Self-Employed Taxes in Spain vs UK Employee Taxes

Spain has a reputation for being one of the worst places in the world to be self-employed thanks of its high social security payments. 

The issue is, even if you don't earn anything at all during a certain month, you still have to pay a minimum of €230 in social security (excluding during the first year, which we'll cover below). 

But for those with a higher and stable income, being self-employed is not so bad, as we'll find out. 

Let's take a look at the example below.

Case Study: Sarah

Sarah wants to move from the UK to Spain and continue to work for her UK employer.

Let's assume she has an Irish passport, so we'll ignore visa issues (although the new Digital Nomad visa may be another way to get around these). 

She wants to do things by the book so plans to register as self-employed in Spain and invoice her UK employer (who will now refer to as the UK company, as they'll no longer be her employer) each month. 

She wants to know how much more tax she'll pay in Spain. 

Let's work it out. 

Sarah earns a gross salary of £45,000, which gives her £2,851 a month after deductions for tax and national insurance. 

If she was to invoice her employer £45,000 a year, how much tax would she pay in Spain?

Social Security in Spain

During her first year as autónoma (self-employed), Sarah would have to pay €80 per month in social security (unless she lives in Madrid or Andalucía, where she would pay nothing). However, in year 2, she'd pay €420 per month and in year 3, €445 per month. 

For this calculation, we'll ignore the first year discount and use the year 2 amount of €420.

Income Tax in Spain

Assuming Sarah is under 65 and has no dependent children, she'd have a personal allowance of €5,550 (£4,826) per year in Spain, which is significantly lower than the UK allowance of £12,570.

She'll also have a €2,000 (£1,739) allowance for business costs that are difficult to justify (for which no invoices or receipts are needed). For simplicity, we'll assume she has no other allowable expenses. 

After subtracting her social security payments (unlike the UK, social security payments are tax deductible in Spain), Sarah would have an after-tax income of €2,972 (£2,584) per month, which is £267 less than she earned in the UK. Not a huge difference month-to-month but significant over the year. 

But there's a reason for this difference. 

Employer's National Insurance

In the UK, employers pay 15.05% (22/23 rate) of an employee's salary as national insurance. 

This means that while Sarah's gross salary is £45,000 per year, she actually costs her employer £50,565 each year.

What if Sarah was to ask her employer for £50,565 each year rather than her current salary of £45,000? 

Doing the same calculations as above, Sarah would end up with a monthly take-home salary of £2,885, which is basically the same as she was earning in the UK!

Other factors to consider

• It's important to consider that, as a contractor rather than an employee, Sarah will be in a weaker position. Her former employer could terminate the arrangement at any time and Sarah would have no right to redundancy payments. Therefore, if Sarah was to go ahead with the idea, it would be crucial to have a back up plan. 
• She'd also lose her employee benefits, such as paid holidays and the right to paid maternity & sickness leave. 
• There would be a monthly cost for accounting which we haven't taken into consideration (starting from €30 per month for a monthly online service excluding annual tax filing costs). However, hopefully this cost would be covered by extra expenses which Sarah could claim against her profits, such as claiming back part of the utility bills she pays for her home. 
• While self-employed, Sarah would get full access to public healthcare and limited rights to a  state pension, unemployment and sickness benefit. 

Conclusion

• Assuming you have a stable, relatively high monthly salary, being self employed isn't so bad in Spain tax-wise.
• If Sarah was to charge the UK company a fee roughly the same as how much she cost them as an employee, her monthly after-tax income would be the same in Spain as it was in the UK.
• However, tax isn't everything. It's crucial to remember that Sarah would lose the protection she enjoyed as an employee in terms of redundancy and the benefits such as paid holidays and sickness pay. Whether the sacrifice is worth it in order for a new life in the sun is a question for Sarah to consider.