Why have special tax rules for couples?
Like most countries Spain has special rules for the taxation of couples. These are deemed necessary for the sake of fairness and the UK has similar rules. Â Without married couple tax rules, everyone would be treated like single taxpayers with a separate declaration and personal tax allowance.
That sounds fair enough but what about couples where one half of the marriage doesn't work or earn any money, perhaps because they are at home looking after children? They would only get one personal tax free allowance, the same as a single person, but with two people effectively working to support a family. Â For this reason it is thought fair in most countries that married couples can claim a larger tax free allowance.
But should that allowance be double - two single people's allowances? Â Again most countries adopt a compromise position, this time to be fair to single people. Â If a married person got a full extra personal tax allowance this could be seen as unfair to single people particularly those on low incomes who might be seen to subsidising couples earning more than they do.
What are the Spanish married couples tax rules?
Spain aims to strike a balance between single and married couples by giving couples the option of being taxed separately or being taxed as a couple with enhanced allowances though not double those of single taxpayers (see next paragraph - Spanish married couples allowance).
Every couple therefore first needs to calculate their taxes individually, as if they were single. Â This is done in exactly the same way as a single taxpayer's tax calculation (see Spanish income tax rates). Â The only complication is what happens to income, allowances and deductions that belong jointly to the couple, for example:
- additional personal allowances for children who live with their parents
- deductions for mortgage and rent costs (see section on Housing deductions)
- interest on joint bank accounts
Naturally enough all such items are split 50:50 and allocated to the individual returns
After working out their total tax bill as two individuals, Â a couple then needs to work out their tax bill with a combined computation and then compare the result. Â If a combined returned produces a lower tax bill they are entitled to declare as a couple and forget the individual returns, and vice versa. Â The crucial question is, how generous are the married couples allowances for the joint returns?
Spanish married Â couples allowance
The additional deduction for married couples' returns (called in Spanish declaracion conjunta) is 3.400â‚¬. Â This is the compromise between a married couple being treated poorly (having to share one allowance) and overly generously (getting two full single allowances when only one of them is earning).
Calculating the tax of a couple is not quite as easy as adding one single allowance (currently 5.151â‚¬) Â to the married couples allowances (3.400â‚¬) to give a combined allowance (8.551â‚¬) against their joint income. Â The allowance is given in two stages so that only the married couples allowance reduces the couple's liability to higher rate tax.
Example: Â Couple with combined earnings of 30.000â‚¬ before personal allowances
(Spanish income tax rates for earned income are 24% up to 17.707â‚¬ and 28% between 17.708â‚¬ and 33.007â‚¬)
The couple's tax is calculated by first deducting only the married allowance of 3.400â‚¬. Â That gives a net income of 26.600â‚¬ and a tax charge as follows:
17.707 @ 24% = 4.250â‚¬
8.893 @ 28% = 2.490â‚¬
Total tax 6.740â‚¬
There is then a separate deduction for the single personal allowance at the basic rate only (24%). Â If the primary declarer has a personal allowance of 5.151 for example then the deduction is 5.151 @ 24% = 1.236â‚¬. Â The tax total is 6.740 - 1.236 = 5.504â‚¬
This is less generous to the married couple than being able to take off both allowances before any tax is calculated because that would give them the benefit of both allowances at the higher tax rate. Â The effect can be quite pronounced for couples reaching the top rate of tax, 43%.
What is the best strategy for a couple to minimise tax?
The traditional advice is that couples where only one spouse earns significant income should declare together, whereas if both have income then they should declare separately. Â Essentially the goal is to make maximum use of tax allowances. Â If you have no income then you can't gain the benefit of allowances so you might as well declare with your spouse and get the extra married couples allowance.
There are complications, particularly the interaction of the various different allowances available and whether you are paying higher rate taxes. Â Unless your case is very clear-cut (one spouse has little or no income, or both have significant income e.g. above single persons' allowance) then you may have to calculate the tax both ways and compare the two results.
Another thing to think about is structuring your income to make the most of the choices available to married couples. Â For example it may be possible to shift marital income from one spouse to another to use up more tax allowances (e.g. by arranging for interest or dividends to be divided differently).
What counts as married for Spanish married couples tax purposes?
Besides traditional marriages, same sex marriages count for the purposes of making joint declarations.
Being in a pareja de hecho (like a registered partnership for couples who live together) does NOT entitle you to make a joint declaration.
If you are divorced or separated you can make a joint declaration only up to the date of legal separation but not thereafter.
For specific queries about tax contact Advoco here
More tax articles can be found on our Advice page