Income tax (IRPF) on the payroll: How much do I save with Flexible Remuneration?
Income tax (IRPF) on payroll, earnings, deductions, flexible remuneration… For most employees in Spain, these concepts can be perplexing. Indeed, these notions often pose challenges without prior training in the field. In fact, when a company takes on the task of explaining what Flexible Remuneration is and how it contributes to the economy of workers, the first step is to clarify certain uncertainties. These should revolve around salary, its distribution, applicable taxes, and deductions. But also, how each particular case can be affected in one way or another based on very personal factors.
Regardless of how the company wishes to approach this training and information process, there are steps to follow. At least, that should be the case to achieve the successful adoption of a Flexible Remuneration program by the staff.
Table of Contents
- 2. How IRPF Affects the Payroll
- 3. How Hacienda Regulates Company Withholdings
- 4. Flexible Remuneration on the Payroll
- 5. How Flexible Remuneration is Reflected on the Payroll
1. Payroll Concepts
To begin, it is necessary to understand each concept included in the payroll, primarily earnings, deductions, and other items. Next, delve into the IRPF, its brackets depending on salary, and the impact of these on the annual net income. Once relevant questions are answered, the HR department is in a position to explain what Flexible Remuneration is and how it contributes to increasing the purchasing power of the staff. Depending on the profile of workers, their years of service, the gross salary of the staff, or their preferences regarding benefits, the company can detail to a greater or lesser extent the direct implication of the IRPF in specific salary terms.
2. How IRPF Affects the Payroll
Every company applies the Personal Income Tax (IRPF) to the salaries of workers. This is done in the form of withholding, on a monthly basis throughout the fiscal year, to advance the anticipated payment to the Tax Agency. This concept always appears itemized, or should, on each employee’s paycheck. IRPF taxation is a direct and progressive tax. The latter means that it taxes each person differently and proportionally based on their income.
In fact, the company calculates the application of IRPF to each professional based on tables that mark the salary brackets to be considered for each type. It is important to explain to the staff what IRPF brackets apply to them individually. Keep in mind that IRPF is divided into the state rate and the regional rate, and this can vary from year to year. What we need to know is that IRPF is not applied to the total earnings because it does not take into account certain economic benefits that the worker enjoys at the expense of the company. Here in lies the advantage of Flexible Remuneration plans for staff.
3. How Hacienda Regulates Company Withholdings
In addition to compensation, IRPF takes into account other variables such as the family situation of each employee or their assets.
According to the Tax Agency, “the object of the tax is the taxpayer’s income, understood as the total of their earnings (employment, capital, and economic activities), gains and losses, and the imputed income established by law (real estate income, international tax transparency, and assignment of image rights), regardless of where they occurred and regardless of the payer’s residence.” This means that the amount that appears on the payroll as IRPF is not an exact payment of taxes; it is an approximate withholding made by our company.
The calculation of the final amount to be paid will not be seen until next year’s income tax return, where it will be calculated whether the amounts withheld coincide or not with what we have to pay to the tax authorities.
4. Flexible Remuneration on the Payroll
The concepts framed within Flexible Remuneration represent a significant advantage for employees, as they enjoy very advantageous supplements that do not increase the taxable base subject to IRPF. This allows the staff to extend their purchasing power and enjoy highly valued services at a very economical price. In addition to price advantages, employees do not have to pay a stipulated percentage to the tax authorities for these benefits. The salary allocated to Flexible Remuneration is deducted from the gross, thus achieving a reduction in the taxable base subject to IRPF.
This reduction affects the IRPF bracket, which decreases, thereby reducing the percentage stipulated in the tax tables. Medical insurance, life insurance, etc., are benefits that are usually exempt from IRPF, as long as they do not exceed 30% of the gross or total earnings.
5. How Flexible Remuneration is Reflected on the Payroll
When applying a withholding on the payroll or enabling a Flexible Remuneration plan, it is important that both concepts are correctly documented on the payroll. That is, expressed nominally and, along with them, the percentage of withholding on the amount of gross salary subject to wages. In this way, the worker will easily see how their Flexible Remuneration plan works in favor of their paycheck. In the earnings section, they can see the consumption made on Flexible Remuneration products and services (in our example, restaurant vouchers, transportation, and childcare).
They will appear in earnings as part of the employee’s gross salary. In the deductions section, the sum of these amounts will appear as the total amount to be deducted. Employees have the advantage of creating their own Flexible Remuneration plan voluntarily and according to their needs: each one decides what benefits they need and what amount they consume.