When it comes to filing the income tax return, many confusing terms and concepts appear, at least for people who do not understand much about numbers, taxes and percentages. One of the latter that draws a lot of attention is the marginal type. How do we know how much we have to pay? How is it different from the effective type? To get you out of doubt, we will explain what the marginal rate is in personal income tax.
The objective of this article is not only to answer these questions, but also to explain what personal income tax is, the marginal rate and How does it affect the income statement? If you want to know more about this percentage, I recommend that you continue reading.
What is personal income tax?
Before explaining what the marginal rate is in personal income tax, we are first going to comment on what exactly the latter is. This is the Personal Income Tax (IRPF), that is, it is a tax that all natural persons residing in Spain are obliged to pay. This is applied to the income they have obtained throughout a calendar year. It should be noted that this tax is based on the tax principles of economic capacity, progressivity and generality.
In addition, throughout the year, the Tax Agency sets aside a part of our payroll and other income, which would be personal income tax. It does so in a preventive way of what the person in question will have to pay later to the same body through the income statement. So you could say that this tax that we are charged every month it is an advance of what all Spanish citizens will have to pay to the Treasury.
It should be noted that we must pay more or less, depending on the amount of money we have advanced through retentions. In the event that we have paid more, the Tax Agency will end up returning the difference to us when we have made the income statement. On the contrary, if we still need something to reach the amount that we have to pay, we must pay it.
Through this type of withholding, the Government makes sure that we all comply with our payment obligations and thus be able to finance ourselves. After all, taxes were invented for that. But who exactly are the taxpayers of the Personal Income Tax? As well, are all those natural persons whose habitual residence is in Spain or whose habitual residence is abroad but through a diplomatic mission, institutes abroad or consular offices.
The income statement includes a total of three components that must be paid through personal income tax, are the following:
- Yields
- Capital gains and/or losses
- Income imputations
The marginal rate in personal income tax
Now that we know what personal income tax is, we are going to explain what the marginal rate is in personal income tax. It's about the additional and maximum withholding that the taxpayer must pay in question if he earns or if it is one euro more than what is established in the corresponding level of income. As it is a progressive tax, the withholding rates are divided into different brackets. Each of them is taxed at another percentage, which is increasing. There is also the so-called effective rate, which is basically the average withholding related to the annual income that has been declared by the taxpayer.
What are the income tax brackets?
As we have already mentioned before when explaining what the marginal rate is in personal income tax, there are different sections established by the AEAT (State Tax Administration Agency). We will see them below, but in a general way. It should be noted that the responsibility for managing and collecting half of the tax falls on the autonomous communities. Because of this, they can modify the legs and apply their own rates. Yes indeed, there is a maximum that is set by the State:
- €0 – €12.450: 19% marginal rate
- €12.450,01 – €20.200: 24% marginal rate
- €20.200,01 – €35.200: 30% marginal rate
- €35.200,01 – €60.000: 37% marginal rate
- More than €60.000: 45% marginal rate
Now understanding what the tranches and the marginal rate are, it is important that we know how to differentiate it from the effective rate. While the first is the maximum that the taxpayer in question for a part of his income, the second represents the average withholding applied to said taxpayer's income statement.
How does the marginal rate affect the income statement?
As the marginal rate is arranged in personal income tax, the more income we have, the more we will pay, since the percentage increases as the section increases. In other words: The higher the income figure, the more taxes we will have to pay to the Treasury. So the importance of the marginal rate is not insignificant when making the income statement. To understand it better, we are going to give an example in which we will apply the general rates of the State and having already discounted the Social Security contributions and without having relevant deductions:
A taxpayer has declared a total income of 38 thousand euros. Of this amount, the first 12.450 euros are tax-free. However, for the remaining €25.550, said taxpayer must pay 24% for the first €7.750, which would be €1.812 in total; 30% for the following €15.500, which would be equivalent to €4.650, and 37% for the remaining €2.300, which would be another €851.
The total sum of these percentages, which is ultimately what the taxpayer in the example has to pay, is 7.313 euros. This amount is equivalent to 19,25% of the 38 thousand euros declared. Therefore, the effective rate, which would be the average, is equivalent to 19,25%. In this example, the marginal rate would be 37%, because it is the maximum percentage that has had to pay.
I hope that with this information it has become clear to you what the marginal rate is in personal income tax and how the calculation of the brackets and rates is carried out. Remember that you always have the option of going to an agent to process your income statement, in case you do not see how to do it yourself.