If there is one question we get frequently at our offices, that is about pensions and their associated taxes.
But in this article, we solve them all.
What’s next is a complete guide regarding taxes on pensions in Spain. We will answer once and for all if you actually need to pay taxes on your pensions (and at what rate if the answer is yes), when and how to do it, all available allowances, and much more.
What tax does apply to pensions?
The first thing we must clarify is the perspective or categorization the Spanish Tax Agency does regarding pensions.
In that sense, pensions are considered an income, and hence are subject to the income tax (in Spain called “IRPF” or “Impuesto Sobre la Renta de las Personas Físicas”).
The exact rate depends on how much income you generate, and the different allowances that can be applied.
We will explore both concepts later on in this article so that you can understand the exact tax percentage you will face (in case you need to pay taxes on your pension).
By now, bear in mind that pension = income.
Nevertheless, things are not that simple, and we find an important difference when it comes to private pensions.
Let’s take the example of the US traditional IRA and 401k, which are taxed as pensions too.
Nevertheless, Roth IRA or Roth 401k, are not treated as pensions, and both would be taxed through the wealth tax, but also taxed under the income tax only once you make withdrawals.
Do I pay tax on my pension if I live in Spain?
The answer, as usual, is that it depends.
And in this case, it depends on three main factors:
Being a tax resident (or not)
If you spend more than 183 days per year in Spain (that is, 6 months), you will be regarded as a tax resident.
That is the typical case of non-lucrative visa holders who receive a pension.
Being a tax resident means you will pay income tax in Spain (“IRPF”) for all incomes you generate all around the world.
That, of course, includes pensions.
Hence, as a tax resident, you may probably need to pay taxes on this type of income. But in order to make sure we must move on to the next section.
Source and total income per year
In case you are a tax resident, there are two other things to consider: the total amount of income you generate per year, and if that income comes from a single source or from more than one.
What happens if you just earn your income from a single source (in this case, you just receive a pension)?
- Then, if the amount you perceive per year is less than € 22.000, you don’t need to file an income tax return, and hence your pension will be tax exempt
- But if you earn more than 22k per year from your pension, you will need to pay taxes on that income
On the other hand, if apart from your pension you have other income sources, the threshold is much lower:
If your total income (combining pension and any other source, like a rental income) is higher than € 12.000 per year and the income from the smaller source is more than € 1.500 per year, then you must file an income tax return and pay taxes on your pension.
Pensions collected from outside Spain
As we mentioned, as a tax resident you pay taxes on ALL incomes you generate worldwide.
This includes pensions collected both in Spain and outside Spain.
So you would still declare and pay taxes on pensions coming from abroad.
Nevertheless, there is one exemption.
If in the country from where you received the pension you also had to pay income tax on it, and Spain has a double treaty convention with that country, it is possible that you won’t pay that same tax again in the Spanish territory.
In many cases, you would just pay in Spain the difference in case the tax rate applicable in Spain is higher than the one in your country of origin, even though in many others you would pay the full amount in Spain and then request the corresponding refund to your country of origin.
The bottom line is that thanks to those treaties, you avoid paying the same tax twice, one way or another.
The vast majority of countries do have a double tax treaty between Spain, including for example the UK, but make sure to check the complete list of countries with this agreement first to be fully sure.
Tax rates on pensions
Defining an exact percentage is quite complex, as the exact number depends on many factors.
First of all, we have the general income tax rule, which is a progressive rate that goes from 19% to 47% depending on how much you earn.
But then, you also find the different allowances and deductions that will make the base rate lower, and hence allow you to pay less.
And what happens to tax retained at source?
As always, it depends on your pension, but on average they at taxed at a 7.7% rate, while the highest state pensions enjoy, at least, a 19% rate at source.
There are several allowances available that will help you save taxes.
- If you are aged between 65 a 74, you have an allowance of € 6.700
- If you are aged over 75, that allowance is € 8.100
- Besides, everyone has a personal € 5.500 allowance
How do these allowances work?
You would apply that “allowed” amount to the corresponding tax bracket and just pay the lowest rate available on it (instead of paying all your income in total based on the corresponding bracket for the total amount).
Do pensions pay capital gains tax in Spain?
No. As we mentioned before, pensions are considered an income, and hence are levied through income tax and not on capital gains taxation.
The only exemption comes from private pensions like Roth IRA or Roth 401k which are taxed through the wealth tax.
How to pay taxes on your pension
All your income must be paid yearly through the annual income tax declaration.
This declaration must be filed from April to June of the following year.
There is where you would declare and include your pension, and pay the corresponding tax percentage.
Nevertheless, this can be quite complex, and our advice is to get in touch with our tax lawyers so that we can guide you step by step and make sure you fully understand how your pensions will be taxed, and by how much.
We will also make sure you don’t miss any deadlines in case you need to declare them, and we will help you find all possible allowances to save money.
Hence, if you want to access the most cost-effective and effortless way to fully understand your tax obligations, contact us today: