Taxation on UK Pensions in Spain

UK pensions are taxed as earned income in Spain. Non-residents are subject to UK income tax at source at the member’s marginal rate. You have a few options which can be complex without the correct advice.

Spanish tax law treats income from a UK Occupational Pension Scheme in a simple manner. The amount received is subject to income tax in Spain as earned income. Please refer to the applicable income tax bands in Spain. Such pensions are not deemed as having a capital value, hence they are not subject to wealth tax nor are declarable under the M720 rules that require the declaration of foreign assets.

Spain′s DTA (Double Taxation Agreement) allows residents to obtain an NT tax code from HMRC to allow them to withdraw income from their pension without the deduction of UK tax at source. You can only receive an NT tax code if you have taken income from a pension before (not including your 25% PCLS which is free from UK tax at source anyway). You can also avoid paying emergency tax if you have a P45 dated the same year you requested the payment – this can only be if you are receiving any other UK sources of income for that year and live overseas. Should you not have an NT code or a P45 for that year, you have three options:

• Option 1 – When you withdraw your 25% PCLS, also withdraw the minimum withdrawal amount of income from your pension at the same time. The pension will then be informed of your NT tax code/tax code which can then be used to avoid income tax being deducted at source for all future payments. This can take months to obtain.
• Option 2 – Withdraw the minimum amount of income and wait for your NT tax code before taking the desired income/ad-hoc amount
• Option 3 – Take a withdrawal and then claim the tax back from HMRC at the end of the year. It is your job to reclaim the tax with HMRC every year. If you are a Spanish resident, you shall only be taxed in Spain as stated under the new double taxation agreement (DTA) that came into effect on 1 January 2015. This means a claim can be made to HMRC so that no UK withholding tax applies.

It is important to note that a 9.1% social charge is payable on any income taken from a pension (7.4% for pension income under €2,000 a month/€3,000 per couple unless you hold EU Form S1 or are not affiliated with the Spanish healthcare system. The rules surrounding this can be quite complex and require specialist advice.

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