PAYE - Income Tax deductions to employee's pay
In Spain, employers withhold a percentage of the employee's gross salary as a payment on account of the employee's income tax.
There are slightly different rules for permanent and temporary contracts. Generally, for permanent contracts the amount withheld will depend on the size of the salary and the employee's personal entitlements given some of their personal circumstances. If possible, the amounts withheld should be very close to the actual tax liability of the employee. By doing so, you will minimize any additional payments or refunds should the employee file a tax return following the year end.
However, problems can arise if an employee is working under a temporary contract as there is a minimum amount to withhold of just 2%. This means that during the temporary contract phase, the employee will probably be under contributing to the actual income tax liability accrued, therefore when the employee changes to a permanent contract the amount under contributed will need to be regularised.
Let's look at an example, for an employee earning € 1,500 gross per month:
Estimate of PAYE Employee Deductions
| Permanent | Temporary | |
| Gross Salary | € 1.500 | € 1.500 |
| Employee PAYE | 182 | 30 |
| % retention | 12% | 2% |
Withholding 2% is a right but not an obligation. If you are able to agree with the employee to retain the correct PAYE percentage, you can avoid three potential problems. Firstly, the employee will not get accustomed to an artificially high net pay which could potentially lead to dissatisfaction later on. Secondly, because the retentions match the income tax liability, no large adjustment when a permanent contract begins will be needed. Thirdly, if the pay has been agreed on a net pay basis, there will be no increase in the cost to the employer when the contract is renewed on a permanent basis.
Our recommendation is that salaries are always agreed on a gross pay basis and if at all possible that even if the contract is temporary, you opt to withhold the correct amount.
vNational Insurance Contributions - Social Security
Social Security payments can come as quite a shock to those new to the Spanish system and are certainly the most controversial issue regarding employing staff.
In Spain, both employees and employers are liable to pay social security contributions and they are payable as a percentage of earnings subject to social security up to €3,074 per month (€36,889 per annum).
Employee contributions are deducted from the gross salary at 6.40% for temporary contracts and 6.35% for permanent contracts.Estimate of Social Security Employee Deductions
| Permanent | Temporary | |
| Gross Salary | € 1.500 | € 1.500 |
| Employee Social Security | 95 | 96 |
| % retention | 6.35% | 6.40% |
Employer contributions represent an added cost to the employer at approximately 40% for all contracts.
Estimate of Social Security Employer Costs
| Permanent | Temporary | |
| Gross Salary | € 1.500 | € 1.500 |
| Employer Social Security | 600 | 600 |
| Total Cost to Employer | 2.100 | 2.100 |
Obviously, the impact of this social security cost cannot be ignored and makes employing staff a much more expensive business than in other parts of the world. You must take this payment into consideration, before making an offer to a potential employee, as you may find that the salary you have offered becomes unaffordable once social security has been factored in.
The table below summarizes our example:
| Estimate of employment | Permanent | Temporary |
| Gross Salary | € 1.500 | € 1.500 |
| Employee PAYE | 182 | 30 |
| % retention | 12% | 2% |
| Total Cost to Employer | 2.100 | 2.100 |
| Employee Social Security | 95 | 96 |
| % retention | 6,35% | 6,40% |
| Net for employee | 1.223 | 1.374 |
| Employer Social Security | 600 | 600 |
| Total Cost to Employer | 2.100 | 2.100 |
