Taxation
Business 09/12/2021

Catalan Government modifies income tax to benefit lower incomes

The Generalitat will change tax brackets after the Constitutional Court overturned the previous rebate

3 min
The Minister of Economy, Jaume Giró, in an archive image.

BarcelonaThe Government will introduce a package of amendments to the 2022 budgets to reform the part of income tax that regional governments can regulate. The reform will affect those with incomes under €35,000 p.a., although the changes will have a higher impact on low incomes of up to €17,000.

The decision has been taken after the Constitutional Court overturned the reduction of this amount for the lowest incomes following an appeal filed by Pedro Sánchez's government arguing that it had usurped its powers. "They are tax improvements that benefit groups with lower incomes," Giró said. He believes that the measure announced on Thursday will allow the Generalitat "to return to do justice to lower income groups after the Constitutional Court overturned" the extension of the exemption from tax for those earning under €6,105 (up from €5,550), considering that it was an exclusive competence of the State.

To reverse this situation, the Catalan government plans to introduce three new sections in personal income tax, a measure for which it does have powers and that, according to sources in the Catalan government, will have a negative impact on revenues of €19m. The modification of the sections has been agreed by the two parties in government, ERC and Junts, and will be introduced as an amendment to the 2022 budgets. Finance Minister Jaume Giró has been optimistic about the possibility that the measure will receive the support of En Comú, who gave their support to the budget.

Up until now, anybody earning under €17,707 p.a. was taxed at 12%. Now this is cut up into two sections: under €12,450, taxed at 10.5%, from €12,450 to €17,707, taxed at 12%. 17,707 to 33,007 euros, which had a rate of 14%. With the amendment there will be a bracket from €17,707 to €21,000 euros that will remain at 14%, and another bracket from €21,000 to €33,007 euros that will rise to 15%. Finally, the section from €33,007 to €53,407 euros, which was previously taxed at 18.5%, will increase to 18.8%.

The Generalitat estimates that increases to average incomes are offset by reductions in the first sections, which benefit all taxpayers. With this measure, the government estimates that it will stop collecting about €19m. According to the executive, the tax reduction will benefit people with salaries of under €35,000 gross per annum, which represent about 80% of taxpayers. The Government only estimates that, in some cases, higher incomes will suffer a tax increase that will not exceed 0.7% of what they paid before the measure.

The reduction will mainly affect workers with salaries of under €37,340 gross per year, and will mainly favor people earning under €16,935. The Generalitat calculates that, on average, a single person without children with a gross salary of 16,000 euros will save about 71 euros per year, representing 12.5% of what would have been paid in income tax without the measure. The saving is proportionally lower, 7.7%, for a worker earning 20,000 euros, but in absolute terms it would be greater, 104 euros. For workers with salaries of 30,000 euros, the reduction drops to 52 euros, or 2% of taxation. In the case of a taxpayer with a spouse and a child, the reductions are 12.6%, 7.1% and 1.4%, respectively.

Other measures

In addition to these changes, the Government will introduce other measures through the accompanying law. The first are deductions for single-parent families, 300 euros for both the birth or adoption of children, and for the rent of primary residence, 10% of the rent with a maximum of 300 euros. Likewise, there will also be an exemption from the CO2 emissions tax for those vehicles temporarily withdrawn from circulation. In total, these changes will impact with about 5 million euros in the coffers of the Generalitat.

In addition, the Department of Economy also proposes that children who live or have lived in foster care with a family can pay inheritance and donations tax as if they were a child of the host family if they receive an inheritance. According to Giró, there are "compelling reasons" to approve these measures, since they improve the situation of vulnerable groups.

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