Andalus

So, if one was resident in Spain and receiving a UK state pension and a UK government work pension, then:
The UK state pension would be taxable in Spain;
The UK government work pension would be taxable in the UK?

However, I've also seen something to the effect that, whilst the UK government work pension would not be taxable in Spain, it would still be assessed as income in Spain for the purpose of determining the rate of tax, i.e. it could push you into paying a higher % tax rate on the UK state pension.

Have I understood this correctly?

Fred James

Exactly. In simple terms the UK exempt pension is added to the rest of your income. Although not directly taxed, it may lower the access points to a higher rate of tax on the rest of your income.

Joppa

Plus it will reduce any personal tax-free allowance you have in Spain.

Andalus

Could you expand on this. I thought the allowances were a fixed starting point, so to speak?
So the over-65 amount is €6,700, above that you become liable for tax and the UK taxed income when added to the equation could take you from the 19% bracket up to 24%, 30% etc.

But the €6,700 would remain the same??

Actually, that's also raised another question for me; where you have income (above your allowance) the rate up to €12,450 is 19% and then from €12,451 to €20,200 it's 24%

Is the 24% rate only on the portion between €12,451 to €20,200 or is it then applied equally across everything above the allowance?

bobd22

I'm not sure that is the case. You declare it as UK tax paid if you had no other income theb you would not pay any Spanish tax. Yes it's taken as income in Spain in relation to tax thresholds but that's it. Surely if it's as you say and one had other taxable income in Spain by using the UK paid government pension as you say reducing your tax free threshold would in reality be a form of double taxation? I'm not an expert I use a gestor to do my Spanish tax which includes government pension and UK property rental income both UK tax paid I'm sure it doesn't affect my tax free threshold which is used up by declaring UK state pension and savings interest etc. I then pay tax on what's over the threshold. Maybe Fred could clarify? My understanding is if overall income takes me into a higher threshold I pay tax at higher rate on amount over basic threshold?
​​
​

bobd22

My understanding is it's like UK you pay the higher rate tax on the proportion over higher threshold not the whole amount of income? Again maybe Fred could confirm.
​​​​​​

Andalus

That would be my guess as well.

But, say for argument's sake, my only 'Spanish-taxable' income is my UK state pension and that would put me in the up to €12,450: 19% bracket.
But then my UK government work pension (taxable in the UK, not taxable in Spain) would notionally bring me into a higher band, say the €20,201 to €35,200: 30% band.

Does that mean that my UK state pension, over and above my allowance, is taxable at the 30% rate?

Any expert advice much appreciated.

bobd22

Are you drawing your state pension now? If not and with a government pension you may find your UK state pension is under the full amount . Reason being to obtain the government pension we were what the call opted out . We paid slightly less NI and after the new single tier pension came in, in 2016 that affected amount we government pensions were paid in state pension . My state pension is reduced in the region of £50 per week as a result of this and I basically get what the state pension was pre the 2016 change. It all depends on how long you were in the government pension scheme.

Andalus

I have been getting the state pension for about 4 years and it is reduced, I think, to reflect contributions that were diverted into the government works pension which I began receiving pre-2016.

So, in simple terms, if I add together UK state pension + UK government works pension, whatever tax band that lands me in is the rate at which Spain would tax me on the UK state pension?

bobd22

No they would tax your state pension and any other income savings interest etc. you declare your net income from government pension . Spain then using total income to assess your tax threshold it may be that both will take you into higher band but you only pay the higher rate on amount over the basic tax free threshold and your government pension is exempt Spanish tax as tax has been paid in the UK. It's only taken into account to assess your tax level. Hopefully Fred will be along and explain better than me.

Fred James

Well I will try.

Between you , you have got the concept pretty right. However it’s actually more complicated than it looks.

There are a number of "personal” allowances. The obvious ones are the basic age related ones. €5550 for everyone, €6700 for over 65 and €8100 if over 75. In addition there is a general ”working” allowance of €2000 which pensioners and workers get. These allowances are applied in full and exempt income does not affect them.

However there is another , more recent allowance for people on “low” incomes. For some reason it is rarely mentioned on the numerous ”Taxes in Spain” websites, but this is from the AEAT official guidance.

The amounts that will reduce the net income from work are increased, also increasing the amount below which this reduction will be applied.

This reduction will apply to taxpayers with net income from work less than 19,747.50 euros as long as they do not have income, excluding exempt income, other than income from work, greater than 6,500 euros.

The new amounts of the reduction are as follows:

• Taxpayers with net income from work equal to or less than 14,047.50 euros : 6,498 euros annually.
• Taxpayers with net income from work between between 14,047.50 and 19,747.50 euros : 6,498 euros less the result of multiplying by 1.14 the difference between work performance and 14,047.50 euros annually.

It’s actually a very generous allowance and it effectively means that that the tax threshold for a 65 year old pensioner is €15198.Now, looking at how the receipt of a UK government pension could affect this, you will note from the AEAT description that the extra allowance is not available to taxpayers with other income (typically savings interest and dividends etc) that exceeds €6500. As noted, this does not include “exempt” income such as UK government pensions. So far so good, BUT the addition of the exempt income to the tax base could eat into the availability of of this special allowance. Bearing in mind that the average government pension will be big enough to negate this extra allowance totally, that would cost the taxpayer about €1200 in extra tax. That is in addition to any extra tax due as a result of the exempt income pushing you past the initial €12500 tax threshold of 19%.
On the question raised about tax thresholds, you only pay the tax rate within the threshold band, when your overall income exceeds a threshold, you only pay the higher rate on the income that falls within that higher threshold. It does not affect the tax paid on income within the lower bands.

As you can see, it’s suddenly got a bit more complicated than you may have thought. Unless your maths is pretty good, if you want to check how it affects you, personally, then your best bet is to use the tax simulator on the AEAT website when it becomes available in April 2024.

Andalus

Fred, thank you for shedding some light on what I agree is a much more complex area than I'd envisaged. Can I draw on your expertise further.

The more recent allowance you refer to seems to relate to income specifically from work, rather than general income, is that correct?

I'm also interested in the allowance for married couples, for the first taxpayer, a general tax allowance is €5.550 and €3.400 for the second. Are these in addition to the basic personal allowances €5,550 for people under 65, €6,700 for over 65? In other words, a married couple under pension age might attract €11,100 for one and €8,950 for the second? (€12,200 and €10,100 respectively for a couple over pension age?)

I was also taken with your point that 'you only pay the higher rate on the income that falls within that higher threshold'. Would it not make a difference then in which order the income was considered? For example, if the UK state pension was taken first it might use up all or most of the allowance, tax (at either the basic or higher rate?) would then only be payable on the balance? If, however, the exempt income was taken first and the UK state pension was at the back of the queue, so to speak, then might you end up paying tax on the entire UK state pension and at a higher rate??

I agree, a tax simulator, when it finally lands, would be very welcome!

Lynn R

The low income allowance also applies to pension income (which is treated as income from work by AEAT).

Married couples can opt to make either a joint declaration or individual ones, whichever is most beneficial in their circumstances. If a joint declaration is made then the first taxpayer receives the basic personal allowance (€5550 or higher if over 65) and the second €3,400. Obviously it is only beneficial if the second taxpayer does not have enough income of their own to make full use of the basic personal allowance. No, the allowances are not doubled up.

Fred James

It’s worth pointing out that the tax program automatically calculates the tax due on both options ( joint or separate) and you choose the better option.

Fred James

It makes no difference. All of the income types are dealt with by the program which does not give you any such options. It’s a totally computerised system. You can do it yourself, get an accountant to do it or even get a person at the tax office to do it. All will use the same program. It’s a self declaration system, you do not need to produce any backup paperwork.