Personal Income tax in Spain is known as IRPF (Impuesto sobre la Renta de Personas Físicas, often referred to in short as ‘La Renta’). Since 2007, the responsibility for regulating and collecting personal income tax has been decentralized, with the autonomous regions being responsible for collecting 50% of tax revenues on behalf of the state. A single national rate applies for each tax band for the whole of the national portion of the income tax. Whereas tax rates on the regional portion vary between regions, Madrid having the lowest and Catalonia the highest.
As in other countries, income tax is payable by both residents and non-residents. Residence status must be established before filing a Spanish tax return to see which return is due and to calculate the relevant amount of tax payable. The rules governing this are complex but as a rule of thumb, Spain considers any person to be resident for tax purposes if they were living in Spain for more than 183 days in the tax year (which in Spain is a calendar year). We recommend that anyone who is unsure about their residency status seek advice – we at Abad would be happy to assist you.
Tax returns are currently being processed for the 2015 tax year and the deadline for submitting these is 30th June 2016.
Allowances and deductions
The way in which allowances are given and deductions are made in Spain differs greatly from the UK, making it very difficult (almost impossible at first glance!) to understand how the tax has been calculated.
In the UK we are used to seeing our personal allowances being deducted from our total income to arrive at our taxable income, to which the relevant tax rates and bandings are then applied.
In Spain, only certain allowances, such as the earned income allowance, are deducted from income in this way before calculating the tax payable in accordance with the bandings. This allowance changed dramatically in 2015 so that a standard allowance of 2,000 euros will be given against earned income across the board. Thereafter, anyone on ‘low earnings’ ( less than 14,450 euros) could receive an additional allowance, up to a total of 3,700 euros, depending on their income level and whether they have substantial unearned income or not .
Once tax payable is calculated any personal allowances will then be applied which in 2015 was 5,550 euros for the under 65’s (higher allowances being available for older people).
Allowances are adjusted annually and vary depending on whether the income is from earned income; the tax payer is single or lives with elderly relatives or dependants, and the number of children, amongst other factors. There is also an allowance for making a joint declaration with your spouse rather than individual returns.
To complicate matters further, some autonomous regions (like Cantabria, Castilla-La Mancha and Madrid) have different allowances for their own autonomous share of the income tax and also establish their own deductions.
Current Rates
Once the gross income has been reduced by the allowances, reductions and deductions, the rate has to be applied to find out the tax payable.
As of January 1st 2015, income tax has been reformed and simplified. It's important to note that these rates vary between each region. The rates shown below as an example are those that apply to the Community of Madrid.
From (euros) Up to (euros) Tax Rate
€0 €12.450 20%
€12.450 €20.200 25 %
€20.200 €35.200 31 %
€35.200 €60.000 39 %
More than €60.000 47 %
Please note that these rates only apply to general income. Some kinds of income, like interest on savings accounts, have different rates.
A worked example:
Let’s assume earnings of a 64 year old are 19,450 euros. Firstly, they would receive an automatic allowance of 2,000 euros, but wouldn’t qualify for any extra allowance as their earnings exceed 14,450 euros. This means that their taxable income is 17,450 euros.
The first 12,450 would be taxed at 20% and the balance (5,000 euros) at 25% making tax payable of 3,740. The personal tax allowance of 5,550 euros is then applied at the basic rate of tax, being 20%. I.e. a reduction of 1,110 euros is made. Tax payable in this case would therefore be 2,630 euros.
Conclusion:
As illustrated above, the tax system despite having been simplified of late is still incredibly complex to understand. For this reason, we highly recommend that you use a fiscal advisor to calculate your tax liability and submit your tax returns on a timely basis. Follow the link at the right of this blog if you would like our assistance in your tax affairs.