Tax on pensions when retiring to Spain

Leiden

I'm looking at the possibility of applying for a non-lucrative visa for Spain in order to enable me to reside in Spain which I understand would require me to pax tax in Spain. I understand that there is a double tax agreement between UK and Spain which means that you would not pay tax on the same income twice. 

My income consists of a UK state pension and also a works pension which would be classed as a government pension. From what I've read, the state pension would fall to be taxed in Spain, the government pension would continue to be taxed in the UK. So far, so good!

My question is this; in deciding the rate at which I would pay tax, would Spanish tax authorities aggregate both sources of income in order to arrive at this? For example, my UK state pension alone would probably place me in the lowest tax bracket (19%) for Spanish tax. However, if they included the government pension in the calculation, even though they would not actually be taxing me on it, could this could elevate the UK state pension to being taxed at one of the higher band rates?

I hope this makes sense, I'm asking on the basis that there may be others currently in exactly the same situation who can describe how it works in practice. Thanks in advance.

pinnks

You are broadly "there" with your understanding.  If you are resident in Spain, they have the right to tax your income wherever it arises, i.e. your worldwide income.  The UK has the right to tax income of a non-resident (you) that arises in the UK, hence the double taxation agreement (DTA).

As you say, the state pension is taxable ONLY in Spain (Article 18 of the DTA) and a Government Service pension is taxable ONLY in the UK (Article 18(2)(a)), unless you also have Spanish citizenship (sole or dual), in which case Spain get the tax (Article 18(2)(b)).

As Spain agrees to exempt the Govt Service pension, and, as its tax rates are on more of a sliding scale than our slabs of income at one rate or another, you need to look at Article 22(1)(b) which says, "Where in accordance with any provision of the Convention income derived or capital owned by a resident of Spain is exempt from tax in Spain, Spain may nevertheless, in calculating the amount of tax on the remaining income (or capital) of such resident, take into account the exempted income or capital" .

What this means is that Spain will base your tax rate on the level of your worldwide income, even if it has agreed to exempt some of that income from tax in the DTA.  For example, if a Spanish resident had income arising in Spain of, say, 50,000€, they would pay tax on that income at X%.  If, instead, their Spanish income was only 30,000€ but they also had a UK Govt pension of 20,000€, taxable ONLY in the UK, the rate at which their 30,000€ Spanish income would be taxed is the rate applicable to 30,000 + 20,000 = 50,000€, so the same X% at that which applied to the person whose 50,000€ income arose only in Spain.

Does this explain it?

2014 UK-Spain Double Taxation Convention (publishing.service.gov.uk) 

Leiden

That explains it perfectly, thank you.

It's the answer I expected, not the one I'd hoped for!

Do you know, would the same thing apply in reverse with HMRC? Would they apply the Spanish-taxed UK state pension against my personal allowance prior to taxing the UK Govt pension?

pinnks

No, the UK tax rules do not work that way.  If they did it would have to be provided for in Article 22(2).

Overall you will probably still pay less tax in Spain than you would otherwise pay if the treaty worked differently as you will benefit from the UK and Spanish allowances against your income.  That gives an overall £12,570 extra tax-free amount and the UK taxable income that remains will probably be all, or mostly, at 20%.  In Spain, your £11,500ish UK state pension may be taxed at a higher rate than the expected 19% but that probably won't negate your savings in the UK.

EDIT: it looks as though your personal allowance in Spain will be 6,700€ (£5,675), and I think the 19% range is then on the first 12,450€ (£19,550) above that allowance, with 24% on the next 7,750€ (£6,565), and and 30% on the next 15,000€ (£12,710).