Knowing how to calculate your Personal Income Tax
If you are an English entrepreneur in Spain, your company falls under foreign, and often difficult to understand, laws. Read on to find out how to pay your personal income tax according to these regulations, how to calculate it, when to pay it and of course, how best to anticipate this amount.
What to do in the first quarter?
In your first few months of business operation, predicting your income tax in Spain might not actually prove very useful and can equate to nothing more than an approximation. But, let’s imagine that at the end of your first quarter, your operating revenue is around 1000 Euros.
Suppose it is March during Year 1 and you have made 1,000 Euros in turnover and 500 Euros of expenses. We know that on 20th April you will need to pay the personal income tax. So let’s calculate the net profitability, in other words the difference between sales and the charges for that quarter. The result is the amount of 500 Euros from which we deduct 20% (100 Euros) for the payment of personal income tax. Then, on 20thApril of Year 1, you will pay 100 Euros to the Hacienda, the Spanish organisation that collects tax. You should consider this payment as a type of deposit.
What about for the other quarters?
It’s tempting to assume that this process is simply repeated for the following quarters however, this isn’t exactly the case. In fact, for Quarter 2 (April, May, June) you will need to calculate the net profitability compared to the cumulative amount of sales and expenses. Knowing that you increased your sales of 1,000 per quarter and our expenses have stagnated (utopian), you will end up with 3,000 Euros net cumulative quarterly revenue at the end of Quarter 2 (1,000 Euros for Q1 + 2,000 Euros for Q2) and 1,000 Euros of cumulative quarterly charges. Thus, you’ll have a net profit of 2,000 Euros from which you’ll then deduct 20% which is 400 Euros. The amount that we will have to deal with in the month of July but this is where the subtlety of Spanish taxation lies.
In Quarter 1, you paid a deposit of 100 Euros. Theoretically, you should pay 400 Euros for theQuarter 2 since it corresponds to 20% of the net profit for those 3 months. However, this is not the case since the 100 Euros you had paid already will be deducted from the 400 Euros. So, for your personal income tax in Quarter 2, you will have to pay 300 Euros (400 minus 100).
According to this example, in your Quarter 3, you will have 6000 Euros in cumulative quarterly sales for 1,500 Euros of cumulative quarterly charges which is 4,500 Euros of profit and 9,000 Euros of which is personal income tax since you have already paid 400 Euros of it. You will have to adjust this to 500 Euros in the month of October. For Quarter 4, you will have made 10,000 Euros in cumulative quarterly sales for 2000 Euros of cumulative quarterly charges which makes 8,000 Euros of profit of which 1,600 Euros is personal income tax already having paid 900 Euros of it. This leaves 700 Euros to pay.
How to anticipate income tax?
The idea behind this article is to help you to anticipate and plan for the amount of tax you, as an entrepreneur in Spain, will have to pay each quarter. Too often, entrepreneurs in Spain do not foresee these amounts that must be paid at the end of each quarter.
The simplest method to avoid this is to budget the year by using previous years as a reference point. Further to this, you can calculate the total amount you have in terms of personal income tax for the year N to prepare for at least this amount for the year N + 1 to avoid any surprise.
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