How payroll withholding (retención) works on your Spanish salary

Key rules

• Advance payment: The withholding on your payslip is only an advance, so your final tax bill can be higher or lower.
• Modelo 145: Give your employer a Modelo 145 so your family situation lowers your rate.
• Changes that raise your rate: Report within 10 days any change that increases your withholding.
• Refunds: The tax agency has six months to pay a refund, then owes you late-payment interest.

The percentage on your payslip is an advance, not your final tax

Your employer holds back a percentage of each payment and sends it to the tax agency for you. This is the retención. It is an advance on your yearly income tax, so the rate on your payslip will usually differ from what you finally owe. The difference is settled when you file your annual return: if too much was withheld, you get money back. If too little, you pay the rest.

How your employer works out the rate

Your employer calculates the rate, not you. In outline:

1. They take your expected gross pay for the year.
2. They subtract your own social security contributions and a fixed allowance of 2,000 euros a year for other expenses. Higher allowances apply if you are disabled or moved for the job.
3. A reduction applies if your income is low. It is largest at the lowest incomes and fades as pay rises.
4. They subtract a personal and family minimum. It depends on your age, children, dependants and any disability.
5. They apply the tax scale. It has several brackets, and part of it is set by your region, so the result differs between regions.
6. The tax is divided by your gross pay to give one percentage, applied to every payment.

Some short contracts have a minimum rate. Very low annual pay may have no withholding at all, depending on your family situation. The rate is recalculated when your circumstances change, at the start of each year and sometimes in July. These rules are for employees of a Spanish payer. Non-residents taxed separately follow different rules.

Tell your employer your circumstances with the Modelo 145

The family minimum only counts if your employer knows your situation. You give it to them on the Modelo 145 form. Without it, your employer may withhold more than you need to pay. Fill it in when you start the job.

When your situation changes

Send a new Modelo 145 in writing when something changes, such as a new child, a change in marital status, a new dependant or a disability. Send it before the payroll is processed, normally in the month of the change. Your employer uses the new rate from the first payroll after you tell them. It is not backdated, so any gap is settled in your annual return.

If a change lowers your withholding, telling your employer is optional. If it raises your withholding, for example a dependant stops qualifying, you must report it within 10 days.

Settling up: the annual return

Withholdings count as payments you have already made. If they exceed your tax, the tax agency refunds the difference by bank transfer to the account in your return. It has six months to pay. After that it owes you late-payment interest.

You do not have to file if you earn less than 22,000 euros a year from one payer. With more than one payer, the limit is 15,876 euros if the second and later payers paid more than 1,500 euros in total. Other income can lower these limits. Even if you do not have to file, you can file to claim a refund or deductions.

If your payslip rate looks wrong at the start of the year or in July, ask your employer to recalculate it. The timeline and checklist below walk through the steps, and the what-if section covers withholding that is too high or too low.

Timeline and deadlines

• Your employer applies the new withholding rate, which is not backdated: from the first payroll after the date you gave notice

• Report a change that raises your withholding, such as a dependant who no longer qualifies: within 10 days of the change

• File your annual return so any difference between the tax withheld and the tax you owe is settled: in the filing campaign after the tax year ends

• The tax agency pays any refund by bank transfer to the account in your return: within six months of the end of the filing period, or of filing if later

• If the refund is late, the tax agency owes you late-payment interest on the amount: after the six months have passed

Checklist

• Check your payslip for the withholding percentage, which is an advance on your yearly tax, so it can differ from your final tax bill.

• Give your employer a Modelo 145 form with your age, children, dependants and any disability, because the percentage is calculated from these.

• Send a new Modelo 145 in writing when your family situation changes, before the payroll is processed.

• Tell your employer within 10 days if a change raises your withholding rate.

• Check whether your pay is under the limit for filing a return: 22,000 euros a year from one payer, or 15,876 euros if a second payer paid you more than 1,500 euros.

• File a return even if you are not obliged to, when you want a refund of excess withholding.

What if your payroll withholding is too low or too high?

Withholding is only an advance on your income tax. If your employer withheld too little or too much, the difference is settled when you file your annual IRPF return, or you can fix the rate going forward by updating your circumstances with your employer.

If too little was withheld

You pay the difference when you file your annual return. The filing campaign usually runs from April to the end of June. You can split the tax due into two instalments: 60% at filing and 40% by early November.

You generally face no penalty, because withholding is your employer's duty and the final tax is worked out in the return. The exception is when you gave your employer wrong data. In that case penalties may apply to you.

The employer answers to the Tax Agency for any amount it should have withheld, and can face surcharges, interest and penalties.

If too much was withheld

You get the excess back through the same return. Withholdings count as payments on account.

The Tax Agency has six months from the end of the filing period (or from the day you file, if later) to pay. After that it owes you late-payment interest. Most refunds arrive within weeks to a few months.

If you are not obliged to file, you can still file to claim the refund.

Fixing the rate during the year

Tell your employer in writing when your family circumstances change. Examples are a new child, a change in marital status, a new dependant, a disability, or a mortgage on a home bought before 2013. You do this with the Modelo 145 form. For other changes there is no fixed form.

• Timing: Notify before the payroll is processed, normally within the month of the change. Your employer applies the new rate from the first payroll after the date you tell them, at the earliest.
• Lower withholding: If the change would lower your rate, telling your employer is voluntary.

Confirm the exact notification deadline with your employer or the Tax Agency.

Quick answers on salary tax for new residents

Do 14 payments instead of 12 change my annual tax?

No, having 14 payments instead of 12 does not change your annual salary or your annual tax. Withholding is based on the yearly total, so the same percentage applies to each payment. With 14 payments each one is smaller, and the two extra ones are called pagas extra.

Do my social security contributions reduce my taxable salary?

Yes, your own social security contributions, including unemployment and training, are deducted from your employment income before tax is calculated. Mandatory mutual fund contributions and union dues also count, within limits.

Are expense reimbursements from my employer taxable?

It depends on the type of expense, and many are tax-free. Justified transport costs are exempt. Meals and lodging are exempt up to daily limits when the trip is outside your workplace and municipality. Anything above the limits, or paid without proof, counts as taxable salary.

Is my final settlement (finiquito) withheld at a different rate?

No, a finiquito covering salary and holiday pay is withheld at your regular rate, like ordinary pay. Only dismissal compensation is exempt, up to the legal limit. Amounts above it are taxable, and may get a reduction if built up over more than two years.