IRPF: Personal Income Tax

[Spanish version]

Sorry, education and healthcare aren't free

If we compare social conditions across countries, Spain is one of the better-off ones: we have access to quality public healthcare and education that — despite wait times and budget-cut headaches — still serves everyone.

One of the taxes used to fund these services (among many others) is IRPF — Impuesto sobre la Renta de las Personas Físicas, or Personal Income Tax.

Unlike VAT, which applies to consumption (you need to buy something to pay VAT), IRPF applies to the income you earn during the year. So to pay IRPF, you need to earn "rentas" (as in: income), which could be a salary, invoices that have been paid to you, dividends, or interest from investments, and so on.

IRPF is considered a solidarity tax. What does that mean? Basically, the more profit you generate (profit being your income minus your deductible expenses), the more you should contribute. That way, people with higher profits contribute more, and people who aren't profitable this year can receive support.

[Side note: the influencer-of-the-week complaining that "they're robbing me, I have to move to Andorra" usually has private insurance and no dependents, so the whole solidarity thing doesn't matter to them — until they need surgery and come running back to Spain, thanks to everyone who did contribute.]

IRPF effectively reduces your income

IRPF is a tax applied directly to your profit (your "renta").

If you're a salaried employee, the process is pretty simple: your employer basically handles it. They run your payroll, withhold a set percentage, and the following year it gets reconciled through your annual tax return. Depending on the previous year's withholding, sometimes you owe money, sometimes you get money back. Generally, the amounts to settle in the tax return tend to be small, as long as there's nothing unusual going on.

And that's the "small" catch with IRPF: income can come from many sources, and the deductions available vary year to year. Just to give you an idea: you rent your home, you bought an electric car, you have two jobs, you have dependents, you make donations, you have a pension plan, you won the lottery... All of these are factors that affect the final amount you owe in IRPF.

Now add the fact that you're self-employed (autónoma), with no employer withholding anything for you.

Not everyone pays the same way

Remember when you registered and chose an epígrafe (or your gestoría chose it for you)? These IAE codes (Impuesto sobre Actividades Económicas) fall into three broad groups: business, professional, and artistic.

Most autónomas fall under either a business or professional epígrafe, so I'll focus on those two. The difference comes down to who's the focal point when the service is delivered:

Are you a consultant selling your services and expertise? That's clearly a professional activity.
Do you run a board game shop? That's clearly a business activity.

Basically: if you are the protagonist in your work, it's a professional activity. The moment what you're selling is a product or service that doesn't depend on your personal presence, it's a business activity.

So what happens when you start growing and need to hire staff? In that case, it's quite likely your activity type has changed, which is exactly why you should review your epígrafe once a year, and any time you make a significant shift in what you do. To complicate things further, there are many similar IAE codes across different groups, and that directly affects how you invoice your clients.

If you're under a business epígrafe, this isn't very complex. But if you're under a professional one, this next part matters to you.

Professional activity means invoicing with withholding

If your epígrafe puts you in the professional group, one of the rules that applies is that you must account for the "retención" in your invoice whenever your client has business activity (i.e., when you invoice a company, a public entity, or another autónoma). This is the amount of money that your client is going to pay as IRPF on your behalf.

This withholding rate is always 15%, even when the amount you'd actually owe is higher. That difference gets settled in your annual tax return. That said, if you're just starting out, you can request a reduction and apply 7% instead. Ask your gestoría (or us) how to do that.

In practical terms, if you invoice €1,000 to an S.L. (an entity with business activity), your invoice would look like this:

Tax base: 1,000 €
15% IRPF: – 150 €
21% VAT: + 210 €
Total invoice: 1,060 €

Both IRPF and VAT are calculated on the tax base (the price of your service).

Your client will pay you 1,060 €.
On your quarterly VAT return, you'll need to declare the VAT you collected.
And your client, in turn, will need to pay in the 150 € of IRPF they withheld from you. Simple as that.

IRPF instalment payments

So for professional activities, part of your IRPF is already withheld via your invoices. On top of that, every quarter there are several filing forms (modelos) related to IRPF. I'll explain three of them, and we'll focus on the last one, which is the one that matters for this post:

• Modelo 111: this is where you settle the withholdings applied to any employees you might have, and to other autónomas who've invoiced you with withholding. (Yes — you become a tax collector too.)
• Modelo 115: Are you renting office space? If so, you're likely being invoiced with a 19% withholding. This model is where you pay that withholding to Hacienda.
• Modelo 130: The standard way of paying your IRPF on account.

With Modelo 130, what we do each quarter is report to Hacienda how your activity is going — income in, expenses subtracted — and based on the result, you pay 20% on account of your IRPF (minus any IRPF already deducted via invoices with withholding). Here too, the percentage is fixed, regardless of your actual results. Again, any differences get settled when you file your annual tax return.

Obviously, there's always an exception.

There's a point where you can voluntarily choose not to file it. If you have a professional activity, and more than 70% of what you invoice is invoiced with withholding, you can opt out of filing Modelo 130. Whether that's a good idea for you depends on your specific situation. In this case, we run an analysis of what your final annual tax position is likely to look like. Based on the IRPF you'd owe and your real (and projected) numbers, we can suggest whether it makes sense to pay part of the tax in advance or settle it all at once when you file your annual return.

By the way! With Modelos 111 and 115, you can't request instalment payments (unlike VAT), so make sure you have that money ready when the payment is due.

Annual tax return

Between April and June of the following year, you'll need to file your annual return, reporting all your income (of whatever kind), your deductible expenses, and other information. That will produce the real amount you owe overall.

If you overpaid during the year, you can get it back (or gift it to the State. That's your call). If you owe money, it means you're above-average in income, and things are going well for you, so congratulations!

That said, this amount shouldn't come as a surprise. Your asesora should be able to tell you each quarter roughly how much money to set aside for June of the following year. If they're not doing that, it's time to change asesoría.

Either way, keep in mind that if you do owe money, you can also request to pay it in two convenient monthly instalments.

In summary (print this and stick it on the fridge)

• IRPF does come out of your income after deductible expenses are subtracted.
• Your economic activity (IAE) determines whether you need to apply withholding on your invoices and whether you need to file the quarterly IRPF instalment forms.
• Filing your annual tax return is mandatory if you have an economic activity, regardless of your revenue.
• Check periodically with your gestoría whether your declared economic activities still match your current and future reality.
• Check periodically with your gestoría about the latest updates related to the annual return, and whether you could benefit in any way, like opening a pension plan for your future.

For any questions, get in touch with us, and we'll help you untangle your own situation: