Ministry of Finance May Not Adjust Income Tax Following Minimum Wage Increase

The Spanish Ministry of Finance is considering not adjusting the personal income tax (IRPF) in light of the anticipated increase in the minimum wage (SMI) for 2025, which could result in new tax obligations for beneficiaries of the minimum wage.

According to recommendations from a group of experts convened by the Ministry of Labor, the government is expected to raise the minimum wage by either EUR39 or EUR50 per month, leading to two potential scenarios. The SMI could rise to either EUR1,173 or EUR1,184 gross per month. However, it has been indicated that the IRPF will not be adjusted to reflect this increase, which would mean that individuals earning the SMI will be required to pay taxes for the first time.

In previous years, the Ministry of Finance typically raised the income tax exemption threshold in line with increases in the SMI. For instance, last year the threshold was increased to EUR15,876, and in 2023 it was raised to EUR15,120. However, sources from the Ministry confirm that there are discussions around not implementing such an adjustment this time, meaning the tax exemption threshold would remain unchanged. Calculations from the Registry of Tax Advisors (REAF) suggest that this could result in beneficiaries of the SMI paying approximately 42% of the anticipated wage increase in taxes.

While a final decision has yet to be made, the Ministry of Finance is contemplating the possibility of not updating the IRPF, which has steadily increased by 54% since 2018. If the decision is made to maintain the current exemption level, those receiving the minimum wage would start contributing to income tax, just as they currently do with social security contributions.

This potential decision could spark renewed tension between the government and opposition parties. Last year, when the minimum wage increase was announced, the leader of the Popular Party, Alberto Núñez Feijóo, urged the President to adjust the IRPF, arguing that the state should not increase its tax revenues and that workers should receive the full benefits of the wage increase. Just days later, the Ministry of Finance put forward a draft decree proposing the necessary adjustments.

In the previous year, adjustments were made to the deduction for work income to prevent a tax burden due to the wage increase. These measures collectively benefited around 5.2 million taxpayers and resulted in a fiscal cost to the treasury of EUR1.385 billion.

Currently, the expert recommendations outline two possible scenarios for the annual minimum wage: one would set it at EUR16,422, which is an increase of EUR546 annually, while the other would raise it to EUR16,576, adding EUR700 to annual earnings. In either case, beneficiaries would face a tax withholding of approximately 42% of the wage increase, which is significant due to the complex structure of the income tax and the impact of marginal rates.

In the first scenario, the increase would lead to a tax payment of EUR233.20, while in the second scenario, it would amount to EUR300. This tax obligation would apply uniformly across all regions, as the withholding is managed by the employer. The only exceptions to this may be Madrid and the Valencia Community, where slight adjustments could lead to minor tax refunds for employees.

Taxpayers in regions other than Madrid and Valencia may find it less beneficial to file an income tax return, as they could face additional taxes ranging from EUR45 to EUR57, depending on the wage increase scenario.