Information on the application of personal income tax

Personal income tax (IRPF) is a personal, direct tax that, according to equal, general and progressive principles, taxes the income of natural persons in accordance with their nature and their personal and family circumstances.

Personal income tax is applied directly to salaries, and the payer (UPC) is obliged to withhold and subsequently remit the tax withheld to the Tax Agency. Later, when individuals file their tax return, these amounts advanced by the UPC are formalised.

The withholding rate is the result of applying the Tax Agency's current regulations. To calculate the withholding rate, the personal and family circumstances stated by the employee in Form 145 are taken into account, as well as the gross (fixed and variable) salaries that they are due to receive from the UPC during the tax year in view of the term of the contract/employment that is current at a given time.

Any variation in these details (personal and family circumstances, extensions, changes in salary, leave/return to work, new contracts, etc.) causes the personal income tax withholding rate to be recalculated.

• Initial contracts/appointments

Salaries paid by the UPC below €15,876 (per tax year and payer): 0% personal income tax withholding.

If you have had a previous employment relationship or another payer and this means that the total amount you will receive in the tax year is more than the salaries paid by the UPC, you can apply for a voluntary income tax withholding rate (which will be applied whenever this is more than the rate that the UPC is legally bound to apply).

• Variations in employment in a tax year (extensions, changes in salary, leave/return to work, etc.)

Variations in employment in the same tax year cause the personal income tax withholding rate to be recalculated.

The later in the year the change occurs, the greater the impact on the withholding rate, as the adjustment is applied from the month in which the change occurs until the month of December but considering the salaries of the entire tax year.

If the economic details change at the beginning of the year (in February, for example), the impact on the rate will be less, as the adjustment will take place over 11 months, from February to December.

Example of the effect on personal income tax of variations in the same tax year:

• Start of the contract 01/06/2023.
• Details of the contract:
  • Initial term 1 year, from 01/06/2023 to 31/05/2024.
  • Gross monthly salary of €2,100 (with proportional extraordinary payments) of a person in situation 3, with no dependants.
• For calculating personal income tax the sum of the gross monthly salaries from June to September is taken into account (as the calculation is always per tax year).

Given it is one-year contract and the sum of the salaries that the employee will receive from the UPC (€14,700) does not exceed the minimum amount to which a withholding rate can be applied, a personal income tax withholding rate of 0.00% is applied to all salaries in 2023, from June to December

A new tax year begins in 2024, so personal income tax is calculated considering the sum of the salaries to be received from the UPC (€10,500), from January to the end of the term of the contract; in this example, 31/05/2024.

If a one-year extension is agreed (under the same conditions), starting on 01/06/2024, in that same month, June 2024, the personal income tax withholding rate is calculated again; in this case, the following is taken into account:

• The total income receivable in 2024 (salaries received from January to May, plus salaries to be received from June to December).
• Tax Agency regulations:

According to Tax Agency regulations, this total amount (€25,200) must be subject to a given personal income tax withholding rate for the whole year (for the example, let us say 15%). This rate would have been applied every month if the term of the contract had been continuous, from January to December, but in our example the contract started in 2023 and a personal income tax withholding rate of 0% was applied to the salaries from January to May 2024. Therefore, personal income tax must be adjusted from June to December 2024 to compensate for the months in which the withholding rate was 0%.

This adjustment means that the personal income tax withholding rate to be applied to the salaries from June to December 2024 is higher: 24.39% rather than 15%

Please bear in mind that the details are approximate and have been provided for the purpose of illustration and to make the example more understandable.
 

• Effect on personal income tax of leave for the birth or care of a minor in the Social Security system.

If a UPC employee is on leave due to the birth or care of a minor, the body who pays the salaries during this time is the Social Security. This means that the UPC cannot count this income as a tax base for calculating personal income tax and so, when the leave ends, the personal income tax rate may drop considerably. In this case, you can ask for a voluntary income tax rate to be applied.