The Spanish government is preparing to revise the tax treatment of the minimum interprofessional wage (SMI)The Ministry of Finance is seriously considering extending and strengthening the income tax deduction created for those earning the minimum wage, so that the next increase in this minimum wage does not end up causing a loss of purchasing power for workers or a disproportionate additional cost for companies.
Sources from the department he heads MarÃa Jesús Montero They indicate that the idea of ​​updating this deduction "is on the table" as a tool to distribute the impact of the minimum wage increase between the State and businesses. The underlying objective is clear: to ensure that the net salary of those at the bottom of the pay scale is reduced. increase or, at the very least, do not recedewhile respecting the commitment to the European Social Charter to place the minimum wage at around 60% of the average net salary.
How the personal income tax deduction for the minimum wage came about
The current income tax deduction for those receiving the minimum wage is the result of one of the greater internal tensions of the current legislature between the coalition partners, PSOE and Sumar. At the beginning of 2025, after years of consecutive increases in the minimum wage —61% since 2018, going from just over 10.300 euros gross per year to 16.576 euros per year—that is, 1.184 euros per month in 14 payments—, the Treasury argued that the minimum wage should start to be taxed, while the Ministry of Labor considered that it made no sense to tax those who earn the least.
To resolve the clash, the Government opted for an intermediate formula: The minimum exemption from personal income tax was not updated to the new minimum wage level—as Sumar had demanded—but a specific tax deduction was created for low-income workers. This deduction offsets what is withheld from their paychecks, so that, in the statement of income, the final result will be that do not pay income tax or pay much less than what they should according to the general tables.
The measure was conceived from the beginning as temporary and limited to a single fiscal year, but in practice it allowed approximately one 20% of SMI recipients —primarily single people without children, the group most affected by the withholdings— would not lose purchasing power. Without this deduction, a significant portion of these workers would have been paying around 300 euros per year in respect of personal income tax.
In technical terms, the reform established a new deduction for taxpayers with total employment income less than 17.256 euros. The maximum deduction of 340 euros per year For those earning up to the current minimum wage of €16.576, the deduction is applied, and it is gradually reduced until it disappears when the minimum wage reaches €17.256. Furthermore, the law expressly limits this deduction. cannot exceed the portion of the quota (state plus regional) corresponding to employment income, which prevents it from generating negative balances or refunds higher than what was withheld.
Why the Tax Office prefers a deduction rather than raising the tax-free threshold
Choosing a specific deduction, instead of relinking the minimum exempt from personal income tax The increase in the minimum wage, according to government sources, is due to reasons of fairness and revenue collection. Raising the tax-free threshold would mean a tax cut for all taxpayers, including high earners, since personal income tax is progressive and both low and high salaries are taxed in the lower income brackets.
If these general thresholds were increased, the cost to the public coffers would be much older and would also benefit taxpayers who are not part of the group being protected. With the specific deduction, however, the tax relief is concentrated on those with incomes equivalent to or close to the minimum wage, with a more contained budgetary impact and without extending the discount to the higher income brackets.
The Treasury insists that the minimum wage must continue to rise to maintain the purchasing power of workers with more modest salaries, a group in which [the working class] predominates. women and youthBut the ministry also points out that it is obligated to maintain a certain budgetary balance and to comply with European demands for fiscal consolidation. In this context, the deduction is conceived as a "surgical" tool: it allows for precise adjustments to the tax burden on those who need it most, without completely altering the structure of personal income tax.
The official position of the Montero department can be summarized in one idea: what is truly relevant in this discussion is that the net salary that the number of people receiving the minimum wage increases, and that the increase in the minimum wage is not absorbed by taxes or business costs. Comply with the European Social Charter, which sets the bar at 60% of the average net salary, is the reference that guides both salary policy and associated tax adjustments.
The upcoming increase in the minimum wage and the role of the deduction
Alongside this tax debate, the government is already working on the next review of the minimum wage. committee of experts The advisory body to the Ministry of Labor has recommended two different scenarios for 2026, depending on whether or not the minimum wage is taxed under personal income tax. If it remains without effective taxation, they propose an increase in... 3,1%which would set the minimum at €1.221 gross per month in 14 payments (approximately €17.094 annually). If it is believed that taxes should be paid, the recommendation rises to 4,7%, up to 1.240 euros per month (17.360 euros per year).
These figures, which will form the basis of negotiations at the social dialogue table, aim to ensure that the minimum wage does not lose ground to inflation and, at the same time, approaches the aforementioned 60% of the average net salary. The key lies in how taxation is structured: if personal income tax is not adjusted, part of the increase could be retained by the Treasury through withholdings, which is why the ministry is willing to extend the current deduction in an amount that has not yet been determined.
Sources close to the negotiations indicate that one of the scenarios being considered is to raise the deduction, currently up to 340 euros per year, to around 600 EurosThis figure would allow the State to assume practically the entire fiscal impact of the planned increase for 2026 when the minimum wage is taxed, so that the worker notices the increase in their paycheck and the cost does not fall solely on employers.
In fact, the Treasury's concern is that, if the deduction is not updated, in the lowest part of the salary bracket the tax authorities will end up absorbing almost the entirety of the improvementAnd that even at levels slightly above the minimum wage, income tax takes a very substantial portion of the increase. Hence the insistence on adjusting this mechanism so that the decreed increase translates into real euros in the worker's pocket.
Government unity and clash with employers
One of the political novelties of this new round is that, unlike what happened in the past, Economy, Finance and Labor They are aligned on the essentials. The Minister of Economy, Carlos Cuerpo, has endorsed the conclusions of the committee of experts, and the Second Vice President and Minister of Labor, Yolanda DÃaz, has publicly emphasized that the Government "is aligned" with the report, making it clear that this time there will be no internal battle like in previous years.
The Treasury, for its part, has reiterated that it is open to "analyzing the update of the current income tax deduction" to adapt it to the increase in the minimum wage that is ultimately agreed upon. The ministry's commitment is that the new minimum wage increase will be adjusted accordingly. do not result in an excessive tax cost for companies nor in a net loss for lower-income workers.
The focus of the conflict thus shifts to the social dialogue table. Business organizations, CEOE and CepymeThey have proposed a significantly smaller increase in the minimum wage, around 1,5% by 2026, which would barely bring it to about €1.202 gross per month in 14 payments, and, moreover, without intending to exempt it from income tax. This proposal clashes head-on with the views of the unions and the recommendations of experts.
The major unions, CCOO and UGTThey are demanding a 7,5% increase, to approximately €1.273 per month paid in fourteen installments, with mandatory taxation under the Personal Income Tax (IRPF) but accompanied by mechanisms such as deductions to ensure that, in net terms, the minimum wage meets European standards. The disagreement with employers is not only about figures; there are also disagreements regarding the methodology used by experts and the regulation of the absorption of bonuses and salary supplements, an issue that the Ministry of Labor intends to address concurrently through the transposition of European regulations.
In this context, the income tax deduction for those earning the minimum wage has become a key piece of the puzzle. For the government, it allows deactivate part of the business resistanceThis is because part of the cost of the increase is not borne by companies but by the State, and, at the same time, it responds to the union's demand that the improvement in the minimum wage not be lost along the way due to taxes.
The experience of 2025, when this specific deduction was introduced and prevented hundreds of thousands of minimum wage earners from having their net income reduced, now serves as a precedent. What began as a temporary patch Intended to resolve an internal political crisis, this measure has ultimately become a permanent fiscal tool. If its amount is updated and remains linked to future increases in the minimum wage, this mechanism could become a stable element of the Spanish tax system, specifically designed to protect those with lower incomes without requiring a general reform of the tax-free allowances.
Pending the final figures, everything points to the Income tax deduction for recipients of the minimum wage It will continue to be the chosen path to reconcile three objectives that do not always fit together well: raising the minimum wage, not strangling companies, and preventing lower-income workers from seeing the tax authorities take a good part of the improvement that is promised to them on paper.