The Ministry of Finance has sparked controversy by confirming that once this occurs, as it did with the increases noted in recent years. This would mean that, for the first time, some of its beneficiaries would have to pay tax at a rate higher than 40% for the excess income between the current exempt minimum, located at 15,876 euros, and the new salary floor that is decided. This anomaly in the operation of the tax, which implies a tax surcharge of about 43 cents for each extra euro in income, would also affect the rest of low incomes, up to approximately 21,000 euros per year.
The SMI, according to the recommendations of the experts of the Ministry of Labor, is always in 14 payments, which implies a salary improvement of 546 or 700 euros per year. The problem is that, without an adaptation of the minimum income tax exemption to this increase, employees who receive the new minimum wage will have to pay 233 or 300 euros annually to the Treasury in the form of withholdings, depending on the increase. In both cases it means losing almost 43% of the salary improvement through the withholding practiced by the employer, since the obligation to file the Income Tax return does not operate up to 22,000 euros per year.
This 43% tax, unusually high for low incomes, is the maximum marginal rate allowed by law and is explained by the design with which the income tax operates, which suffers from erratic behavior in the lower brackets. The consequences of this distortion are seen in what is known as the marginal personal income tax rate, that is, the highest rate that a taxpayer supports when they exceed certain income thresholds. In other words: that moment in which, for every euro you earn more, you must also pay more taxes.
The phenomenon occurs due to the symbiosis between two concepts. The first is the exempt minimum, which marks the limit from which you must report to the Treasury. The ministry plans to leave it. The other is the application of reductions for work performance. The mixture of both is what causes taxpayers to endure excessive withholding. It is a failure in the tax scheme, since the marginal rate, once these thresholds are exceeded, drops drastically again for immediately subsequent incomes (up to around 30%) and begins to rise progressively as incomes grow. income.
Where does this problem come from? There are several reductions for income from work, which is the main source of income for taxpayers. The first reduction, as a general rule, is 2,000 euros for all employees. And it is joined by other additional ones of variable nature. It starts with 7,302 euros for taxpayers with income equal to or less than 14,852 euros per year, and the benefit gradually decreases as income increases, disappearing after 19,747.5 euros per year. That is, as the salary increases, the tax advantage to which one is entitled decreases. This is what causes the marginal rate to skyrocket to over 40% in those sections.
In practice, as long as it is confirmed that the Treasury does not match the exempt minimum with the salary increase that is foreseen, taxpayers who earn the new SMI (16,422 euros in the first scenario, 16,576 euros in the second) will have to pay taxes for 546 or 700 euros, respectively, a figure that is the result of subtracting the exempt minimum from the future new remuneration reference. In the first case, the taxpayer will suffer a withholding of 233.19 euros, and in the second it will be 300.03 euros.
From these brackets, the rest of low incomes will also bear a marginal taxation of 43%. Thus, an employee who reaches 17,000 euros will pay taxes of 1,124 euros (again assuming that the exempt minimum remains at 15,876 euros) and will pay 483 euros as withholdings. A worker who earns 18,000 will pay 913.32 euros, another who reaches 19,000 will lose 1,343 and another who earns 20,000 will pay 1,773 euros.
The erratic behavior of the tax in these sections has been happening for many years now. For this reason, with the latest increases in the SMI, the Treasury has always adapted the minimum income tax exemption to reduce the tax surcharge that the lowest incomes would suffer. This is what happened, without going any further, in 2024, when both the minimum wage and the exempt minimum rose from 15,000 to 15,876 euros.
The Treasury option opens the door to a new battle front between the Government and the opposition. Last year, when the Executive announced the increase in the SMI at this point in the year, the leader of the PP, Alberto Núñez Feijóo, said that “the logical thing” would be for the State not to increase its tax collection and for workers to receive in their pockets the full increase in salary. Just two days later, the Treasury brought the draft of the royal decree that provided for the correction to a hearing and public information. Furthermore, the ministry recalled a year ago that, whenever the SMI rose, . “And this time will not be an exception,” they added then.
