2. Personal Income Tax

In 2019 income from personal income tax amounted to 86,892 million, 4.9 more than the amount collected in 2018.

The evolution of the tax was marked by three elements: the growth of the bases, the regulatory and management changes (in particular, the refunds linked to maternity benefits and the reduction of withholdings on the lowest incomes) and the good results of the annual declaration for the 2018 financial year.

Regarding the first element, household incomes grew by % in 2019 (6% in 2018), with increases in all sources of income, particularly those linked to capital gains. The trend in the year was one of progressive moderation in growth, which was more intense once the upward step caused in the evolution of these incomes by the increases in public salaries and pensions in July 2018, following the approval of the Budget, was overcome.

Income from work, which is the most important part of household income, grew by 5.1% in 2019, the same as in 2018. Pensions were the incomes that grew the most, 5.4%. In the first half of the year, the increase was slightly above 7%, but in the second half of the year it fell to 5%, reflecting the upward break that occurred in mid-2018 due to the increase in pensions included in the 2018 Budget. The average pension growth for the year as a whole was 4.1%, slightly above the increase recorded in 2018. The figure includes not only public pensions, but also pensions from funds which, although marginal in the total pension mass, are irregular and distort the evolution of the whole. Chart 2.1 illustrates the change that occurred in these average pensions following the approval of the 2018 Budget, which represented a general increase greater than those made in previous years, in addition to contemplating greater increases for the lowest pensions. It should be remembered in this regard that the increase in the average pension is not only due to the revaluation established every year in general (which is that of contributory pensions), but also due to the additional increases that some other pensions may have (this is the case of the last two years and of 2011) and, above all, due to the incorporation of new pensioners, generally with higher pensions than those who are within the system. It is important to take this issue into consideration because pensioners who are already receiving a pension do not see their pension increase by the percentage that pensions increase on average, but by the percentage that has been established for that year. This means, for example, that a person who was a pensioner with a contributory pension in 2009 saw his or her pension increase according to the line shown in Chart 2.1 and not according to the percentage indicated by the bars. In figures, this pensioner received a pension 9.4% higher in 2019 than in 2009, while general prices in the same period increased by 13%.

Unlike pensions, wage growth in 2019 was lower than in 2018 (5.1% and 5.4% respectively). The explanation lies in the moderation shown by the wage bill in the private sector (4.8% compared to the previous 6.1%) as a result of the slower pace of job creation, and despite the increase in wages, particularly the lowest ones, driven by the increase in the minimum interprofessional wage (precisely this greater increase explains that, due to a composition effect, on average the increase in 2019 is lower than in 2018; Chart 2.2). The opposite occurred in the public sector, where overall wage yields grew by 5.7%, almost 2.5 points above the 2018 figure. Compared to the previous year, both employment and average wages increased, in this case also due to the increases after the Budget came into force, but also due to the update at the beginning of the year and the adaptation of the remuneration levels of the security forces.

Household capital income (furniture, rent and capital gains) grew by 7.1% in 2019 (Tables 2.1, 2.4, 2.5 and 2.6). This is less than what they did in 2018 (14.5%). The lower growth was mainly due to the advancement of some operations to 2018 to avoid the rise in rates for higher incomes that was announced when the 2019 Budget project was presented. The last quarter of 2019 also saw higher than usual growth, possibly for the same reasons, but not with the same intensity as in 2018.

In any case, three relevant facts should be highlighted. The first is that capital gains grew in 2019 for the second consecutive year, after almost 9 years of continuous declines and despite the fact that bank account interest is now almost symbolic and dividends decreased compared to 2018. Income from fixed-income securities occupied the space left by the other two assets. The second notable fact is the volume reached by capital gains, close to the maximums reached during the period before the crisis, although its importance within income is less than then (Chart 2.3). Finally, it is worth highlighting the growth in rental income from property rentals, which closed their third year with increases of around 9% (Chart 2.4). These incomes have been steadily gaining weight since 2005 (in the previous ten years their importance within household income was stable at around 2.5%) as a result of both the increase in this type of assets within the wealth of families and the effect of greater control over them.

As for personal business income, it is estimated that it grew by 5.8%, down from 7.2% in 2018. All variables related to small businesses showed a downward trend in 2019 and returns reflected this slowdown.

In 2019, the effective rate on gross household income increased by 0.7% (Table 2.1). The reason for the increase is the greater growth expected in income that is not subject to withholding and is recorded in the annual declaration. Without the annual fee and family deductions, the rate was slightly lower (-0.2%) than in 2018. There are three main reasons that explain this result. Firstly, the extension of the reduction for employment income, a measure included in the 2018 Budget and therefore effective from July of that year, continued to have an effect in the first half of the year. This reduction in tax withholdings was aimed at lower incomes and, consequently, particularly benefited workers in SMEs and pensioners. The second reason was the greater growth enjoyed by the lowest wages thanks to the increase in the minimum interprofessional wage. These salaries have zero or almost zero withholdings, which causes downward pressure on the average withholding rate. These first two elements are what justify why the type of withholding tax on salaries in the private sector decreased and why the average rate remained almost the same as in 2018 (Table 2.3). Thirdly, there is the growth in the pension rate, 1.6%, similar to that of 2018 (1.5%), below the usual for reasons similar to those just seen, the greater increase in the lowest pensions and the lower withholding rate. This effect offsets part of the rate increase that always occurs when pensioners with higher pensions and rates join the system.

As a result of the growth in the bases and the rate, the accrued IRPF grew by 6.1%, one and a half points less than in 2018 (Table 2.1). As mentioned, part of the growth is due to the forecast of the annual tax rate (which will be announced provisionally at the end of June). Without this quota and family deductions, the growth of the accrued tax was 5.1% (6.5% in 2018).

Withholdings on earned income, which is the income that weighs most heavily within the tax total, grew by 5.4% compared to 6.6% the previous year. The increase was greater in pensions than in salaries (7% and 5.1% respectively; Table 2.3). In both cases, as happened in 2018, the evolution throughout the year had two parts. In the first half of the year, growth was high due to increases in public salaries and pensions, despite the gradual moderation of private wages and the slight fall in the rate in these companies. In the second part, once the step that these increases gave rise to since July 2018 was completed, the growth of withholdings contracted below even the rates prior to the step, despite the fact that the rates in the public sector maintained growth and those of pensions returned to increases of around 3%.

Capital withholdings increased by 3.1%. The growth is lower than that recorded in income tax because it must be remembered that only around 40% of these income tax are subject to withholding. In 2019 in particular, the difference is due to the greater dynamism that is presumed for the set of real estate capital income compared to those that are subject to withholding (basically local). In other cases (capital assets and gains from investment funds) the growth of the whole and of the subject returns is equal or very close. The change in the sign of withholdings on profits from investment funds was notable, with a sharp fall in 2018 (-11.8%) and a large increase in 2019 (9.9%).

In other concepts, payments on account of individual companies also saw their growth moderate (4.4% versus 6.7% in 2018), both in the aspect of fractional payments and in that of withholdings on economic activities, and income accrued from the tax on lottery prizes decreased again (-10.3%), the third consecutive year of declines. In 2019, it was also subject to changes, given that the threshold for the exempt amount was raised progressively, culminating on January 1, 2020. In 2019, the limit was 20,000 euros, up from 10,000 in 2018, although its impact on taxes remained marginal.

Income from income tax grew by % in 2019, although without the differential rate or family deductions, the growth was 5.2%, similar to the tax accrued also without these components. In addition to the differences that usually occur between accrual and cash due to the annual declaration (settled the year after its accrual), in 2019 the extraordinary refunds derived from the ruling on maternity benefits were made. These two elements, the good results of the 2018 annual declaration and the extraordinary returns, were those that marked, together with the evolution of the bases, the cash income for the year 2019.

Income from withholdings on work and economic activities grew by 5.4% in 2019, 6.5% if the impact of regulatory changes is eliminated. Overall, the trend was towards moderation (up to mid-year, cumulative growth was 5.9%), but with different phases and with different intensities in the private and public sectors.

In the private sector, revenues increased by 5%, less than in 2018, due, as we have seen, to three causes: the reduction of withholding taxes for the lowest incomes, which limited income growth throughout the first part of the year; the slowdown in job creation that continued throughout the year; and the decrease in the average effective rate due to the increase in the lowest wages above the rest of the wage increases.

The trend towards moderation in withholdings was accentuated by the peculiar evolution that income from withholdings in the PA had in the last two years. in response to the impact of the salary and pension increases that occurred after the approval of the Budget in July 2018. As noted, the consequence was that in 2019, high growth rates were recorded in the first half of the year (8.1% until July) and a downward step in the second (increases of around 6% if some atypical factors are corrected). In 2019 as a whole, the increase was finally 6.5%. The same profile was observed in salaries and pensions.

As regards the results of the annual declaration (corresponding to the 2018 financial year settled in 2019), income grew by 14.1%, despite the fact that some of the measures (extension of family deductions and refund of the withholdings made on maternity benefits in 2018) acted negatively (without them, the growth of this income would have risen above 18%). The reasons for these good results are found in the increase in income not subject to withholding and, in particular, in capital gains. Part of these good results were a consequence of the advance in the generation of these profits to the last months of 2018 following the announcement of the rate hike that was included in the draft Budget for 2019, an effect that was also seen in other income (such as capital income).

As regards the returns from the annual declaration, it should be noted that they were affected by those derived from maternity benefits for the years 2014-2017 (Table 1.5). In the case of refunds relating exclusively to the 2018 campaign, growth was relatively high (over 8%), also partly due to the effect of the new family deductions and the adjustment of withholdings on maternity benefits in 2018. These returns were made at a slightly higher rate than in the previous year.

In the rest of the concepts, four elements stand out: the growth of split payments at a rate similar to that recorded in the previous two years (7%); the increase, for the second consecutive year, of withholding taxes on capital gains (4.2%); the stabilisation of income from withholding taxes on capital gains from investment funds after the sharp decline last year; and the reduction in revenue from the Lottery Tax (-15.2%), most of which, as mentioned, was not justified by the increase in the tax threshold.