One of the most common questions I hear from British clients who have moved to Spain, or are planning to, is whether they still owe tax to HMRC on their UK pension. The answer is more nuanced than most people expect, and getting it wrong can be costly.
Once you have spent more than 183 days in a calendar year in Spain, you are generally considered a Spanish tax resident. That status carries a significant consequence: Spain taxes your worldwide income, including pensions earned and held in the United Kingdom. This does not mean you will necessarily pay more tax than you would have done in the UK, but it does mean the rules change completely, and you need to plan around those rules rather than assume they will work the same way they did at home.
The double taxation treaty
The UK and Spain have a treaty in place to prevent the same income being taxed twice, but it is widely misunderstood. Under its terms, Spain holds the primary taxing rights over most private and workplace pensions paid to Spanish residents. This makes sense in principle, but there is a practical complication: HMRC deducts tax from UK pension payments by default, regardless of where you live. Unless you actively register with HMRC as a non-resident and request that your pension is paid gross, you can end up paying tax in both countries and having to claim a refund from one of them. The process is straightforward once you know it needs to be done, but many people do not find out until after the problem has already occurred.
How Spain taxes pension income
Spain applies a progressive rate to pension income, the same way it applies to other earned income. Rates generally start at around 19% on the lowest portion of income and rise to 47% or higher at the upper end, depending on your total income and the region you live in. Catalonia and the Basque Country, for example, apply slightly different regional rates. Your UK state pension is included in this calculation: it is not treated separately and does not benefit from any special exemption simply because it originated in the UK.
The 25% lump sum
This is an area where many people are caught off guard. In the UK, you are entitled to take 25% of your pension pot as a tax-free lump sum. That entitlement is a product of UK law, and Spain is not bound by it. If you take a large lump sum after becoming a Spanish resident, the Spanish tax authorities may treat it as taxable income in full, depending on the structure and timing. Taking that lump sum before you establish Spanish residency, while you are still a UK resident, is often a more tax-efficient approach, though the right answer depends on your individual situation and is worth discussing before you act.
What this means in practice
The key takeaway from the treaty and the Spanish rules is that moving to Spain does not automatically mean paying more tax on your pension. With the right structure in place, many clients pay a comparable or even lower effective rate than they did in the UK. But that outcome requires planning, not assumption. The steps involved, registering with HMRC, understanding your Spanish filing obligations, and structuring drawdown efficiently, are all manageable. They just need to be approached in the right order and with accurate information.
If you are approaching retirement or have recently moved to Spain and are unsure how your pension is being taxed, it is worth getting clarity before the next tax year begins.
Have questions about your situation?
Book a free 30-minute call to discuss your UK pension and investment position.
Book a Time to Talk