With the recent tax changes in the Spanish system, we have heard a lot about talk about personal income tax deflation and how collections are being divided between the different administrations, but what exactly are we talking about?
During the last year we have seen how the prices of necessary goods, such as food, electricity and transport, have increased. On the other hand, wages have not risen to the same extent, resulting in an increase in the loss of purchasing power among the population.
To better understand this concept, it is important to be clear about what inflation is. Inflation is defined as the generalised rise in the prices of goods and services over time.
With rising prices and no increase in wages, the population has a lower spending or savings capacity, The fact that with the same salary they have to face higher expenses, losing the value of their money.
Personal income tax is a so-called progressive tax, i.e. the more a person earns, the higher the tax applied.
What is the problem? With the rise in the cost of living, you continue to pay the same IRPF, without taking into account the loss of purchasing power. In other words, although you can buy less because of inflation, the IRPF remains the same.
This is where personal income tax deflation measures come in. Deflating personal income tax means calculating Personal Income Tax (IRPF) in real terms, The deflator is a monetary policy instrument, i.e. it adjusts its value to inflation, eliminating the effects of price increases. In this way, deflation is change the personal income tax brackets adjusting this tax to the new costs of living.
Although there is a small part of the population likely to benefit from personal income tax deflation -For those whose salaries are substantially increased, the reality is very different for the vast majority of employees.
In view of the changes, we see that people have increasingly less spending and savings capacity because, with the minimum wage, we have to cope with the rising prices of products that we consume, of those that are the basics of living. Compared to 2021, last year we saw how everything went through the roof and, with less money, it is a real problem for families.
I will give an example with numbers to make things clearer, while the CPI has reached 9%, gross wages have risen by only 4.31 PPP3T. With these percentages we can see that, although we are facing an interesting increase, what we need to live is still above.
For example, in the Community of Madrid personal income tax rates will be deflated by 4.1%, a percentage equivalent to the average wage increase.
New brackets after applying 4.1% to the taxable base.
| Net base - From | Rest of base - Up to | Full quota | Applicable type % |
| 0 | 12.960,45 | 0 | 8,5% |
| 12.960,45 | 5472,75 | 1.101,64 | 10,7% |
| 18.433,20 | 15.927,30 | 1.687,22 | 12,8% |
| 34.360,50 | 21.236,40 | 3.725,91 | 17,4% |
| 55.596,90 | From now on | 7.421,07 | 20,5% |
Gradually, some Autonomous Communities such as Madrid, Castilla y León and Andalusia have announced that they will develop measures to deflate personal income tax, establishing new brackets for this tax and thus mitigating in some way the effects of inflation on the purchasing power of the population.
However, it is important to note that the regulation and collection of personal income tax is also a state competence, and not only of the Autonomous Communities.
The cost of living is skyrocketing. Although there are wages that have risen slightly, the increase in the CPI to 9% is what stands out the most, that which brings us upside down and with which the vast majority do not even know what to do. Companies, unable to make increases, must start thinking about new alternatives.
One option for assisting workers can be the flexible remuneration, This system of remuneration enables employees to to allocate part of their gross salary to the use of a number of services or consumption exempt from personal income tax.
When we talk about this new system, we are saying that there is a part of our salary that goes to the consumption of products and/or expenditure for services. The expenditure on transport, spending on meals away from home or childcare vouchers are the star services and the most demanded by employees.
The benefits, which are being offered for both the company and the employee, For the former, this means, among other things, an increase in net remuneration without an increase in salary costs, and for the latter, increased motivation, savings and productivity in general.
In short, the personal income tax deflation The fact is that, with the high rise in prices for consumption and living expenses, those employees who barely make the minimum wage have it worst.
At this point, flexible remuneration is offered as a possible solution to help workers. Employees, who will be able to take advantage of services with income tax exemptions and reduce the impact of rising product prices, do you think this is a good idea?
