June 21st, 2006
Retiring to a place in the sun is a reality for an increasing number of people. More than 1m Britons have their pensions paid overseas, with 74,000 receiving their pension in Spain alone (compared with just 26,700 a decade ago), according to new figures from the Department for Work and Pensions (DWP).
But setting up your finances properly is as important as choosing the right villa. Get it wrong and you could be paying tax where you do not need to, forking out commission where it is not necessary and footing the bill for expenses you had not foreseen.
The situations can be very different depending on where you retire. Here are some factors to consider if you are heading for Europe’s most popular destination.
Generally you will be taxed wherever you are resident. The taxation of expats is complicated, but as a rule of thumb you will continue to pay UK taxes as long as HM Revenue & Customs considers you to be a UK resident. You will remain liable for British taxes if you spend 183 days or more in the UK, or your visits to this country average 91 days or more a year over four years.
Double taxation agreements with Spain, Italy, France and Portugal mean you will not be taxed twice on the same income and that you can ask for UK income that is normally paid net of basic rate tax to be paid to you gross. Such payments include interest on bank and building society savings accounts, as well as income from bonds, pensions and annuities.
If you become non resident in the UK for tax purposes, income, wherever generated or paid, will be liable to tax in your new country. Tax rates range from 15 per cent to 45 per cent in Spain, from 0 per cent to 40 per cent in France and from 10 per cent to 42 per cent in Portugal.
Experts say that for people with a mid range retirement income there is little overall difference between the amount of tax you will pay in France, Italy, Spain or Portugal compared with the UK, but, depending on your personal circumstances, it may be beneficial to receive any UK income such as pension or interest on savings gross, without deduction of UK tax.