How much will you save with Spain’s income tax cut?

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On Thursday September 29th, Spain’s Budget Minister María Jesús Montero announced that her administration will reduce the personal income tax on people earning up to €21,000 gross ($20,200) per year.

At the same time, she confirmed the government will slap a new tax in 2023 and 2024 on residents whose wealth exceeds €3 million to help pay for inflation relief measures.

In this article, our focus will be on contract workers, self-employed workers, small business owners and pensioners who are lower earners.

The announcement of the tax changes comes as Spain is gearing up for local elections in May 2023 and a general election expected at the end of next year, which has led right-wing regional governments and the left-wing national government to engage in a tax war to sway the voting balance in their favour.

But how much will ordinary hard-working Spaniards and foreign residents actually benefit from the national government’s new tax measures?

Contract workers and pensioners:

The Spanish government has offered four cases with different incomes and personal conditions, serving as examples of how they will calculate how much each one stands to save.

The tax reductions apply to rendimientos del trabajo (earned income), with more earners in the lower-pay grade set to gain as deductions will now apply to those who earn up to €21,000 gross a year rather than up to €18,000 as it was previously. 

  • A worker who is married, has children, earns €19,000 (gross) a year and does a joint tax declaration stands to save €331 on their annual income tax return. 
  • A pensioner who is over the age of 65 and has a pension of €16,500 will save €689.
  • A single parent who has two children and who earns €18,500 (gross) will save €516 on their income tax return. 
  • A worker with no children with an annual income of €18,000 (gross) will save €746 on their income tax return.

The change in tax conditions means that workers on Spain’s minimum wage (€14,000) will not have to pay income tax if they don’t earn above €15,000, which is the new threshold.

Self-employed workers 

Some of the reforms approved by Spain’s national government also seek more favourable tax conditions for the country’s self-employed workers and small businesses in terms of income tax (IRPF) and corporate tax (impuesto de sociedades). 

According to Spanish tax agency Hacienda, 1.6 million autónomos (as self-employed workers are called) stand to benefit from the IRPF cut, and up to a quarter of small businesses (500,000 micropymes) will gain from the corporate tax reduction. 

The changes for autónomos are that those who use the módulos system to estimate their earnings will get an additional 5 percent tax reduction on their net income.

Módulos (modules) is the name used to refer to the tax settlement system that allows some self-employed workers to pay the Spanish taxman based on their estimated benefits rather than their exact monthly earnings, thus simplifying the declaration process.

Autónomos will also get an increase in the margin of expenses that are difficult to justify (Gastos de Difícil Justificación) on their income tax return, from 5 to 7 percent. 

However, Spain’s main autónomo association ATA has criticised the reduction as “stingy” given that on average self-employed workers will only save €115 on average on next year’s annual tax return.

Small businesses that invoice less than €1 million will get the promised tax reduction from 25 to 23 percent on their nominal corporate tax.