Tax — The 2021 income tax return
Archive article, published in 2021. Its content reflects the context at that time.
“I need to file my income tax return.” This is the phrase we will soon be hearing on every street corner. The most organised taxpayers will begin preparing their dreaded return from 7 April, while those less concerned about their taxes will leave it until the last minute on 30 June, the final filing day. Yet we all hope for the same outcome: “Let’s hope I get a refund.”
You may therefore be interested to know that, following approval of the new State Budget, changes introduced from 1 January will make the word “refund” less common, or at least less generous. In the pursuit of higher public revenue, tax rates have increased and deductions that previously offered a small reward when filing this most personal of taxes have been restricted.
These increases may seem remote to most people, as they affect only those earning more than €300,000 or accumulating a savings tax base of €200,000 in a year. Earning or saving a lot is apparently no longer advisable: those fortunate enough to reach these figures will also have the extraordinary privilege of contributing almost half for everyone’s benefit. Heroes without capes.
Having learnt the new lesson — “Best not to earn or save too much, my child” — let us review another change that most ordinary people may need to keep on their radar: the reduction in tax relief for pension contributions.
Tax legislation previously allowed us to reduce our personal income tax liability by contributing to a pension plan. Many people chose to put money into their own pension pot and pay slightly less income tax, and with good reason. The repeated depletion of public pension funds by politicians in recent years may have become the best marketing campaign for private retirement plans. Almost every young worker has heard: “Our generation won’t have pensions.”
Until now, contributions to these plans could reduce the personal income tax base by up to 30% of employment and business income, subject to an overall limit of €8,000. A substantial amount, given the rising rates of our dearly beloved tax.
Under the new government amendment, this limit will fall from €8,000 to €2,000. The €8,000 limit will remain only where the contribution comes from an employer rather than the individual.
The days of contributing to a pension plan instead of paying income tax are over. Those contributing to these plans will now do so mainly for their own retirement provision, rather than to save a few euros on their tax return.
What is the aim of this amendment? Clearly, and in keeping with much of Spain’s tax legislation, it is simply revenue collection.
Explaining this to a child would be difficult: how do you explain that the government penalises someone for working hard to earn more or build up savings? Fortunately, we can always fall back on: “We need to help others.”
There is one Spanish region, better known for its referendum attempts than for its virtues, where taxes have for years been used for more than revenue collection: to discourage conduct harmful to society or encourage beneficial behaviour. Taxes on sugary drinks and CO2 seek to change — and do change — certain everyday habits. These taxes may not bring a material benefit to the administration, but they do benefit society.
An interesting anecdote: the central government challenged the Catalan government before the high court, arguing that a tax on emissions from fuel combustion fell within central rather than regional competence. The court dismissed the challenge, and Catalonia continued happily taxing its diminishing black fumes.
What we never knew, and may never know, is why the central government brought the challenge. It looks like a tantrum about not wanting to be the only villain in the film, collecting taxes solely to raise revenue.
Once the tears are over, let us hope the lesson has been learnt and the government gets moving. In the meantime, it will have been overtaken not only by Catalonia but also by the European Union, which, from July this year, will establish a tax on the manufacture, import or acquisition of non-reusable plastic packaging in Spain.
We will have to wait to see whether the central government again concentrates on fighting to defend its powers — this time against the Europeans — or gets down to work. Until then, do not forget:
Do not aspire to earn too much, do not save and, above all, remember to file your income tax return.