Free information on how to reduce your UK pension tax to 6.3%!

The purpose of this post is to make British Expats aware of how UK pensions are taxed in Spain and how to reduce this tax bill significantly.

Most of you will be British Expats living in Spain with your UK pensions still in the UK with no idea of how they are taxed in Spain. Many will also find it surprising when they have to pay tax on their 25% lump sum. It is important to understand how your pensions are taxed to pre-empt a shock to your retirement plans.

Taxation on UK pensions

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. Such Pensions are not deemed as having a capital value hence is not subject to wealth tax nor is declarable under the M720 rules that require the declaration of foreign assets.
The Spanish tax law treats lump sum withdrawals, drawdowns and lifetime annuities all as earned income hence there is no tax free element like in the UK. For this reason, if you are over 55 and considering moving to Spain from the UK, you should think about taking your lump sum in the UK before you move to avoid paying Spanish tax.

Example: For demonstration purposes only we have assumed the individual is a higher rate tax payer (47% if annual income is over €60,000)

Contributions into the Pension Scheme:      €100,000
Value of fund on date of withdrawal:           €150,000
Withdrawable amount:                                   €12,000
Taxable amount:                                              €12,000
Amount of tax due                                           €5,640 (tax rate of 47%)

UK pension death tax applies to UK pensions regardless where you are resident. This means if you die after the age of 75, your pension will be taxed at your beneficiary’s marginal rate on receipt up to 45%. It is taxed as earned income in the relevant year which could be a significant amount.

Taxation on QROPS in Spain

A QROPS stand for a qualifying recognised overseas pension scheme which was introduced by HMRC in 2006. Effectively it allows anyone with a UK pension to transfer their pension overseas. Find more information about QROPS here [link moderated]. The Spanish tax system definition of pensions exclude retirement schemes outside of Spain even if they received tax relief on contributions in the country of origin. For this reason, they are treated as income from capital invested rather than earned income. Furthermore, the taxation is not on the amount received but rather on the profit element received as investment income tax. The Spanish system taxes retirement schemes in two separate ways:

1.    Plan de Pension – This is the equivalent to a UK Pension I.e. Individuals are subject to Spanish tax relief on contributions into the scheme and income received is taxed as earned income.

2.    Plan de Jubilacion – A retirement savings scheme, such as an endowment savings plan in the UK, is subject to investment income tax on the profit element only.

Any non-Spanish pension plan such as QROPS is treated as a ‘Plan de Jubilacion’. The Spanish provider is required to calculate the profit element when making the withdrawal and issue an annual tax certificate to the member.

Example: For demonstration purposes only, we have assumed no other earned income in the tax year. Tax rates will increase at the appropriate tax band.

Contributions into the Pension Scheme:             €100,000
Value of fund on date of withdrawal:                   €150,000
Withdrawable amount:                                           €12,000
Taxable income:                                                       €4,000 (Capital is €8,000 and gain €4,000)
Amount of tax due:                                                  €760 (tax rate of 19%)

As you can see from the illustration above. QROPS is taxed very efficiently in Spain. Effectively only 6.3% is taxed fro the amount you withdraw.

UK pension, death tax does not apply to QROPS, meaning 100% of your pension fund passes to your beneficiaries free of tax.

Download a free tax guide on our website [link moderated]

You can also request a free consultation with one of our recommended advisers on our website.

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