first €10k of income, and 25% for the next €10k.
You might say to yourself, OK, my crown pension isn't taxed in Spain, so the only income taxable is the other €8k, which falls into the first tax band at 20%, so I will pay €1600 tax.
Wrong! The Spanish tax authorities will say this guy has a total income of €18k. He isn't liable to tax here in Spain on the first €10k because it comes from UK crown pensions, so we move on to the remaining €8k of the €18k which falls into THE SECOND TAX BAND at 25%. So tax payable is €2k.
Of course, we haven't taken into account personal allowances and there are other complexities concerning the applicable tax rates, but the principle I want to get over is that crown pension income is not taxed here but it has an effect on your Spanish tax band.
thank you very much
Posted: Tue Apr 4, 2023 6:21pm
Legendary helpful member
This link should help as not all crown pensions come under the agreement
Lynn
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Posted: Tue Apr 4, 2023 8:20pm
Helpful member
Herefordjack wrote on Tue Apr 4, 2023 2:53pm:
Your crown pensions are not liable to tax in Spain, they will be taxed in the UK.
HOWEVER, they need to be declared on your Spanish tax return (in a box specially for crown pension proceeds) because even though they are not liable to tax, they are taken into account as income when setting your tax bands for the tax you DO have to pay in Spain....
Read more...
...
Here's a ficticious example to illustrate what I mean. The tax rates are ficticious too.
Let's say you have an annual income of €10k in crown pension payments and another €8k in other income sources. Let's further assume that the Spanish tax rates are set at 20% for the first €10k of income, and 25% for the next €10k.
You might say to yourself, OK, my crown pension isn't taxed in Spain, so the only income taxable is the other €8k, which falls into the first tax band at 20%, so I will pay €1600 tax.
Wrong! The Spanish tax authorities will say this guy has a total income of €18k. He isn't liable to tax here in Spain on the first €10k because it comes from UK crown pensions, so we move on to the remaining €8k of the €18k which falls into THE SECOND TAX BAND at 25%. So tax payable is €2k.
Of course, we haven't taken into account personal allowances and there are other complexities concerning the applicable tax rates, but the principle I want to get over is that crown pension income is not taxed here but it has an effect on your Spanish tax band.
Thanks for this. It is a very useful example.
Could you clarify whether people with a crown pension would still get a Spanish personal allowance to set against their UK state pension and other pensions, or would this be assumed to be used up by the crown pension even though it isn't taxable in Spain? Unfortunately I have heard people say conflicting things on this matter, but it sounds like you understand the system properly.
Growing Old Disgracefully wrote on Tue Apr 4, 2023 8:20pm:
Thanks for this. It is a very useful example.
Could you clarify whether people with a crown pension would still get a Spanish personal allowance to set against their UK state pension and other pensions, or would this be assumed to be used up by the crown pension even though it isn't taxable in Spain? Unfortunately I have heard people say con...
Read more...
...flicting things on this matter, but it sounds like you understand the system properly.
thank you very much
Posted: Tue Apr 4, 2023 9:44pm
Super helpful member
Growing Old Disgracefully wrote on Tue Apr 4, 2023 8:20pm:
Thanks for this. It is a very useful example.
Could you clarify whether people with a crown pension would still get a Spanish personal allowance to set against their UK state pension and other pensions, or would this be assumed to be used up by the crown pension even though it isn't taxable in Spain? Unfortunately I have heard people say con...
Read more...
...flicting things on this matter, but it sounds like you understand the system properly.
I have submitted my own tax returns in Spain for the past five years, but I need to qualify this by stating that I legally decoupled from the UK tax system after Year One and now only pay income tax in Spain, my adopted country.
I have a UK crown pension as part of my income and I certainly get the Spanish tax allowances now in Spain. As far as I can remember, I got them in the first year too.
GrahamLynn wrote on Tue Apr 4, 2023 6:21pm:
This link should help as not all crown pensions come under the agreement
Lynn
Perfect example.
V
