UK state pension increases for expats, but Spanish taxes apply. Photo Credit: Sasun Bughdaryan / Unsplash
British pensioners living in Spain could see their annual income rise by nearly ÂŁ500 (a little more than âŹ580) beginning next April, after the latest UK earnings figures pointed to another State Pension increase. However, how much retirees could actually gain depends on one final figure still to come, as well as the Spanish tax rules that apply to their pension income.
The âTriple Lockâ: UK State Pension increases depending on three key statistics
Under the UK governmentâs âTriple Lockâ policy, the State Pension increases each April by whichever figure is highest among: the average wage growth from May to July, September CPI inflation, or 2.5 per cent. With total average earnings increasing by around 3.9 per cent, the full new State Pension is projected to increase by up to ÂŁ489 (approximately âŹ570) per year, raising annual payments to approximately ÂŁ13,000, or nearly âŹ15,200.
Thousands of British pensioners in Spain could benefit from increase
For the roughly 100,000 British pensioners living in Spain, this projected boost offers much-needed relief from the rising cost of living. Unlike other UK retirees in non-EU countries, including Canada, Australia, or South Africa, where the pension remains static, British pensioners in Spain retain their rights to an annual uprating. This was secured under the UK-EU Withdrawal Agreement, which ensured that British expats across the EU could benefit from every Triple Lock policy adjustment.
However, the final increase is not yet set in stone. If Septemberâs UK inflation rate outpaces wage growth, the final pension boost could be even higher.
Spanish taxes and foreign exchange rates: the two major catches
How much of the âŹ570 increase pensioners will get to keep depends on two variables: the Spanish tax policy, and foreign exchange rates. For starters, the UK State Pension is non-taxable at source in Britain but must be declared in Spain by tax residents, since the Spanish tax agency, or Agencia Tributaria, treats UK State Pension payouts as earned income.
This means that, depending on the total personal income of the pensioner, as well as the autonomous community where they reside, income tax could range anywhere from 19 per cent to more than 45 per cent. The rise in the pension may push expatriates past local tax allowance thresholds, obligating them to pay more taxes on their annual DeclaraciĂłn de la Renta.
Additionally, because payments are issued in pounds sterling but spent in euros, exchange rate shifts will directly affect how much extra money lands in pensionersâ Spanish bank accounts.
The basics of securing the pension increase: expats advised to talk to a specialist
In order to secure the pension, UK expatriates should inspect their National Insurance record to confirm they have the 35 years required for the maximum State Pension. British pensioners are also advised to review their pensions with a cross-border financial specialist, in order to maximise their net retirement incomes in Spain.
All in all, while the upcoming Triple Lock boost is projected to bring a welcome financial relief to many British retirees in Spain, the true value of that extra income will depend on local tax obligations and the rate of exchange. Taking the time to research and talk to a specialist could help pensioners keep as much of that money in their pockets as possible.