There has been a lot of information recently regarding the revised tax legislation that will result in tax cuts in 2015 (see my blog of 23rd November 2014 and the detail of the changes in our Library here ). However, if your income is in sterling, then this may not be case.
Firstly, if your income is in sterling, then it’s likely that you pay your tax following submission of a return between April and June each year. As this return covers the previous year, then the allowances and tax rates for this year’s returns are still the one that we have been used to for the last few years. The new tax allowances will not apply until your return in 2016. If you are working and earning euro income in Spain, then the new allowances will be used from this month.
However, in terms of your sterling income, the amount that you receive in euros has been rising this year following the strengthening of the pound. The official exchange rate at the end of the year was €1.2838 to £1, and the average rate during the year was €1.2405 to £1. Comparing these to 2013: the year-end rate was €1.1995 and the average rate was €1.1775. In percentage terms this is an increase of 7% and 5.3%.
So, even if your sterling income remained the same as last year, you will have received approx.5% more, and consequently the taxman will want some of your increase as well. If your income is between €10,500 and €13,260 (depending on your age and status) then you suffer a double whammy, because you receive extra personal allowances and tax credits based on your income, and these are also lower because of the increase in you euro income.
To put it into perspective, let’s look at a few examples. The income figure where you pay no tax (the break-even point) for 2013 are shown below, in brackets at the side of each break-even point is the estimated tax payable in 2015 (for income received in 2014). These estimates are based on the general personal allowances.
Joint income Return – over 65 – £11,000 (€275), under 65 – £10,600. (€315)
Individual Return – over 65 – £9,425 (€250), under 65 – £8,850 (€200)
For income of around £15,000 and £20,000 the additional tax is around €230 and €375 respectively. The figures are the same for all return types and age groups, as it’s simply a tax on the extra income, and there are no additional allowances and tax credits affected by a higher income.
The good news is that in 2016 (in respect of your income received in 2015) you get some of this extra tax back, but will still be paying a few euros more than last year (2013 income). Note this depends where you live as the rate for the first tier tax band in the Autonomous Regions varies from 19.5% in Madrid to 22% in Andalucia. The example is for Valencia where the rate is 21.90%. This calculation also assumes the exchange rate stays the same, which is unlikely. If the pound is stronger again next year, then you will pay yet more tax, but if it weaker then you may pay less.
So, it’s not just the Spanish government that affect the amount of tax you pay, the markets do as well.
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