The Spanish income tax system explained
British nationals residing in Spain, or who would like to live in Spain full-time, will need to pay relevant taxes for specific income earned. It can frustrating sometimes when not all the relevant information is provided to you. That’s why at PSI Consultants we have complied a list of the most important income taxes that British nationals are liable to pay in Spain.
INCOME FROM PENSION
Spain taxes pensions as general income and therefore the rates vary depending in which area you are a resident in Spain. There is a UK - Spain ‘Double Tax Treaty’ which determines where Spanish residents are taxed, however the completion of Brexit may change this situation. For now:
Lump sum pensions from the UK are completely taxable in Spain.
Private pensions from the UK are taxable only in Spain.
State pensions from the UK are taxable only in Spain.
Occupational pensions from the UK are taxable only in Spain.
Government service pensions from the UK are only taxable in the UK.
It is important for you to notify HM Revenue & Customs that you no longer reside in the UK and that you are registered and paying tax in Spain, otherwise pension income will be taxed in the UK. For UK state retirement pension, you will be paid at gross.
You will need to obtain a tax residency certificate from your local Spanish tax office to confirm your residency in Spain, and send this off to HMRC PAYE, PO Box 1970, Liverpool, L75 1WX.
INCOME FROM SELF-EMPLOYMENT
Income from self-employed work will be subject to a specific tax band depending on how much is earned. The net profit of income is considered for taxation, this is the gross income minus the business expenses.
Regardless of how much is earned, you will have to register for VAT (IVA) whether you are self-employed or your business is structured as a company. The standard rate of IVA is 21%. However, certain services are exempt or subject to reduced rates.
INCOME FROM EMPLOYMENT
British residents living in Spain are liable to taxed on worldwide income from any employment. It is irrelevant if the work is provided in Spain or in another country. So long as you earn gross employment income and bonuses, you will be taxed in Spain as general income.
Having said that, there are some special rules for certain benefits, meanwhile you may be able to apply for an exemption for work performed overseas, although this is subject to specific requirements.
THE BECKHAM LAW
British nationals who become Spanish residents as a result of employed work in Spain, may be able to utilise a special tax regime. You will be allowed to opt to be taxed as non-residents for the year of arrival and the following five years. Although, you will have to manually apply for this regime in the first 6 months of employment and living in Spain.
There will be many terms and conditions and therefore you will need to investigate if your particular circumstance is applicable to this regime. The Beckham Law only apply’s to applicants who work directly for a business and not self-employed work or to retired pensioners.
INCOME FROM PROPERTY RENTING
There is a 60% tax reduction for Spanish residents, available against the net rental income before tax is payable. This is applicable to a property that is being rented from the renters main home (Arrendamiento de bienes inmuebles destinados a vivienda) and not short-term holiday lets.
The net rental income is the amount due after deducting usual day-to-day running expenses, such as managing agents’ fees, home insurance, mortgage interest, repairs and maintenance and so on.
Non-residents who live in a country a part of the European Union are taxed on the net rental income from Spanish property after expenses at the flat rate of 19%. Non European Union residents pay tax at 24% on the gross rental income and expenses cannot be deducted.
INCOME FROM EXTRA PROPERTY RENTING
If you own a property in Spain that is not your main home, a notional rental income (Imputación de Rentas Inmobiliarias) is deemed to arise for periods where the property is not being let and is empty. This income for Spanish residents is added to their general income and taxed at progressive rates relating to how much is earned. Non-residents from the European Union are taxed at 19% while non-residents from outside the European Union are taxed at 24%.
This tax is based on 1.1% of the value (Valor Catastral) of the property owned in Spain. This is shown in IBI (Impuesto sobre Bienes Inmuebles) or SUMA, depending where your property is located in Spain. The Valor Catastral value will increase to 2% if it has not been revised in the last ten years.
This national rental tax applies to empty overseas properties owned by Spanish residents.
At PSI Consultants, our experienced legal & fiscal experts can help you determine what income bracket you fall in to and the taxes that apply to you. Furthermore, we can help organise tax payments and save you money where possible, boosting your personal funds and limiting your tax burdens.
If you would like to learn more about our Spanish services in the Costa Blanca area, please feel free to contact us at any time when our office is open between 9am - 2:30-pm, Mondays to Fridays.
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