How much tax will you pay on your pension in Spain?

The amount of tax you will pay on your pension will depend on how the Spanish government classifies your pension. It will normally fall under either the standard income tax or the capital gains tax rates unless you qualify for special circumstances.

Please remember if you are planning on living in Spain for less than six months a year you will not be liable to pay tax on your pension in Spain. In this situation, the government would class you as a non-resident.

However, if you wish to stay longer than six months a year, you will have to register as a Spanish resident. Being a Spanish resident means that you are subject to Spanish income tax on all your worldwide income. The Spanish government class pensions as income, so standard income tax rates would normally apply. However, this isn’t always the case as Spain does not treat all pensions alike.

Let’s see how the government classes different pensions:

How the Spanish tax office treats state-paid pensions

The Spanish system treats state pensions from any country as earned income, and taxes it according to the standard income tax rates.

Your personal allowance is normally €5,550. However, the allowance is €6,700 when the taxpayer is over 65 years of age and €8,100 when the taxpayer is over 75 years of age.

How the Spanish tax office treats pensions paid by a former foreign employer

The government classes these pensions as normal income and taxes them accordingly, like state-paid pensions.

How the Spanish tax office treats pensions paid by a foreign Government employer

A pension paid by a former State employer is exempt from income tax in Spain if a double tax treaty exists between Spain and the other country. Many countries have a double tax treaty with Spain. You should check with the local tax authority in your country which pensions are classed as government pensions and obtain a copy of the official list. This will be very helpful if you ever have to provide evidence to the Spanish tax office.

How the Spanish tax office treats the exemption will depend on each tax treaty. Under normal circumstances, this type of pension is not taxable in Spain as it is paid at source in your home country. However, it is important to remember that it will be considered when calculating your Spanish personal allowance. It will also contribute towards your lower tax rates if you have any additional sources of income. This could potentially lead to your other income sources being taxed at a higher rate.

How the Spanish Tax office treats private pension plans

Foreign private pension schemes or tax-free savings accounts are not treated as pensions by the Spanish tax system. They are subject to taxation like investment schemes. The Spanish tax office treats these saving schemes in different ways, and will depend on three factors:

1. Whether the funds are inaccessible until you reach the age of retirement.
2. Whether the funds are managed by a financial institution.
3. How your income can be withdrawn from the scheme on reaching the age of retirement, for example, if you are able to withdraw a lump sum tax-free or take an annuity.

Let’s see how these variables can affect you:

What happens when you withdraw a lump sum from your pension?

One of the most important differences in tax treatment is when a particular country allows a tax-free lump sum withdrawal from a pension scheme. This tax exemption is not recognised in Spain so it would be taxed accordingly. We recommend that if you find yourself in this position your tax-free lump sum should be withdrawn before becoming a tax resident in Spain in order to benefit from the tax relief.

If your pension or savings scheme is not recognised as a pension by the Spanish tax office, you will enjoy a much more favourable tax treatment in Spain. In this case, you will need to apply the capital gains tax rates to your scheme. However, calculating exactly what you need to pay can often get very complicated so we would encourage you to seek professional advice to obtain the exact amounts. Remember capital gains tax only taxes the profit gained on your original investment.

The rates of capital gains tax that would apply to your withdrawals are as follows.

What happens when you receive annuities?

The Spanish government taxes annuities very favourably as a proportion of the income is tax-free, and only the balance is subject to income tax.

The percentage of your annuity which is taxed is determined by applying a fixed percentage between 8% and 40% to the amount you receive. Your age when you start withdrawing your annuity will determine the amount of tax you will pay. For example, a person under 40 years of age would have 40% of his annuity income taxed leaving the remaining 60% tax-free. A person aged 70 or over would have 8% of his or her annuity income taxed leaving 92% of it completely tax-free.

Annuity income is taxed as savings income so the standard capital gains tax rates apply - see table above.

The above tax treatment normally applies to annuities which have not been acquired through inheritance or other means of succession. Nor do they apply when an employer has not contributed to the savings. If this is not your case we would advise you to seek the advice of a professional tax specialist.

For temporary annuities (an annuity paid for a fixed period of time) the relevant percentage applied to the income depends on the duration of the annuity i.e. for an annuity up to five years 12% is liable to Spanish tax leaving 88% exempt; for an annuity over 15 years, 25% is taxed and 75% exempt. Depending on your individual case you should seek advice from a tax specialist.

Will you be affected by the Wealth tax?

For those with substantial pension pots (above €500,000 or €700,000 depending on the autonomous region) trying to establish whether your retirement scheme is subject to additional wealth tax can be problematic. As a general rule, if the retirement scheme funds are inaccessible until a particular age, the funds should be exempt from wealth tax. However, as mentioned before, each foreign pension scheme should be examined by a tax specialist to confirm the correct tax treatment and rates.

Now that you know the basics of how your pension will be taxed in Spain, why not go to the next step? Learn how to make your tax declaration and much more by looking at our full guide to the Spanish tax system.