The Tax Agency cuts income tax for low-paid workers in 2026: who can claim the new deduction?

 

A new deduction to prevent the increase in the minimum wage from raising income tax

The 2026 increase in Spain’s statutory minimum wage has been accompanied by an amendment to personal income tax (IRPF). Its purpose is to prevent lower-paid workers from bearing a higher tax burden solely because their wages have increased.

For 2026, the statutory minimum wage has been set at €1,221 per month in 14 instalments, equivalent to €17,094 gross per year for a full-time employee. Royal Decree 126/2026 provides that the measure takes effect from 1 January 2026.

At the same time, Royal Decree-Law 5/2026 amended Additional Provision 61 of the Personal Income Tax Law, introducing a specific deduction for certain workers whose annual gross employment income is below €20,048.45.

The aim is clear: to prevent a significant part of the increase in the minimum wage from being absorbed by income tax.

However, some press reports have oversimplified the reform, claiming that everyone earning less than €20,000 will be exempt from tax.

That is not quite right.

No general €20,000 tax exemption has been introduced

The reform does not exempt the first €20,000 of salary from income tax.

Nor does it directly change the personal allowance or reduce the taxable base.

What it introduces is a tax-credit deduction from the tax liability, calculated after determining the taxable base, applying the state and regional tax rates, and calculating the resulting liability.

Technically:

• The salary remains employment income subject to personal income tax.

• The worker must include it in their tax return.

• The deduction reduces the final tax liability payable.

• The deduction decreases progressively as salary rises.

• The measure does not, by itself, remove the obligation to file a tax return.

This distinction matters because an exemption, a reduction of the tax base and a deduction from the tax liability have different legal and economic effects.

Who can claim the new deduction?

The deduction is available to taxpayers who receive gross employment income derived from the effective provision of services under an employment or statutory relationship.

Two main requirements must be met.

1. Annual salary below €20,048.45

Qualifying gross employment income must be below €20,048.45 per year.

The reference is gross income for tax purposes, before deducting Social Security contributions, the general deductible expense or any other reduction.

2. No more than €6,500 in other income

The taxpayer must not receive more than €6,500 per year in income other than the qualifying employment income, excluding exempt income.

This limit can be decisive.

Income that may affect whether the requirement is met includes:

• Income from business or professional activities.

• Rental income from property.

• Interest, dividends and other investment income.

• Capital gains.

• Certain pensions or employment income that does not arise from the effective provision of services covered by the deduction.

It is therefore not enough to check the amount shown on a payslip.

A worker earning €18,000 per year who also receives €7,000 in rental income cannot claim the deduction, even though their salary is below the threshold.

How much is the deduction?

The maximum deduction is €590.89.

The calculation depends on annual gross salary.

Salaries of up to €17,094

Where gross employment income does not exceed €17,094 per year, the deduction is:

€590.89.

This amount matches the new annual statutory minimum wage for 2026.

According to information published by the Ministry of Finance, the measure means a worker earning approximately €17,000 will have no income tax liability in 2026, compared with the tax that would have arisen under the previous rules.

Salaries between €17,094 and €20,048.45

For salaries above €17,094, the deduction decreases progressively according to this formula:

€590.89 – 0.20 × (salary minus €17,094).

Approximate examples are:

Annual gross salary	Approximate deduction
€17,094	€590.89
€18,000	€409.69
€19,000	€209.69
€20,000	€9.69
€20,048.45	No entitlement to the deduction

The reduction is therefore gradual. There is no sudden cliff between someone earning €19,999 and someone earning slightly more than €20,000.

The deduction is subject to an additional limit

The deduction cannot exceed the proportion of the combined state and regional gross tax liabilities attributable to the net employment income covered by this measure.

This means the taxpayer will not necessarily receive €590.89 in cash.

The deduction reduces the income tax liability up to the statutory limit. If the tax liability attributable to the salary is lower than the calculated deduction, the difference does not automatically generate an additional refund.

The measure is designed to reduce or eliminate the effective tax burden on the lowest salaries, but it is not a separate benefit paid independently of the tax.

Practical examples

A worker earning the minimum wage with no other income

A worker earns gross salary of €17,094 in 2026 and receives no other income.

In principle, they qualify for the maximum deduction of €590.89, subject to the limit based on the tax liability attributable to their employment income.

The reform is intended to make their effective tax burden zero or very low.

A worker earning €19,000

A worker earns €19,000 gross per year and receives €300 in bank interest.

Because their other income does not exceed €6,500, they may claim an approximate deduction of:

€590.89 – 0.20 × (€19,000 – €17,094) = €209.69.

A low-paid worker who rents out a property

A taxpayer earns €18,000 as an employee and receives €7,200 in rental income.

Although their salary is below €20,048.45, their other income exceeds the €6,500 limit.

They therefore cannot claim the deduction.

A self-employed person with income below €20,000

A self-employed person receives €17,000 in income from their business activity.

The deduction does not apply because the law covers employment income from an employment or statutory relationship, not income from business or professional activities.

A pensioner receiving a €17,000 pension

Pensions are classified as employment income for tax purposes, but they do not arise from the effective provision of services during the tax year under an employment or statutory relationship.

Accordingly, a pension is not covered by this specific deduction merely because it is below €20,048.45. The wording of the law does not include every type of income that is classified as employment income for tax purposes.

Will this affect tax withheld from payslips?

The deduction determines the final tax for the 2026 tax year, which will normally be reported in the 2027 tax-return filing season.

Monthly tax withheld by the employer is a payment on account. The amount withheld during the year therefore need not exactly match the final tax due after the deduction is applied.

For example:

• The employer may adjust the withholding rate under the applicable rules.

• Tax may have been withheld during part of the year.

• The deduction may result in a refund when the tax return is filed.

• The final result may depend on other income, family circumstances and regional deductions.

Withholding from a payslip should not be confused with the final personal income tax liability.

Does this measure require a tax return to be filed?

Claiming the deduction does not automatically change the general thresholds that determine whether a tax return must be filed.

A person may not be required to file a return and may nevertheless benefit from doing so to recover tax withheld.

A person may also be required to file because they have multiple payers, business income, rental income, capital gains or other circumstances.

Each case must be considered individually.

What should taxpayers check?

Taxpayers who may qualify should check:

1. The total amount of their gross salary for 2026.

2. Whether they have one or more payers.

3. Any other income received during the year.

4. Whether the €6,500 limit is met.

5. Whether the deduction is actually included in the tax return.

6. The tax withheld during the year.

7. The maximum tax liability against which the deduction may be applied.

Particular care is needed where a taxpayer also has small rental receipts, interest, gains from selling assets, secondary business activities or pension income.

Conclusion

The new deduction provides a real income tax reduction for lower-paid workers and prevents the 2026 increase in the statutory minimum wage from being partly offset by tax.

However, it is not correct to say that everyone earning less than €20,000 is exempt from income tax.

The deduction:

• Applies only to certain types of employment income.

• Requires salary to be below €20,048.45.

• Limits other income to €6,500.

• Decreases progressively above €17,094.

• Is subject to a limit based on the relevant tax liability.

• Does not necessarily remove the obligation to file a tax return.

The reform is beneficial, but applying it requires reviewing the taxpayer’s total income, not just the figure shown on the payslip.