Local government pension (lump sum) tax Spain

Hi First post and apologies if it has been covered before. My question relates to the treatment of a UK local government pension lump sum payment by the Spanish authorities. I am a Spanish tax resident and work part time, which I intend to continue doing. I plan to take my UK local government pension early, in September, and understand this can only be taxed in the UK, with only my personal allowances affected in Spain due to the double taxation agreement.  Is the associated lump sum payment treated the same way, i.e taxed in the UK,  or is it classed as simple unearned income that will be fully taxed in Spain. Thank you

Hi,

Any amount over the tax free amount will be taxed in the same way.

Thank you.

My first post, linked to the previous post. Tax resident in Spain since 2004, my bad experience with the DTT 2013 was eventually resolved by HMRC intervention with Hacienda, following which around 3000euros has so far been refunded, as I had been taxed on the LGPS . However, it seems there is still a form of double taxation (as I see it) via box 470 of the tax return. The info from the P60 is inserted for addition to any income taxable in Spain, for the purpose of calculating the %tax rate on income only taxable in Spain. (In my case the DWP pension) this total tips my rate of tax from 19% to 24% on the DWP pension. My understanding is that Spain can do this under their own rules. It does seem a bit harsh to increase that tax rate on just a UK state pension by this means, using income covered by the DTT 2013.

Hi Beiderbeck Dunleath,
HMRC cannot comment on the tax laws of another country.
Thank you. 

 

Beiderbeck Dunleath For what it's worth, this is in a lot of DTTs that I have looked at, and reflects how the domestic tax rules of the other country operate. I know this from the UK/Germany treaty and as I understand it, the underlying German tax policy is that the rate at which a person pays tax should be set by reference to their global income, not by reference to the amount of that income that is taxable in Germany. So, a person with income 50,000€, 10,000€ of which is exempted from German tax under the DTT, will pay tax on their remaining 40,000€ at the same rate as a person with income of 50,000€ arising wholly within Germany. We may not like that policy but it is not double taxation, as the income defined in the treaty is taxed only once.

I posted about one month ago, regarding the DTT 2013 re UK/Spain. The reply from HMRC Admin 25 missed the point which I probably did not make clear. In the tax return, I declare the UK government service pension, lifted from the P60, but it is entered as gross, when I have already paid UK tax. So, that gross amount is added to the UK state retirement pension thus putting that pension (including the UK tax already paid as on the P60) into a higher Spanish tax bracket. I think that is highly questionable, and nobody seems able to offer the correct answer. I know HMRC cannot comment on the tax rules of another country, but clarification on Art18 of the DTT 2013 is really what this is about.

I fail to see your problem. You LGPS is taxable only in the UK (assuming you do not have Spanish citizenship) and your UK state pension is taxable only in Spain. However, Spain reserves the right, in Article 22(1)(b) of the DTA, to look at your gross worldwide income when setting its tax rate. The outcome is that your UK state pension together with your other income that is taxable in Spain, are taxed at the tax rate that would apply if the LGPS pension was also taxable only in Spain. This has nothing to do with Article 18, or DT Individual (Spain), so far as I can see. As mentioned, this is set out in clearly in Article 22(1)(b): "Where in accordance with any provision of the Convention income derived or capital owned by a resident of Spain is exempt from tax in Spain, Spain may nevertheless, in calculating the amount of tax on the remaining income (or capital) of such resident, take into account the exempted income or capital." I don't know what the Spanish tax return looks like but imagine there is a box or annex that allows you to report income that is exempted from Spanish tax by reason of a DTA for the purpose of establishing the rate of tax applicable to the income that is taxable.