What is the personal income tax withholding applied to a retirement pension

The amounts withheld are calculated based upon the amount received by each retiree

It is typical for employees to face many uncertainties regarding their pension situation when changing their status from employed to retired. The standard concerns include questions such as: how much income will I receive each month? Is my pension compatible with other income? But undoubtedly, one of the most interesting questions, due to its relevance when planning our outgoings, is about person income tax withholdings on a retirement pension.

The first thing you need to understand regarding a retirement pension is that the payments you receive are considered for tax purposes as earned income. In other words, when you do your annual tax return, a retirement pension is handled the same way as salary during your working life, and therefore, is subject to withholdings.

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How do Spain's income tax brackets affect a retirement pension?

Personal income tax is divided into income brackets that establish each taxpayer's tax burden according to their income. These tax brackets are also used to calculate the monthly withholding applied for each employee, or in our case here, each pension earner. These amounts withheld are included on the annual income tax statement when determining the final amount of taxes owed for each year.

In 2015 new tax reforms went into effect in Spain, making substantial changes in relation to personal income tax assessment. The seven previously existing tax brackets were reduced to five, and the withholding percentages for each of these changed as well. As a result of new regulations, the current personal income tax brackets are as follows:

  • 0 to €12,450 = 19%
  • €12,451 to €20,200 = 24%
  • €20,201 to €35,200 = 30%
  • €35,201 to €60,000 = 37%
  • More than €60,001 = 45%

Now we know the various tax brackets, we can talk about the details of how retirement pensions work. Although there are no special percentages of personal income tax applied for retirement pensions, the minimum and maximum limits applicable in these cases do create some specific circumstances.

Following the pension changes passed by the Spanish Council of Ministers in December 2016, the upper and lower limits have risen by 0.25% on those established in the previous General Budgets. This translates into a minimum monthly pension payment of €637.70 and a maximum of €2,573.70. On an annual basis, and assuming that the pension earner has a right to receive 14 payments, this represents a minimum income of €8,927.80 and a maximum of €36,031.80.

What effect does the family situation of a retirement pension earner have on personal income tax?

When calculating personal income tax on a retirement pension, the personal and family situation of the retiree has to be taken into account, as well as the amount received. Article 81 of Spain's personal income tax (IRPF) regulations establishes three groups of family circumstances that influence the final withholding percentage based on the income declared. These groups are:

  • Single, widowed, or divorced or legally separated.
  • Spouse with income of less than €1,500 annually.
  • Others.

In addition to these three groups, there are other factors that have an effect on the final percentage. Some of these factors include the number of children under 18 years of age, or children older of this but with a disability and subject to parental authority; the number of children under 25 years of age who live with a parent and do not have an annual income above €8,000; the existence of compensatory pensions in favor of the spouse; a pension earner who is disabled, etc.

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Are those receiving the minimum retirement pension required to file an annual tax return?

The minimum income above which a taxpayer has to do a yearly tax return is €12,450. In other words, this is the maximum limit for the first income tax bracket. This means that anyone earning the minimum retirement pension will not be obligated to file the annual tax return. Of course, all other sources of income, and the types of income these represent, must also be taken into account when performing final calculation of the personal income tax that may be owed.

If you do your calculations and are worried about what your retirement pension will be, now is the time to take out a BBVA Pension Plan, which you can browse at bbva.es and which are designed to suit all ages and incomes.

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We offer very good conditions when it comes to paying in your pension with our Va Contigo Account. But if what wish is bring it to BBVA from another company of easy way and fast, put at your disposal our Removals service (to the one which can access from bbva.es or from BBVA's app), which is responsible for carrying out the entire process conveniently, quickly and at no cost to you. Visit BBVA.es to find out more.
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