Sorting Out Your Taxes When You Move to Spain

Along with the Spanish lifestyle, sunshine and beaches also come the taxes.

People move to Spain for lots of reasons: to enjoy a pleasant retirement or early retirement or earlier on in life to begin again, perhaps even to start a family or a new business. It’s an exciting time making the move but there are some tax implications and, tedious though the whole business of taxes is, it is better to be forewarned than unprepared.

Will I have to do a Spanish tax return?

Most people will have to do a Spanish tax return once they are fully resident in Spain. There are exceptions if your income falls below certain levels:

– If total income is less than €8.000 and derived from only one source

– Anyone earning more than €1.600 in interest or €1.000 in rental income has to file a declaration regardless of the above rule

– If you an employee and earn €22.000 or less you are exempt from filing a tax return, provided you have no other untaxed income to declare.

You should note that in our first year of residency you should file a tax return however low your income, even zero, but thereafter these minimum levels apply.

What about pensioners?

These rules apply to pensioners the same as everybody else: unless their total income from all sources falls below these limits a Spanish tax return should be filed. The exception is if your only pension is a UK government pension such as civil service, police, armed services (but not NHS) – this income is taxed in the UK still and not declarable in Spain.

Besides being the right thing to do, registering for Spanish tax and declaring in Spain can bring benefits even with a small pension. For example say you receive a private pension from the UK and tax is deducted at source. If you register for Spanish tax, you can then get a certificate of tax residency from the Spanish tax office and use this to get your pension paid gross without tax deducted. This will be tax free in Spain up to around 8.000€ if you have no other income to declare because of the personal allowances you receive. If you stay in the UK system (illegally) you will continue to have tax deducted from your monthly pension; you can get a rebate later on when you file a tax return but it’s surely better to get your pension in full upfront.

Can I say goodbye to the Inland Revenue?

The HMRC (formerly called the Revenue) will continue to send you tax forms to fill in every year even after you have left the country unless you apply to be treated as a non-resident and be deemed a non-UK taxpayer. There is a link below to a revenue form called the P85 and this is how you apply.

There are certain sorts of income always taxable in the UK like property rental income from there and civil service pensions. Also if you move to Spain but keep a business or carry on working in the UK you may not find it so easy to shake off the Revenue. If you are in this split situation with interests in both countries take advice from a professional.

How much tax will I pay in Spain?

At modest levels of income the Spanish tax system is quite reasonable although as you move up the income scale the top rate of tax is quite high (43%) although the UK’s top rate will soon be even higher (50%).

But these rates are only applied after various allowances and credits are taken off your gross income:

General allowance 5,151 euro

Age allowance (65+) 6,069 euro (75+) 6,273 euro

Disabled allowance 2,316 – 7,038 euro depending on degree of incapacity

Child allowance

First child – 1,836 euro
Second child – 2,040 euro
Third child – 3,672 euro
Each further child – 4,182 euro

Elderly relative living with family whose income is less than 8,000 euro pa:

65+ 918 euro
75+ 1,122 euro

Maternity allowance

2,244€ pa per child under three years old.

Earnings related Personal Allowance (for employees and also applies to pensions)

Earnings not more than 9,180€: 4,080 euro (reduces to 2,652 on a sliding scale as income rises to about 13.000€)

There are other important allowances against mortgage costs, rental and dividend income and contributions to pensions and social security.

How does the system work? Do I need advice?

The Spanish tax system for residents is based around an annual declaration, universally referred to as “La Renta”. Everyone liable for tax must complete a Spanish Tax Form 100 between the beginning of May and the end of June, including all income and capital gains from the previous calendar year. So if you were tax resident in Spain during 2009 you should be getting your declaration in by 30th June 2010. Husbands and wives can file separate returns or joint ones (they choose depending on what is more advantageous).

A lot of people do manage to make this declaration without specialist advice particularly if their affairs are very simple. The banks and other institutions often help with the returns. Anyone with substantial income should probably seek advice to make sure they are claiming all the allowances to which they are entitled. Similarly if there are multiple sources of income or complexity caused by such things as overseas income, business interests or capital gains, advice should be sought. In the year of transition from the UK to Spain it would be worth talking to an adviser and perhaps if there is a question as to whether a couple should file a joint declaration or not.