Paying my income tax, IRPF

Nearly everyone who lives in Spain has to do an IRPF, income tax, return each year; the declaración de la renta. Before Brexit, some Britons argued they paid their taxes in the UK and didn’t need to pay in Spain. While there may be rare exceptions, in general, if you live here, you pay income tax here. Many Britons living in Spain are also taxed in the UK, for example, on Government Pensions (ex-teachers, ex-military and the like). However, thanks to a bilateral tax agreement between Spain and the UK, the income that is taxed in the UK isn't taxed again in Spain.

People, living in Spain, with an income below 22,000€ from just one source, and paying tax on that income, don't need to file a tax return. If the income is below 15,000€ the income can come from two sources but the second income can't be more than about 2,000€. These figures change each year, but they are roughly accurate for now.

So, it’s not easy to avoid doing a declaración. It's not a particularly onerous, difficult or expensive process if the money comes from wages, pensions, investments, rent and the like but it's always a bit of a hassle. Lots of people pay an accountant to avoid the faff.  If you’re self-employed, you’ll almost certainly need an accountant.

I’m not an accountant, so I’ll just talk about my own tax return. When I worked, my employers took tax off my pay each month. At the end of the tax year (31st December), the tax office—Agencia Estatal de Administración Tributaria, most frequently called Hacienda —starts to do the sums. It takes them a while to sort out the figures but come April they are ready and that's when the declaration period for the last full tax year begins. Declarations have to be submitted by the last day of June. If you miss the deadline, you get fined.

The Spanish tax office creates a borrador, or draft, of your declaración. You need to check it's right and fix any mistakes. When the form is complete, ready to submit, the final page tells you if you owe Hacienda money or if they owe you. For most people most of the info that Hacienda uses to work out the draft comes from the banks, employers, pension providers etc. In the case of we foreigners they rely on us to tell them about overseas sources of income. There are other details that Hacienda may not know about, things like charitable donations (which reduce your tax) or extra income you've had from selling things or winning prizes (which increases your tax). It’s up to you to include everything. If you decide to be naughty then the tax people have four years to catch up with you - after that you're in the clear, at least for that particular year.

If you have overpaid, Hacienda sends the money back quickly. If you owe money, you can pay in one or two instalments—the first at the end of June, the second in November.

I forget how that whole process of raising the borrador to paying money out or getting it back were done the first few years we were here, but it’s been sent via the internet for years now. In those early years I never saw the borrador. I used to make an appointment and go to the tax office. They’d ask me a series of questions. I’d answer, they'd fill in the various boxes for me and hand me a finished version to sign. Nowadays it's much more often submitted electronically but you can still go to the tax office and get Hacienda to fill in the form for you.

When the only money I earned in Spain was taxed at source I did my own tax returns, online. After a few years here I started to get a pension paid in the UK which was worth just £468 per year. To do it right I needed to do something with the tax people in the UK and include the income on my borrador in Spain. To be honest I wasn't quite sure how to do that so I rationalised it as being such a small amount that nobody would care. I was wrong. HMRC (the UK tax office) told Hacienda. He's on the fiddle, they said, and Hacienda came a calling. Luckily, there was an amnesty for overseas pensions, so I was able to sort it out. But they marked my card.

That experience decided me that I needed to use an accountant, especially when another couple of UK pensions kicked in. That didn't stop me having another round with Hacienda.

The second time was much nastier than the first. Right at the end of the four year period Hacienda queried an old declaración. To be honest I was a bit vague about even where I'd been working at the time. For some reason Hacienda had decided that my Teacher’s Pension was not a Government Pension. I asked the accountant, in Molina de Segura, who'd prepared the original documentation, to help me with my "defence". He wasn't at all helpful. Instead I used the accountant I'd been using in Pinoso for a couple of years. 

The accountant suggested, strongly, that the UK tax people should prepare a letter for me to say that the pension was a Government one. I rang them, I asked. But the UK tax people weren't having it; they dug their heels in and said that the Spaniards should get off their fat arses and read their double taxation manual, which covers all the agreements on taxation between the UK and Spain. In the manual every document about the agreement is available in both languages. HMRC also sent me a copy of the page from the manual which listed the Teacher's Pension as a Government one. My accountant, brimming over with national pride, and forgetting that he was working for me, said that the Spanish tax people were better than the British tax people and that the Spaniards would be right. In the middle of this, and completely innocent, I had to pay for all sorts of documents to be translated. I remember being particularly aggrieved that I had to do that for the P60—a certificate which says how much income you’ve got from any particular UK source. The translation had to be done by an official (read expensive) translator. The British tax year runs from April to April so to provide the information for a single, Spanish, calendar, tax year, I had to pay for two P60s to be translated. They had exactly the same words on both, apart from the tax year and the income figure. The accountant might not have been happy to represent me but he raised an invoice quickly enough. A few months later Hacienda came back and said that everything was in order. There was no compensation though for the money or time spent. It just went away.

Now, I don’t worry too much. Every April, my accountant asks for my income. I add it all up, including small things like prizes or vouchers, and send him the figures. He puts them into the borrador and, one day, tells me how much I owe. I always owe, because my income isn’t taxed at source. It's not a day I relish.

Sweet and sour

The Spanish tax year runs from 1st January to 31st December. Sometime around the end of March, or the beginning of April, the tax process begins and people have till June to either put in their claims for reimbursements or pay up what they owe. I still do a bit of part time work and I have some income from a Teacher's Pension so I have tax to pay. For years I did my own tax return by either going to the local tax office or doing it online.

A few years ago it all got a bit more complicated because there were rule changes about the taxation of overseas pension income. Well that and that I'd been evading tax just a little. HM Revenue and Customs dobbed me in to the Spaniards and told them about the 300€ or so I get each year from a tiny AVC pension fund. Pedro, a nice accountant in Molina de Segura sorted it all out for me and I stuck with him the next tax year too. Last year though I went back to doing it myself and ended up with a tax bill of about 1,200€ which was a bit of a shock. That amount represents a bit below four months pay from my very part time. It didn't seem fair or right but, after lots of Googling and questions on expat forums, the evidence suggested it was as it should be. So I gritted my teeth and paid up.

This year I added my pension to the draft tax return form online again and it looked as though I owed around 400€. I decided to ask an accountant, just to be sure. My appointment was this morning. All the sums done the accountant told me the tax people owed me about 50€. This is a good result. It turns out that accountants can do something on the tax returns that private individuals can't so, by not going to an accountant last year, I had doomed myself to overpaying my taxes. I'm taking a positive view of this and being thankful. I am not going to cry over last years spilled milk. There's the sweet.

In February of 2017 we got a huge "rates" demand. Well huge by our standards. Another five months of part time work's worth. With a bit of checking it turned out that there was an error. We are paying the rates for most of our neighbours house!

I put in an appeal with the Land Registry, the Catastro, and waited for something to happen. After about five months I sent an email asking, very politely, if they had any news. They told me they had, by law, up to six months to reply. I asked again after nine months and they told me that the matter was "under consideration". It's now around 15 months and their recent reply was also to wait. Taking on the Land Registry in hand to hand combat is not something I relish. So I booked in for an appointment with the local Consumer Protection Office to see if they could do anything on our behalf. My appointment was this afternoon. Their advice was to go to the Land Registry Office in Alicante and make my case face to face. Not exactly the sort of help I was looking for. Perhaps the most depressing thing was that the chap who suggested this also gave me the address for the local ombudsman rather suggesting that he's not hopeful about the outcome. And that's the sour.

Tax burden

Today is the first day that we Spanish tax payers have been able to sort out either under or over payments in the 2016 tax year. The Spanish tax year is the calendar year.

Everyone, resident in Spain, who earns over 22,000€ or has more than one source of income, has to make a tax declaration. If you earn money from more than one source you don't need to make a declaration if you earn less than 12,000€. The declaration is on worldwide income. What happens is that the tax office, Hacienda to you and me, sends out a thing called a borrador, a draft assessment. Once you are on the website you can check if the borrador looks fair enough. If you have just one job with one salary and things are pretty much as they were last year you may have to tweak a few things but, chances are, that the borrador will be close to the truth. For quite a few years all I did was to have a quick scan and press the accept button because Hacienda usually sent me back a few euros.

If your situation is a bit more complicated you can, of course, buy yourself the services of an accountant to help you fill out the form. I had a short period of being self employed and so I used an accountant, un asesor, for a couple of the declarations. The other option is to book an appointment at the tax office and go and get them to help you fill in your tax declaration. I did that at the beginning when the online version didn't exist. I also did it when I first had problems with the tax on my UK pensions. I reckoned that if a civil servant filled in the form it was much less likely that I would get a late night visit from some heavily armed tax officials keen to check my deductions.

My pension has been a right pain tax wise. It's paid in the UK. Part of it is a Government pension (the sort that police officers, the military, civil servants, teachers and the like get) and part of it is private. The Government Pension, under EU arrangements, has to be taxed in the UK. In the past the Government Pension didn't have to be declared in Spain. The amount was less than the UK tax threshold so, although it was in the UK tax system, I didn't actually have to pay any tax on it. The private bit, and that amounts to less than £400 per year, comes from AVCs. Although I nominally pay UK tax on that income too I have always known that it should be declared in Spain as part of my worldwide income. I didn't think though that even the meanest of mean tax officials would be worried about a piddling £400 earned and taxed miles away. I didn't bother to sort it out. It was pure, one hundred percent, sloth. I don't even have my usual excuse of worrying about speaking Spanish. The UK tax people must have grassed me up to the Spanish Hacienda and the Spaniards came looking for their unpaid tax. I was actually able to take advantage of a tax armistice to pay the back taxes I owed without any penalty but I did need to pay an accountant to sort it out.

Then some Spanish tax laws changed. Although Government Pensions remain taxable in the UK they now have to be declared as a part of my income or that of anyone in a similiar situation living in Spain. Were the situation to be that tax was due on that pension in the UK then Hacienda would knock the amount paid in the UK off any amount due in Spain. The system still avoids double taxation but it also did away with advantage that UK residents in Spain got from both the UK tax threshold and the reduced rates for people on low incomes in Spain.

So the borrador was available online today. Hacienda has a new computer programme this year and it has been widely billed as being easier to use. I agree. It was a lot slicker and a lot easier to understand than the older system. As soon as the system fired up it asked me how much I'd earned on my UK pension. I told it. I boldly clicked, I wasn't worried because I thought I was pretty well sorted, tax wise, nowadays. I insisted on legal contracts for both my teaching jobs and, without doing the sums on the tax deductions, I presumed that I was paying my tax bill every month from my salary much as people do in the UK with the PAYE system. I was wrong. For some reason one of my two employers appears to have paid none of my tax and the other seems to have paid at some discounted 2% rate. The lowest Spanish tax band is 19%. Basically then I've only paid a tiny fraction of the tax bill on my teaching work and none of the tax bill on the two UK pensions. When I pressed the button the shiny new computer system told me that I owed the difference. I felt nauseous as they say in Hollywood.

I'm not going to say how much the tax bill is because it would be dead easy to work out how little I get paid and that would be embarrassing. Suffice it to say that it would take me two months of teaching to earn enough to pay my outstanding tax. It was a bit of a shock to the old system I tell you.

What that Franklin chappie said

I don't really mind taxes. That doesn't mean that I like handing over my hard earned but I approve of the idea. I'm much keener on the model where we pay the taxes and, with them, our governments attempt to provide healthcare, education, infraestructure and all the rest than I am on the model where everyone looks out for themselves and to hell with the rest.

Anyway. For the past six years or so I've been getting a pension from a final salary pension scheme that I paid into for most of my UK working life. Because that money comes from a quasi government source the agreement between Spain and the UK was that it was exempt of Spanish taxes but taxed, at source, in the UK. Normally Spanish residents have to pay tax on their worldwide income here. In reality my pension is so small that it has never exceeded the personal UK allowance so, although Customs and Revenue send me coding notices and I get P60s and what not, I don't actually pay any tax on it. I also have a pension top up from some secondary UK scheme that I paid in to. That produces about £360 a year. That money is declared and taxed in Spain.

This being taxed in the UK had an advantage. It gave me two lots of personal allowances - one for the UK and one in Spain. Of course the tax people realised this and for the 2015 tax year - the tax year in Spain is a normal calendar year - they closed this "loophole". We are now sorting out the 2015 tax bills. The amount of my UK pension now has to be added to my Spanish earnings. The principal of no double taxation is maintained because any tax paid in the UK would be deducted from my Spanish tax bill.

I had a slightly complicated tax year in 2015 because I was technically self employed for a while. I'm having to use an accountant to sort it out rather than just accepting or amending the online draft tax declaration that the Spanish revenue people sent me back in April.

The accountant I use sent me a WhatsApp the other day to say it looked like I owed a bit less than 400€. This is not good but it's not heartbreaking either. It did make me wonder about the people who have decent pensions from the UK though: the ex police, ex military, time served civil servants etc. I've just had a quick look and it seems that the UK personal allowance is around £11,000 so if that suddenly becomes taxable at a mixture of the starting Spanish rate of 19% plus the portion that goes into a higher bracket charged at 24% (and my arithmetic is correct) then they are going to be facing an extra tax bill of just short of 3,000€.

I suspect that could be a bit of a hammer blow for lots of the pensioners here.

Evading tax

I got a letter from the tax people yesterday. Now letters from the tax people are not written in normal, everyday Spanish. They are Brontesque in style. With the envelope ripped open and the single page scanned it looked bad. There were lots of words I didn't understand but it was clear that the Revenue, Hacienda, were unhappy about the tax I'd paid on my pension. Tax people can be nasty. Tax people take your house and send you to prison when you're naughty. Unless of course you are very, very rich in which case they are extremely nice to you.

I explained my situation last year in a post on Life in La Unión Just a quick recap. Normally, if you are a Spanish resident, your worldwide income is taxed in Spain. However, I have a local government pension from the UK and there is an agreement between Spain and the UK that government pensions are taxed at source, in the UK. So far so good but where I turn into Al Capone is about my additional voluntary contributions. They provide an additional pension of about forty quid a month. Rather than declare that cash in Spain I simply left it in the UK tax regime. I shouldn't have done. I should have declared it in Spain.

The financial year in Spain is the calendar year. Sometime early in the year, March I think, Hacidenda do their sums and decide whether you owe them money or they owe you money. In 2014, for the tax year 2013, they caught up with me. I came clean and paid the unpaid tax. It was about 70€. The tax office said that to sort out the same underpayment for 2009, 2010, 2011 and 2012 I'd have to go to an accountant. So I did. I just chose an asesor at random in the town where I was living, La Unión and asked for advice. To be honest the accountant didn't exude reliability but he told me that I earned so little in total that it was all straightforward and I didn't need to do anything. No fines, no clink and no public humiliationn coming my way.

So when I got that letter I started to curse the accountant and think bad thoughts about the man from the Prudential who sold me those worthless AVCs too. Ten minutes later though with a more careful reading of the letter, and only needing to look up two words as it turned out, I realised that the tax people were actually offering an amnesty to we foreigners who hadn't paid up on our pensions. They mentioned the special circumstances we are under i.e. we don't understand the lingo or the culture and we have no idea what's going on. We have till June to sort it out.

Now I have an accountant because I am technically self employed. I phoned him. No worry he said. If it wasn't sent registered post it isn't dangerous. We can talk about it when we next meet.

Thinking about it this letter is actually good. It's a general letter. The accountant in La Unión could be right and it could be that I owe no tax. It could also be that the accountant in La Unión was wrong and I do owe some tax. However, with the amnesty there will be no fine and no interest to pay so the worst it could be is four times the amount I handed over last year or thereabouts. But the best thing is that Hacienda has a process for sorting this out and once I've filled in the appropriate forms and paid any debts it will all be nice and starightforward.

And I do value a quiet life now I'm in my dotage.