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3. Low income and the Renta repayment trap

Episode three in helping someone setting up to be autonomo in Barcelona, and yet another wrinkle - this time the effect on cash flow of IRPF (income tax) retentions and repayments.

The outline of our saga so far is that I'm helping someone who has had to register as autonomo for a low-wage part-time role. The pay is relatively low - bringing in about €750 per month - or €9,000 a year.

In earlier parts of the saga, we've already mentioned that there's a ton of paperwork and a serious disadvantage financially to being self-employed because of the social security payments, and some potentially very challenging cash-flow management issues.

Not only that, but the expenses system is both cumbersome and geared up for those with a large disposable income who can afford extras like a second car or to stay in hotels rather than with friends on business trips.

However, needs must and in the current economic climate if the only work available is part-time and only available on an autonomo basis then it's just about better than nothing.

Today we came across another wrinkle in the system. As an autonomo you have to file a tax return every quarter and pay a sum equivalent to 20% of the invoice value as a pre-payment for IRPF income tax (this is in addition to the VAT payment which also has to be paid). For someone on €750 a month, this adds up to €450 every quarter.  (Note that it's really important that you manage cashflow as late payment or non-submission of forms will incur a fine that starts at €75.) It will be less if you are on a 'retenciones' system where the employer withholds money from you and pays the tax on your behalf - that isn't the case here.

However, being on a low wage, once all the allowances are taken into consideration, it's almost certain that our low-paid autonomo will have paid too much tax, so she will be due a rebate after filing the Renta (annual tax return) in June (hoorah!).

However, talking to the tax office today about a rebate due from last year, it turns out the Hacienda has until December to make any repayments. In other words a whole year and more before the overpaid tax is paid back. (For 2015 the repayment actually came in the first week of July, so not as bad as the previous year. Note that she got all of the tax back - but that's still six+ months after the tax was paid)

To show how this works, our low paid autonomo earns €9,000 in 2014. In the April 2014 she brings in €2250 for the quarter, less €450 tax on account (ie a net €1800). The same in July, October and then January 2015 - total cash income €7,200 for 2014 and €1,800 held by the tax office.

However, due to personal tax allowances, the hacienda will repay the €1,800 paid as tax as an overpayment. But she won't receive this until as late as December 2015.

That's 25% of your net income withheld for more than a year if you're on low pay.

Other autonomos on higher full-time incomes will be better off because the 20% tax paid each quarter is lower than the actual tax rate and so it will net out more fairly against allowances and their tax bill. But for low-paid part-timers, at the low end of the tax thresholds, as we keep finding being autonomo does not work in your favour.


See also:

Part 1: The Spanish autonomo trap for part-time workers

Part 2: Low income part-time autonomo first quarter return - the expenses trap

Previous article: 2. Low income part-time autonomo first quarter returns - the expenses trap Next article: 4. Temporary autonomos - The Gestor Trap

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