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's important to have a clear grasp of what inflation is. Inflation is defined as generalised rise in the prices of goods and services over time.
Con la subida de los precios y sin producirse subidas del salario, la población posee una disminución de su poder adquisitivo. lower spending or savings capacity, as with the same salary, they have to face higher expenses, their money losing value.
Personal income tax is a so-called progressive tax, meaning the more a person earns, the higher the tax applied.
What's the problem? With the rising cost of living, you still pay the same income tax, without taking into account the loss of purchasing power. In other words, even though due to inflation you can buy less, income tax remains the same.
This is where income tax deflation measures come in. Deflating income tax means calculate real personal income tax, i.e. adjusting its value for inflation, removing the effects caused by price increases. In this way, deflation does change the personal income tax brackets adjusting this tax to the new costs of living.
Although there is a small part of the Population that can benefit from income tax deflation —those who receive a substantial pay rise— the truth is that 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 This is because, with the minimum wage, one has to contend with the rising prices of products we consume, those that are basic for living. Compared to 2021, last year we saw everything skyrocket and, with less money, this presents a real problem for families.
Let's use numbers as an example to make everything 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 % income tax rates will be deflated by 4.1%, a percentage equivalent to the average salary increase.
New brackets after applying 4.1% to the taxable base.
| Taxable base – From | Remaining base – Until | Gross 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% |
Little by little, some Autonomous Communities such as Madrid, Castilla y León, and Andalusia have announced that they will develop measures to deflate personal income tax (IRPF), establishing new tax brackets for this tax and thus partially mitigating the effects of inflation on the population's purchasing power.
However, it's important to highlight that the regulation and collection of Personal Income Tax (IRPF) is also a state competence, and not solely that of the Autonomous Communities.
The cost of living is sky-high. Despite some wages having risen slightly, the rise in the CPI to 9% is what stands out the most, the thing that’s driving us crazy and that a large majority doesn’t even know what to do about. Companies, unable to make increases, must start thinking about new alternatives.
An option to help workers could be the Flexible remuneration, This system of compensation 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 transport costs, the cost of eating out, or childcare vouchers they are the star and most in-demand services by employees.
The benefits, which are being offered for both the company and the employee, They assume that, among other things, for the former, net remuneration will increase without wage costs going up, and for the latter, greater motivation, savings, and productivity in general.
In short, the IRPF deflation There's a mismatch in basic payrolls again, and it's the employees who are just about reaching the minimum wage who are having the worst time, given the sharp rise in consumer and living prices.
At this point, flexible remuneration is offered as a potential solution to help workers. Employees will be able to enjoy services with income tax exemptions and reduce the impact of rising product prices. Does that seem like a good idea to you?
