Shock for Spain’s pensioners and unemployed! Spain’s Finance Ministry demands taxes on minimum wage for the first time

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Shock for Spain's pensioners and unemployed! Spain's Finance Ministry demands taxes on minimum wage for the first time
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For the first time, the Spanish Ministry of Finance will oblige pensioners and unemployed individuals receiving minimum wage amounts to pay taxes. This revelation comes from the fine print of an amendment that exempts taxpayers earning the minimum wage from income tax, a detail that went unnoticed during the turbulent process initiated by the government concerning the taxation of these taxpayers in 2025.

The situation has seen a dramatic shift, from Finance Minister María Jesús Montero initially arguing for their taxation to then changing her stance and deciding to exempt them. This exemption, in the form of a deduction in installments, was delayed because the PSOE and Sumar parties included it in an amendment to the bill amending the revised text of the Compulsory Motor Vehicle Liability and Insurance Law. However, this amendment contained an error and did not reach its intended recipients. The government-supporting factions corrected the aforementioned amendment and even rectified another error: a historic jump in income tax that would have resulted in low-income taxpayers paying taxes at a marginal rate of approximately 90% for every euro earned.

Unlike what was done with the SMI in 2024, the chosen formula will compel these taxpayers to file an income tax return in the spring of next year to reclaim what will be withheld from them during this year. In other words, in addition to the formal obligation they acquire, citizens receiving the minimum wage will effectively finance the state with their withholding tax contributions in 2025.

A Hard Blow for Pensioners and Unemployed

Now, to all of this, comes the blow for pensioners and the unemployed. Unlike the corrected error that the Registry of Economists and Tax Advisors (REAF) warned about, this setback appears intentional; the wording deliberately aims to make them pay taxes.

Comparing the new text with what was done and established by the Income Tax Law, it becomes clear that for the first time, the government is excluding pensioners and the unemployed from this premium: “Deduction for obtaining earned income. 1 Taxpayers with full earned income derived from the actual provision of services corresponding to an employment or legal relationship, less than 18,276 euros per year…”. In other words, only those who effectively provide services in an employment relationship can benefit.

This is stipulated in the “First (new) Final Provision,” which amends Law 35/2006 of November 28, on Income Tax and the partial amendment of the Corporate Income Tax, Non-Resident Income Tax, and Wealth Tax laws compared to the current Article 20, which regulates the reduction for obtaining earned income. Now, a pensioner receiving the SMI will be taxed, unless they have a disability or are very old.

Raining on Wet Ground with the Unemployed

As for the unemployed, it’s raining on wet ground since the Royal Decree-Law of May 21, 2024, which adopted urgent measures to simplify and improve the level of unemployment protection, obliged them to make a hidden declaration. The controversy sparked by this decision led to a SEPE instruction that exempted them, but everything indicates that this will only be for 2024. And as happened then, all this is being done again without informing the public about a substantial change in the tax, with the aim that eventually all taxpayers will file a declaration.

In February 2023, Francisco de la Torre, tax inspector and director of the EsadeEcPol Tax Forum, and Carlos Victoria, consultant and professor at the Complutense University of Madrid, who collaborated on Ciudadanos’ income tax reduction in 2018, published the EsadeEcPol work “The Impact of Inflation on the Income Tax of Lower Middle Incomes and How to Better Mitigate It.”

Authors Recommended Proposal for All

Here, they detail the design flaws of income tax, the most serious being that two taxpayers earning the same income pay different amounts depending on incidental circumstances, the most important of which is having two payers and not just one, even if the same income is obtained. This is because, in practice, there are two income tax rates. One is the official one; the other is the withholding tax threshold for those taxpayers not obliged to declare. If this taxpayer, who was legally withheld less than what they would be due if they had to declare, is forced to do so, their income tax increases. These are not isolated cases, as several million taxpayers have withholding tax deductions below the income tax rate and are not obliged to declare.

While this is usually an advantage for these taxpayers, it leads to distortions, asymmetries, and unfair situations in income tax and prevents the universalization of income tax. Or, in other words, this universalization of the income tax return would mean a tax increase for the taxpayers who earn the least in income tax.

De la Torre and Victoria proposed a deduction in the tax return so that these taxpayers, if they have to file, would not pay more. They believe that this would not only end injustices and eliminate efficiency barriers, e.g., for changing jobs, but would also allow for an expansion of income tax liability. The proposal applied to all earned income, unlike what the government is promoting, “but, of course, it had higher costs,” admits De la Torre, who believes that “discriminating against the unemployed is particularly bloody.”