What counts as salary for the tax authorities and what you can deduct

Earned income covers all remuneration — in cash or in kind — that derives directly or indirectly from personal work or an employment or statutory relationship, provided it does not qualify as income from economic activities.

🔵 Legislation: Art. 17 Personal Income Tax Law

By nature (Art. 17.1 Personal Income Tax Law):

The following are earned income, among others:

• Wages and salaries
• Unemployment benefits (except the lump-sum payment, which is exempt)
• Representation expenses
• Subsistence and travel expense allowances (except exempt amounts)
• Employer contributions to pension plans attributed to the employee

By express legal provision (Art. 17.2 Personal Income Tax Law):

The following also qualify as earned income:

• Public pensions from Social Security and Civil Service Pensions (except total permanent incapacity or severe disability)
• Civil servants' mutual fund benefits (MUFACE, MUGEJU, ISFAS)
• Pension plans: all benefits, regardless of the contingency covered (retirement, incapacity, death, dependency, long-term unemployment) and the form of payment (lump sum, annuity or mixed)
• Social security mutual fund benefits: taxable to the extent they exceed contributions that were not deductible from the taxable base
• Insured pension plans (PPA) and dependency insurance
• Occupational pension plans (PPSE)
• Remuneration of members of parliament, senators, councillors and members of legislative assemblies
• Fees for courses, conferences and seminars (if not arranged on own account)
• Assigned copyright (literary, artistic or scientific works) if not arising from an economic activity

🔵 Minimum Living Income (IMV): Taxed as earned income to the extent it exceeds the exempt threshold of €12,600 per year (1.5 × IPREM, Art. 7.y) Personal Income Tax Law). If, together with the IMV, other social benefits are received (regional minimum-income schemes, guaranteed income, regional or local social aid), the threshold applies to the combined total: only the excess is taxable. Renta WEB transfers it automatically to box [3] on page 4. The IMV does not by itself entitle the recipient to the maternity deduction or to the deductions for large families or persons with disabilities in their care.

🟡 Regulations: Art. 7.h) Law PIT

The following remuneration is exempt — it is not included in the taxable base and is not declared:

• Birth and childcare benefits (formerly maternity and paternity benefits) and non-contributory family benefits regulated in the consolidated text of the General Social Security Law (Royal Legislative Decree 8/2015).
• Orphan's pensions and passive assets and those in favour of grandchildren and siblings under 22 years of age or incapacitated for any work, received from public Social Security schemes and Civil Service passive classes.
• Benefits granted by social security mutual funds acting as alternatives to RETA to professionals not integrated in that scheme, provided the benefits are in situations identical to those covered by Social Security for professionals integrated in that special scheme.
• For public employees covered by a Social Security scheme that does not entitle them to maternity or paternity benefits, the remuneration received during leave for childbirth, adoption or guardianship and paternity (Art. 49.a), b) and c) of the Basic Statute of Public Employees) is exempt.
• Other public benefits for birth, multiple delivery or adoption, adoption, maternity or paternity, dependent children and orphanhood.

Exemption limit. The exempt amount is capped at the maximum benefit recognised by Social Security for the corresponding concept. Any excess is taxable as earned income. Where Social Security benefits concur with mutual fund benefits, the excess is considered to arise in the latter.

The monthly amount of the benefit may never exceed 100 % of the maximum contribution base in force, set for 2025 at €4,909.50/month (Order PJC/178/2025).

🟡 Paid breastfeeding leave (not exempt): the income received during paid breastfeeding leave — whether as hourly absence, reduction of working day or accumulated paid leave — is not covered by the exemption of Art. 7.h) and is taxable as earned income.

Historical context. Maternity benefits had been considered subject to PIT until STS 1462/2018, of 3 October (ROJ: STS 3256/2018), which established as legal doctrine their exemption. Royal Decree-Law 27/2018, of 28 December amended Art. 7.h) Law PIT incorporating that doctrine and extending it to paternity benefits and to the paid leave of public employees, with effect from 30 December 2018 and for previous non-prescribed years.

A benefit in kind is any good, right or service received by an employee from their employer free of charge, or at a price below market value.

Main exempt benefits in kind:

Shares must be held for at least 3 years. If this requirement is not met, the employee must file a supplementary self-assessment with late-payment interest.

Valuation of benefits in kind:

• General rule: normal market value.
• The payment on account made by the payer is added to the valuation amount, unless it has been passed on to the employee.

Gross income = Valuation + Payment on account not passed on

Special valuation rules:

Allowances paid by the employer are exempt from tax within the following limits:

Travel expenses:

Subsistence and accommodation expenses:

Accommodation expenses must be supported by receipts. Subsistence expenses do not require justification if they do not exceed the above limits.

In special dependent employment relationships (commercial representatives, etc.), if the employer does not reimburse travel and subsistence expenses, the employee may still apply the exempt limits against their gross income. Accommodation expenses are only exempt if specifically reimbursed by the employer.

General deductible expenses:

• Social Security contributions or compulsory civil servants' mutual fund contributions
• Deductions for passive rights (civil service pensions)
• Contributions to orphans' funds and similar institutions
• Trade union fees and mandatory professional association membership fees
• Legal defence costs in disputes with the employer (up to €300/year)

Other deductible expenses (fixed amount):

(+) Gross cash income (gross amount)
(+) Valuation of benefits in kind + payment on account not passed on
(+) Employer contributions to pension plans attributed to employee
(-) Reductions on irregular income or social security benefits
──────────────────────────────────────────────────────────────────────
(=) Previous net earned income
(-) Social Security contributions and similar
(-) Trade union fees and professional association fees
(-) Legal defence costs
──────────────────────────────────────────────────────────────────────
(=) Net earned income
(-) Fixed expense of €2,000 (+ increases for mobility or disability)
──────────────────────────────────────────────────────────────────────
(=) Reduced net earned income
(-) Reduction for obtaining earned income (if applicable)
──────────────────────────────────────────────────────────────────────
(=) Reduced net earned income to be included in the taxable base

🔵 Regulation: Art. 18.2 IRPF Law and art. 12 IRPF Regulation. Box [0009] on form D-100.

A 30% reduction is applied to gross earned income when one of these two conditions is met, and provided it is allocated to a single tax period:

1. Generation period exceeding 2 years (counted day-to-day). For example, severance for termination of an employment relationship with several years of service.
2. Notably irregular over time — closed list in art. 12 IRPF Regulation:
   • Amounts paid for relocation to another workplace exceeding the exempt limits.
   • Compensation for non-disabling injuries (Social Security, Civil Service pensions, orphans' colleges).
   • Benefits for non-disabling injuries or permanent disability paid by employers or public bodies.
   • Death benefits and burial/funeral expenses exceeding the exempt limit of art. 7.r) IRPF Law.
   • Amounts paid in compensation for salary supplements, pensions or indefinite annuities, or for substantial modification of working conditions.
   • Amounts paid for termination by mutual agreement of the employment relationship.
   • Literary, artistic or scientific awards not exempt from tax (excluding those derived from assignment of intellectual or industrial property rights).

Additional requirements:

• Does not apply if the benefit is received as periodic income (art. 18.1 IRPF Law).
• 5-year rule: if in the 5 prior tax periods this reduction has already been applied to other income with a generation period > 2 years, it cannot be applied again. This restriction does not affect income derived from termination of the employment relationship (ordinary or special).
• For fractional payments of compensation for termination of employment, the generation period is calculated as the number of years of service of the worker. For other income paid in fractional form, the reduction only applies if the quotient (years of generation ÷ fractional periods) is greater than 2.

🟠 General limit: The base to which the 30% applies cannot exceed €300,000 per year.

🟠 Tiered limit for severance from termination of employment relationship (ordinary, special or commercial under art. 17.2.e):

• Amount between €700,000.01 and €1,000,000: the reduction base is decreased by (amount − 700,000). Example: severance of €850,000 → maximum base = 300,000 − 150,000 = €150,000.
• Amount ≥ €1,000,000: the reduction does not apply (base = 0).

If severance from the same company or group converges (art. 42 Commercial Code), the amounts are added arithmetically regardless of the period to which each is allocated.

Benefits from pension plans, PPAs, PPSEs and mutual funds received as a lump sum may benefit from a 40% reduction on the portion corresponding to contributions made before 1 January 2007, where more than 2 years have elapsed since the first contribution.

This reduction is subject to maximum time limits: it must be applied in the year the contingency occurs or in the 2 following tax years. After that deadline, no reduction may be applied.

Taxpayers with net earned income below €19,747.50 and income other than earned income not exceeding €6,500 may apply an additional reduction to their net earned income.

This reduction is decreasing: it is applied in full up to a certain threshold and gradually reduced as income increases.

Pension plans:

All benefits are taxed as earned income. The contingencies covered are: retirement, total and permanent occupational incapacity, death, severe or major dependency, and long-term unemployment.

From 2025, the plan may also be redeemed for contributions with at least 10 years of seniority.

Social security mutual funds:

• Retirement and invalidity: Only taxable to the extent they exceed contributions that were not deductible at the time.
• If contributions were made before 1999 and the non-deducted amount cannot be established, 75% of the benefit is taxable.
• Death and other contingencies: Taxable in full.

Collective insurance implementing pension commitments:

Retirement and invalidity benefits are taxable to the extent they exceed employer contributions attributed to the employee plus direct contributions by the employee. Benefits paid to heirs upon the death of the insured do not qualify as earned income — they are subject to Inheritance and Gift Tax.

Earned income is attributed to the period in which it is due, regardless of when it is received.

Special rule for shares in start-up companies: the non-exempt income exceeding €50,000 is attributed when the shares are listed on the stock exchange, transferred or 10 years have elapsed since delivery, whichever occurs first.

The mandatory compensation for unfair dismissal is exempt up to the amount established in the Workers' Statute, provided the dismissal has been recognised as unfair.

The excess over the mandatory compensation is taxable as earned income, although it may benefit from the 30% reduction if the generation period exceeds 2 years.

For collective dismissals under Art. 51 of the Workers' Statute (redundancy plans), the exemption applies to the mandatory compensation established for unfair dismissal.