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Spain’s Valencia region lowers income tax for yearly earnings under €60K

Valencia's regional president has announced a reduction in income tax for the vast majority of taxpayers as part of a series of reforms that include free transport and other tax benefits for residents of the eastern Spanish region.

spain valencia region income tax reduction
According to Puig, taxpayers in Valencia will save €111 on average this year. Photo: José Jordan/AFP

Valencian regional president Ximo Puig announced on Tuesday September 27th a series of financial reforms intended to make tax outcomes in the coastal Spanish region more progressive.

The headline grabbing reform is a reduction in income tax rates for those earning under €60,000 gross a year, something that benefits 97.4 percent of Valencian taxpayers (1.34 million workers).

The new income rates will be retroactive and apply to earnings from January 1st 2022, thus reflecting on the 2022 annual income tax declaration carried out next year.

“Incomes of €10,000 will save 21 percent (around €94.5),” Puig explained, and “those of €20,000 will save 7.3 percent (€117). Those of €30,000 will save 2.2  percent, or €67.”

Spain’s Personal Income Tax (IRPF) is a state tax, but half of its collection is controlled by the autonomous communities.

As such, each region can change its income tax brackets, like Puig has on Tuesday, and the reductions he has announced will apply to the 50 percent of IRPF collected by the Valencian regional government – it does not represent a reduction in the overall income tax rate.

Valencianos with incomes over €60,000 will not see any change to their income tax.

During his announcement, Puig gave the example of a young single person under 35 earning €28,000 and paying €8,000 on their mortgage who will pay €530 less in their next tax return.

According to the calculations from the Ministry of Finance, a couple who have an 80-year-old dependent relative, earn €30,000 and file a joint tax return would reduce their net regional tax liability by €162.

It is worth noting that that Generalitat is yet to formalise the reforms in writing, so the specifics (and savings) are not yet 100 percent clear. 

Reform measures

The reduction in income tax was announced alongside two other major policies: an increase in tax-exempt minimums, and increases to tax deductions.

The tax-exempt threshold for earnings will be increased by 10 percent for both personal and family incomes, taking it up to €6,105, allowing 33,000 low-income Valencia residents to not pay income tax.

According to Puig, taxpayers in Valencia will save €111 on average this year.

The politics of inflation

Describing the reforms as ‘progressive’ not ‘elitist’ in what many in the Spanish media have interpreted as criticism of the recent People’s Party tax reform across Spain, including in Madrid led by Isabel Díaz Ayuso, and the slashing of a wealth tax in Andalusia, Puig, leader of PSOE in Valencia, claimed his changes will benefit “families with lower income” and improve “the redistribution of wealth” in the region.

READ MORE: Spain’s Andalusia to scrap wealth tax in bid to attract high earners

“That’s the difference, ladies and gentlemen,” Puig said, “here we keep the wealth tax, a tax for which only 0.5 percent of Valencians are taxed… those who have a wealth of more than half a million euros.” 

Mortgages

The reforms also included a tax deduction of €100 for some mortgages, and a promise to build 1,090 new homes on public land in the Valencian Community.

Transport changes

Puig also announced that Valencian public transport (including all metro, tram and bus services) will be free for children and young people under 30 years old from October 9th until the end of the year.

The measure will benefit around 1,553,000 young people across the region and save them €135 each.

Fertility tax deduction

A tax deduction for fertility treatments for Valencian women who cannot be treated in the public health system for reasons of age or low probability of pregnancy was also announced as part of the tax reforms.

READ MORE: How Spain’s politicians are waging a tax war ahead of 2023 elections

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TAXES

The tax changes in Spain in 2023 that you need to know about

The new year in Spain has brought with it a whole raft of new tax measures and changes that you should be aware of. Here's all you need to know.

The tax changes in Spain in 2023 that you need to know about

There are a number of new tax measures or changes to the existing system coming into force in Spain in 2023, while other temporary taxes from 2022 have been maintained.

Here are all the changes you need to know about and how they could affect you.

IRPF

This year, the Ministry of Finance will change the way they calculate the amount of Impuesto de la Renta para las Personas Físicas (IRPF) or personal income tax, you have to pay. 

In total, more than 250,000 workers will benefit from the changes and in some cases, will save more than €1,000 per year.

The government has also raised the minimum exemption from €14,000 to €15,000 to help the most vulnerable in Spanish society.

READ ALSO: Who in Spain will save €1,000 in 2023 thanks to income tax changes?

New pension fund tax

From January 1st 2023, all workers in Spain, whether salaried or self-employed, must pay a new tax through their social security contribution to help fill up Spain’s pension fund – a move that will affect over 20 million workers.

The Intergenerational Equity Mechanism (MEI), as it’s known, will be a small social security contribution intended to help balance pension financing between generations. It is hoped that the MEI will bring in around €22 billion by 2032, when it is anticipated the new tax will be lifted. 

In simple terms, if you work in Spain and thus contribute to social security, the new tax will represent 0.6 percent of your monthly salary, however, of this 0.6 percent your employer will pay 0.5 percent and you will only pay the other 0.1 percent.

READ ALSO: The new tax all workers in Spain will pay in 2023

Wealth tax

The Spanish government will maintain its so-called ‘wealth tax’, but there will be certain changes to it this year. The tax targets those with fortunes of €3 million or more.

Three brackets that have been established are a rate of 1.7 percent for fortunes between €3 and €5.3 million, 2.1 percent for wealth between €5.3 and €10.6 million, and 3.5 percent for fortunes over €10.6 million.

Savings tax

Large savings and capital income will also be taxed at a higher rate in Spain in 2023.

For taxable income over €200,000, the rate will be increased by one percent, from 26 percent to 27 percent. In addition savings of €300,000 or more will be taxed at 28 percent.

Self-employed workers

The Local covered the ongoing changes to tax system for autónomos (self-employed people) throughout 2022, including the main change that social security contributions will now be based on real income, instead of a set amount each month. 

The government has also rejigged the thresholds, but essentially anyone earning under €1,300 per month will be paying less in social security fees, with those earning €1166.70 to €1,300 a month paying just €3 less than they do now.

Those earning between €1,300 and €1,700 will pay the same amount as they do now – €294 per month, while anyone earning over €1,700 will be paying more.

According to the government, of the three million self-employed workers in Spain 2.4 million earn under €1,700 per month, meaning that the majority will see their social security contributions staying the same or reduced.

Self-employed workers in Spain will now have to choose an income bracket based on a projection of their annual net income according to a general table of base levels set by the government.

It’s as complicated as it sounds, with some accountants even unclear on exactly how this will work, but from what do know in 2023 there will be 15 different brackets of net income to calculate your social security contributions.

Tax breaks 

Several regions have announced various tax breaks for 2023, most notably Madrid. From Q1 2023, new autónomos in Madrid will have their social security fees paid for by the government for their first year of self-employed work in the region.

Recently the region also announced that it would offer tax breaks to draw foreign investment. Under the regional plan, foreigners or expatriate Spaniards will be able to deduct 20 percent of the value of their investments in real estate or financial assets from their income tax bill.

READ ALSO: Madrid region offers tax break to draw foreign investment

VAT

The Spanish government is also keeping its VAT cuts (known as IVA in Spanish) on various products. VAT on feminine hygiene and contraceptive products has been cut from 10 percent to 4 percent, as well as the temporary tax reduction on basic foods such as bread, flour, fruits or vegetables, which will be taxed at 0 percent, and to oils and pasta, which now have VAT rates of 5 percent.

These cuts are expected to last for six months.

READ ALSO: Spain axes VAT on basic foods to ease inflation pain

Banking and energy

The headline-grabbing tax measure in 2023 is a carry-over from 2022: a temporary windfall tax on banks and energy companies designed to bring €3.5 billion in extra revenue per year to help deal with the ongoing inflationary crisis.

Energy companies, whose profits have benefited hugely from the energy crisis, will have their excess profits taxed. This will generate around €2 billion per year for state coffers, and the tax will be levied at 1.2 percent on gross income for energy companies that make more than €1 billion a year.

Similarly, there is also a temporary 4.8 percent charge on banks’ net interest income and commissions in 2023 and 2024 to fund measures to ease cost of living pressures.

READ ALSO: Spain to slap windfall taxes on banks, energy firms

Plastic tax

A new tax on non-reusable plastics is also being introduced, approved at a rate of €0.45 per kilo of single-use plastic. A study by International Financial Analysts (AFI) estimates the plastic tax could generate €300 million for the Spanish state coffers.

The tax comes as part of Spain’s Waste and Contaminated Soils Law being brought in to try and decrease the use of single-use plastics, and to reduce the waste produced in landfills by 15 percent compared to 2010 levels.

READ ALSO: How Spain’s new tax on plastics will affect you

The Spanish government hopes to cut the use of food containers and single-use plastic cups by up to 70 percent by 2030.

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