Benefits of Flexible Remuneration in the 2022 Income Tax Declaration

On April 6th, the 2022 Income Tax campaign kicks off, providing a perfect opportunity to explore the numerous advantages that Flexible Remuneration can bring to employees’ savings.

The surge in the number of companies and employees embracing Flexible Remuneration plans in recent years, particularly in the last few months, is not without reason. Companies have identified these plans as the most effective way to enhance their employees’ conditions without increasing salaries, addressing the challenges stemming from the COVID-19 crisis. For employees, it enables them to enjoy goods and services at a lower cost than market rates while paying fewer taxes on them. How does Flexible Remuneration contribute to increased savings in the income tax declaration? Let’s delve into that below.

Table of Contents

• 1. Flexible Remuneration, IRPF, and Income
• 2. How to save through Flexible Remuneration
• 3. How much of the salary can be allocated to Flexible Remuneration?
• 4. How is Flexible Remuneration reflected in the payroll?
• 5. How is Flexible Compensation reflected in the income tax declaration?
• 6. How much can an average salary save through Flexible Remuneration?

1. Flexible Remuneration, IRPF, and Income

To fully grasp all the advantages of Flexible Compensation in income tax, it is essential to have a clear understanding of the three concepts forming this love triangle:

What is Flexible Remuneration?

Flexible Remuneration is a form of workplace compensation that allows employees to convert part of their monetary salary into compensation for products, rights, or services at a cost lower than market prices. In other words, these are day-to-day expenses paid directly from your paycheck as the month progresses, not afterward. As services with total or partial exemption from IRPF, your net income increases.

Employees are entirely free to use Flexible Remuneration or not. And, of course, only on products that fall within the 30% limit of the annual gross salary established by Social Security.

To avoid surprises, it is important to understand its meaning and be well-acquainted with the differences between Flexible Remuneration and Social Benefits.

What is IRPF?

The Personal Income Tax, better known as IRPF, is a tax that levies all the income a person receives during a fiscal year throughout the entire Spanish territory. It is a direct and progressive tax that varies for each person based on the origin of income and personal and family circumstances. This means that the higher the gross income of the individual, the higher the percentage of taxes to be paid.

The incomes referred to include earnings, gains, and losses regardless of where they occur and the residence of the payer.

Regarding the tax period, it spans a natural year. Therefore, IRPF corresponds to all fiscal events imputed until December 31st of each year.

It’s important to remember that, to understand the payslip, the amount indicated as IRPF is not exactly an official tax payment. The concept of IRPF in the payslip is an approximate withholding made by companies monthly according to the ongoing fiscal year.

The actual calculation of the tax amount to be paid during a year will only be carried out in the income tax declaration of the following year. The Administration will verify whether the amounts retained monthly by the company align or not with what we truly owe to the Treasury based on various influential concepts.

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What is the income tax declaration?

The Income Tax or Personal Income Tax (IRPF) is a tax that citizens must pay concerning the income earned throughout a year. Updating this with the State Tax Administration Agency (AEAT or Tax Agency) regularizes each individual’s fiscal situation, involving calculating unpaid taxes and deducting those already paid.

This obligation applies to all citizens who are physical residents in Spain, with exceptions for those (1) with income from personal work equal to or less than €22,000 annually from a single payer, or (2) with income from multiple payers, provided the sum of the second and subsequent payers does not exceed €1,500.

2. How to save through Flexible Remuneration

Through Flexible Remuneration plans, companies can offer goods and services like meal vouchers, transport vouchers, nursery vouchers, health insurance, or training, for direct consumption from their payroll (gross salary), always on a voluntary basis as mentioned earlier.

The key advantage lies in employees securing significant deductions in IRPF since most goods and services offered by companies to their staff have substantial exemptions from taxation.

The concept is straightforward: with Flexible Remuneration, these services and products are consumed from the gross salary, thereby reducing the taxable base and the consequent tax burden.

Without Flexible Remuneration, these services and products would be paid from the net salary, after receiving the paycheck and taxes have already been applied on a higher taxable base.

3. How much of the salary can be allocated to Flexible Remuneration?

While training and daycare are generally fully exempt from IRPF, other benefits with a variable exemption need consideration:

– Meal vouchers: exempt from IRPF up to €11 per working day, resulting in an annual saving of around €600.

– Nursery vouchers: 100% exempt from IRPF.

– Transportation vouchers: exempt from IRPF up to €136.36 per month, with a maximum of €1,500 annually.

– Health insurance: exempt from IRPF up to €500 annually, as it is not considered income for tax purposes. Conditions for IRPF exemption on health insurance may vary in regions with a Foral Treasury, such as Álava, Guipúzcoa, and Vizcaya.

– Training: 100% exempt from IRPF, although the tax treatment of training courses depends on the type of contract and objectives pursued.

In these cases, the contribution base is unaffected, but IRPF is impacted, provided the established limits for each good or service are met, and in no case can they collectively exceed 30% of the employee’s gross annual salary.

4. How is Flexible Remuneration reflected in the payroll?

Individuals have certain expenses that the Tax Agency deems necessary for the development of professional activities. These expenses, directly related to the work performed, are not considered part of the income derived from work, as individuals cannot enjoy them as such. Examples include expenses related to meals, public transport, nursery, training, and health insurance.

The Tax Agency considers these employee expenses necessary for their daily professional activities and thus exempts them.

The higher the portion of these deductible expenses, the lower the taxable base, and therefore, the lower the taxes to be paid. The more necessary consumables we can add as deductible expenses, the more we can reduce the amount subject to taxes: the so-called reduction of the taxable base mentioned in the first section.

Hence, the significant importance and impact of Flexible Remuneration on the purchasing power of employees, as it allows certain expenses that would otherwise be consumed from the net salary to be converted into deductible.

As these tax benefits are tied to the gross salary (before taxes), this is directly reflected in the paycheck, and the taxpayer does not need to take any specific action in their income tax declaration.

5. How is Flexible Compensation reflected in the income tax declaration?

When opening the draft income tax declaration, monetary compensations (the first figure concerning work income) already consider the consumptions exempt from paying IRPF. The taxable base presented already deducts the consumptions included in Flexible Remuneration.

As mentioned above, the company has previously reflected this consumption in the paycheck, and the employee does not need to do anything in their income tax declaration.

A change in income will not affect Flexible Remuneration consumptions in any case, although it may impact the declaration’s result. In the income tax declaration, Flexible Remuneration does not affect the taxable base.

6. How much can an average salary save through Flexible Remuneration?

To fully grasp the previously explained concepts, let’s consider a real example of the savings generated in an average salary through Flexible Remuneration.

Meet María: 35 years old, two children, working in a tech company in Madrid. María prefers not to use a car for commuting, opting for public transportation. She eats out every day and takes her 2-year-old to a nearby daycare before work. All these services are consumed using the advantages of Flexible Remuneration offered by her company, resulting in significant savings.

With an annual gross salary of €30,000, María would save €1,692 annually through Flexible Remuneration. She would pay taxes amounting to €3,488, much less than the €4,938 it would cost her to pay for these services without Flexible Remuneration.

If María eventually paid for the products through Flexible Remuneration, her annual income tax declaration would already include these savings. The taxable base in the draft would be €26,512 (base salary minus total Flexible Compensation expenses).

The benefits of Flexible Remuneration in the income tax declaration can thus be translated as significant savings for the employee at zero cost to the company. A simple plan with three benefits, as seen in the example, can change the daily lives, motivation, and end-of-month outcomes for the entire staff.