Flexible Remuneration: How to calculate tax savings
Flexible Remuneration is one of the most useful mechanisms for reducing the tax burden on both workers and companies. In this way, employees can enjoy a higher net salary each month without a salary increase from the company. But how can you calculate the savings from Flexible Remuneration on your paycheck?
It all depends on the services that your company offers as Flexible Remuneration within its Benefits Plan. These services could include meals, transportation, training, childcare, and more. The more benefits you have and the more you use them, the more money you can accumulate to reduce the taxable base on which your Income Tax (IRPF) is calculated.
In other words: the more you spend through Flexible Remuneration services, the less taxes you will pay. However, each of these benefits has different implications and specific limits that, together, cannot exceed 30% of your gross salary.
Do you want to know how we determine the tax savings you can obtain by using Cobee? We’ll explain clearly and simply how we make the calculations so you understand why sometimes the savings indicated in our app do not exactly match the withholding you see on your paycheck each month 😊
Firstly, how does Income Tax (IRPF) work?
The Personal Income Tax (IRPF) in Spain is progressive, meaning the higher your gross salary, the higher the percentage of taxes you have to pay. This progressive taxation is divided into various brackets that determine the retention percentage applied to each worker’s paycheck.
In the table below, you can see the IRPF brackets in Spain that determine the withholding applied to your paycheck based on your annual salary.
In recent months, many Autonomous Communities have been announcing changes in the brackets for regional IRPF to offset rising prices. Here you can check how the deflation of the IRPF proposed so far works.
For example: for a gross salary of €25,000, is the IRPF 30%?
As seen in the table, for an annual salary of €25,000, the final bracket is 30%, as it falls within the bracket ranging from €20,200 to €35,200. This means you won’t pay a 30% rate on the total salary; instead, this withholding only applies to the money determined by this specific IRPF bracket.
To understand it more easily, with the progressive system, your taxation will be as follows if you earn €25,000:
– Up to €12,450, the 19% bracket applies.
– From €12,450 to €20,200, the 24% bracket applies ➡ only for the €7,750 included in this bracket.
– From €20,200 to €25,000, the 30% bracket applies ➡ It applies the 30% only to the last €4,800.
The percentage of the last bracket in which we find ourselves will be our Marginal IRPF.
So, if you don’t pay 30% on the entire salary, how is the amount determined? The marginal rate is not the effective percentage you pay in IRPF and, therefore, is not what you see on your paycheck. What you see reflected is known as the average or effective rate. The effective or average rate is calculated from the average of all the brackets.
Moreover, it’s essential to understand that the amount you see under the concept of IRPF on your paycheck doesn’t have to be the exact amount of taxes you must pay to the Tax Agency. It is an approximate withholding made by your company.
The final amount you owe will only be visible in the income tax return the following year, where the Tax Agency will calculate whether the amounts withheld from your paycheck match what you owe, considering all income and specific details (deductions, aid, etc.). This is why some years the tax return results in either a payment or a refund.
Having said that, are the savings I see in Cobee real?
With Flexible Remuneration, the money you spend on Cobee’s services is not considered in the calculation of the taxable base for your IRPF. And what does this mean? It means that the amounts you spend on Flexible Remuneration subtract from the highest to the lowest IRPF bracket: in other words, the marginal rate, not the average rate.
However, on your paycheck, the company applies a calculation based on the average rate, which is an estimate based on your salary. For this reason, the savings you get with Flexible Remuneration, as indicated on your paycheck, will also be an estimate. You will have to wait until your income tax return is finalized to know exactly how much the real savings amount to.
With this example*, it will become even clearer:
– For a salary of €25,000: If we consume €1,000 in Flexible Remuneration and only consider the average rate of 22.66% = €1,000 x 22.66% = €226.6 savings.
– For a salary of €25,000: If we consume €1,000 in Flexible Remuneration and apply the marginal rate of 30% = €1,000 x 30% = €300 savings ➡ This is our TOTAL REAL savings.