In addition to your social security contributions, there are three common types of tax self-employed people, and indeed anyone setting up business in Spain has to pay.
Which taxes do I have to pay if I’m self-employed in Spain?
- The first is known as the IAE (“Impuesto sobre Actividades Económicas”). Relax! As of quite recently, “physical people”, a category which covers self-employed people, don’t have to pay this. It only applies to businesses, associations and societies. Even businesses are exempt unless they’re earning more than €1,000,000 per year, by which point presumably you can afford an accountant to worry about this kind of thing. That said, you’ll still hear the name thrown around from time to time.
- The second is “IVA” (“Impuesto sobre el Valor Añadido“), which is known is the UK as good old VAT. VAT in Spain is currently at 21%. With a bit of luck, you might be allowed to pay a lower rate depending on the kind of service or product you sell, but do be careful please – you hear horror stories of the Hacienda reclaiming back years of VAT after the opportunity to charge clients more has been missed.
- The third tax is the “IRPF”, or “Impuesto sobre la Renta de Personas Físicas”. Yes, that’s right, you are being taxed for being a physical person. The IRPF in the UK would be something like the poll tax (or “head tax”) which we, quite sensibly, abolished many years ago. You could also say it’s the equivalent of income tax in Spain. The IRPF is a pretty complicated topic which we’ll go into detail on elsewhere, but bear in mind for now that it’s something that everyone in Spain, self-employed or not, has to declare their earnings and is told accordingly what IRPF rates they need to pay in the annual Declaración de la Renta in May/June. In the first couple of years of your business, you pay around 7% IRPF, and then it goes up to 15%. There is no income tax in Spain, so IRPF could be considered to be the equivalent.
If you have lived in Spain for a while and have never filled in the Declaración de la Renta, you should probably think about doing so during the next year. I must confess it was only in my fourth year in the country that I cottoned onto this fact, but as a young person earning very little, no-one seemed to be too bothered.
Once you’ve added up all these taxes, along with your social security contributions, you should budget on around 40% of your net income to go on taxes in the first six months of being self-employed in Spain. Make sure you don’t undercharge for your products or services, or you’ll find it difficult to stay afloat.