New €340 Income Tax Deduction for Low-Income Employees in 2025

The Government has approved Law 5/2025 of 24 July, published in the Official State Gazette (BOE), introducing a new Personal Income Tax (IRPF) deduction for low-wage employees.

What does the measure provide?

• Taxpayers may qualify if their gross employment income is below €18,276 per year and they have no other income—excluding exempt income—above €6,500.
• If employment income is €16,576 or less, the deduction is up to €340 per year.
• For income between €16,576 and €18,276, the deduction is reduced progressively: €340 minus €0.20 for each euro above €16,576.
• Those with employment income above €18,276 are not entitled to the deduction.
• The deduction is applied directly against the IRPF tax liability (state and regional) and is deducted from the net tax due after other deductions.
• No separate application is required: the Tax Agency is expected to include it automatically in the draft return for tax year 2025, filed in 2026.
• The law entered into force on 24 July 2025, with effects from 1 January 2025.

What is the purpose of the law?

The measure aims to ease the tax burden on lower-income workers, especially those earning close to the minimum wage who may be affected by IRPF withholding amid increases in the statutory minimum wage and high inflation. It also seeks to strengthen the progressivity of the tax system and avoid unintended effects, such as an increase in the minimum wage leading in practice to higher tax withholding.

How does it affect employees and employers?

For an employee earning €16,000 gross per year, for example, the maximum €340 deduction would amount to approximately €28 per month. This saving may make a meaningful difference to households with tight budgets.

For employers, the measure does not change labour costs, social security contributions or contribution bases. The deduction applies at the employee’s personal income tax stage and does not change gross pay or the employer’s obligations.

Points for tax advisers

• Check that the employee does not have more than €6,500 in income other than employment income (for example, rental or investment income), as this would disqualify them.
• Although the deduction is applied automatically, taxpayers should review the draft return to make sure it has been included correctly.
• The deduction applies only to IRPF and does not replace existing deductions. It is added to them, subject to the tax due.
• This adjustment may increase net pay through lower withholding or result in a larger annual refund.
• Because the measure has effect from 1 January 2025, its impact should be considered in the 2025 tax return campaign, filed in 2026.

Assessment

From a tax perspective, the measure is a practical and effective adjustment to strengthen fairness in the IRPF for workers with low earnings. Although the maximum amount of €340 may seem modest, it can have a relevant impact on household finances when incomes are tight. Automatic application also makes the measure easier to use and reduces administrative burdens.

However, it does not by itself address broader challenges such as the tax burden on employment, the distribution of labour costs or the need for hiring incentives. It is a positive step within a wider policy that would need to be complemented by structural reforms in labour, tax and social protection.

Conclusion

Law 5/2025 introduces a significant IRPF deduction for low-income employees, designed to improve their purchasing power and adapt the system to changing wage conditions.

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