Personal Income Tax

Personal Income Tax (IRPF) is a tax that individuals pay based on the amount they earn. Thus, those who earn more pay more, and those who earn less pay less, and there are even people who pay nothing. This is the most important difference with VAT, which we will study later, because with VAT we all pay the same when we buy the same item at the same price. Note that we are saying that those who earn more pay more, in the sense that they pay a proportionally higher amount than those who earn less, and thus compensate for those who pay little due to their small income. This is called progressivity, which can be considered more equitable than proportionality and favors the redistribution of wealth.

The difference between proportionality and progressivity is simple if we explain it with percentages. If everyone pays, for example, 10% of their earnings, those earning 1,000 euros would pay 10% of those 1,000 euros, and those earning 2,000 euros would also pay 10% of their 2,000 euros. This would be paying proportionally. On the other hand, progressivity means that those who earn more pay a higher percentage of their income, so that while those earning 1,000 euros pay 10% of their 1,000 euros, those earning 2,000 euros pay 10% of the first 1,000 euros, but 15% of the second 1,000 euros.

In the personal income tax return, also known as the income tax return, you must include the salary you earn or the benefits you receive if you are your own boss (for example, an electrician, a doctor, a lawyer, a plumber, a taxi driver, etc.). Interest from bank accounts opened, rent collected if you own a rented apartment, profit obtained if you sell a house, etc., should also be included.

As we mentioned, the tax return includes everything earned during the year and subtracts an amount of money that we all need to live with dignity and pay for our basic needs. This amount that is subtracted is called the “personal and family minimum.” This personal and family minimum is higher for people with children, as they must feed them, buy them clothes, books, etc. We must not forget that children and young people are very important to the country, and that's why we help people with children by making them pay less in taxes, so they can spend more money on caring for them.

In addition, other "discounts" (reductions, deductions) are also subtracted from the tax return, which take into account other expenses that individuals must incur and are subtracted from the amount of tax owed. Among these discounts is an amount for mothers with young children, to help them pay for daycare or another person to care for their children while the parents are at work. People who are saving for their retirement can also deduct an amount from those savings. And if we have made donations to help organizations that care for the neediest people (Red Cross, Doctors Without Borders, Caritas, etc.), we can also deduct a portion of the money we have given.

Regarding deductions, you should know that there are not only those set by the State but also those established by each of the Autonomous Communities, which can be applied by individuals living in each Autonomous Community.

The income tax return is filed every year (between April and June). This tax doesn't have to be paid all at once over the next few months, but rather is paid gradually, in installments, with a small portion of people's salaries paid each month. These periods are called “withholdings.” When June arrives, the accounts are made: We add up everything we have earned during the year, and subtract the reductions and deductions established by law. From the resulting amount, we subtract everything we have been paying month by month in the previous year. If we still have something left to pay, we pay it, but if we have overpaid, we get it back.

To help with filing income tax returns, the Tax Agency has created a service on its website called Renta Web, which downloads the data the Tax Agency has on each taxpayer and allows the modification and inclusion of each person's income and expense data, automatically performing the operations and calculations necessary to obtain the result of the tax return, whether to pay or return it, and to file it. You can also visit the Agency's offices to have your tax return filed, or you can do so through the Tax Agency app or by phone.

In conclusion, based on everything we've seen, we can say that the Income Tax is a tax that attempts to be very fair, taking into account the differences between people: some earn more and others less, some have children and others don't. In this way, the tax also contributes to reducing inequalities between people, because, although some pay more because they have more and others pay less because they have less, we all have the same right to enjoy roads, parks, hospitals, schools, and other public goods and services.