- The act has immediate effect on personal income tax: it changes withholding from 5 July and the 2018 tax return.
- The main winners are workers on low salaries and families with young, disabled or numerous children.
- Those with relatives in another European country also get a new deduction that did not exist before.
On 4 July 2018 the Official State Gazette published Act 6/2018 of 3 July, the State Budget Act for 2018, which entered into force the next day. Besides the spending items, the act amends the Personal Income Tax Act: it increases the reduction for employment income, improves the deductions for maternity, large families and dependants with disabilities, and creates a deduction for taxpayers whose relatives live in another EU or European Economic Area state.
The 2018 budget was approved when the year was already well advanced, which has an unusual practical consequence: the tax changes apply mid-year. Employers must adjust payroll withholding from that date, and individuals will see the full effect when they file the 2018 tax return in spring 2019.
Low salaries and withholding
The reduction for employment income is a deduction taken off the worker’s income before the tax is calculated, and it mainly benefits those who earn less. The act increases its amount and raises the income level up to which it applies, so the salary from which tax starts to be payable also goes up. The effect is lower tax for more modest salaries.
According to the Tax Agency, the reduction is calculated under the previous rule for amounts accrued before 5 July and under the new one from that date. For the payroll department it means updating the withholding software; for the worker, checking in the coming payslips that the change has been applied and that the calculation is consistent with their situation.
Family deductions
Unlike reductions, deductions are subtracted directly from the tax due, so their effect is more visible. The maternity deduction increases when a working mother pays for a nursery or an authorised early-years centre for a child under three. The deduction for a dependant with a disability extends to a spouse, not legally separated, who has a disability and is financially dependent on the taxpayer, and the limits of the large-family deduction rise for each child beyond the required minimum.
The new deduction is aimed at those who cannot file jointly because part of their family lives in another EU or European Economic Area country. The act also improves the deduction for Ceuta and Melilla and changes some thresholds for the obligation to file. Like almost all deductions, they require documentary evidence: disability certificates, large-family cards or nursery receipts.
What to review
Families can gather now the documents that justify each deduction and check that they meet the requirements, because some depend on the centre being authorised or on the household’s income. It is also worth checking whether it is possible to request the advance payment of the deductions that allow it, rather than waiting for the tax return.
Companies with employees should confirm with their payroll adviser that July withholding already includes the new reduction, to avoid differences that later force a correction. And anyone with income from several sources or a residence split between countries should ask their adviser how the changes fit their case.
A budget approved late means looking at the payslip and the tax return with a little more care this year.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
