BarcelonaThe wave of employment regulation (ERO) proceedings that has affected many sectors in recent years has left thousands of workers unemployed. The bulk of these cases, however, have been closed with a high number of early retirements, a system that allows older employees to maintain income for a while until they can legally retire. In these cases, it is important to anticipate what will have to be paid to the Inland Revenue when the income tax return arrives.
The banking sector is one of the most open in recent years. Without going any further, in 2021 the acquisition of Bankia by CaixaBank meant the gradual termination of more than 6,400 contracts, many of which were early retirements, while Santander and BBVA also agreed on EROs to lay off more than 3,900 and 1,900 employees, respectively, in Spain as a whole. But beyond banking, even before the outbreak of the pandemic, Catalan industry had been suffering from a sharp drop in closures or reductions in activity that continued in 2020, with the arrival of covid, and in 2021. , with the closure of Nissan factories as the main exponent.
Early retirement or early retirement?
The first thing to do is to understand what early retirement is and what early retirement is, two different concepts. The first is a concept included in the law and therefore accepted by the Tax Agency. It consists of formally applying for retirement and collecting a pension before the age established by law – between 65 and 67 years depending on the case – as long as a series of requirements are met, such as having contributed for 35 years.
On the other hand, early retirement is not defined in any regulations, but is a private agreement between the worker and the company according to which the former stops working in exchange for some kind of compensation, usually an indemnity, the payment of part of the salary or both. In the eyes of the state, the employee remains an active worker: he is not retired and, as a result, does not receive a pension, but becomes unemployed until he reaches the age and conditions for retirement. (in advance or not). In the meantime, he receives an unemployment benefit in addition to the compensation paid by the company.
Most early retirement agreements take place within the framework of an ERO, although there are companies – both large and SME – that can offer them for specific cases. This fact is important when it comes to knowing how much to pay, because the same amount of personal income tax is not paid if it is a compulsory early retirement as if it is a fully voluntary agreement.
In the case of workers over the age of 52, employees can sign a special agreement with Social Security to continue receiving the allowance until they retire, that is, if necessary for longer than they are entitled to receive. The condition is that during this time they continue to contribute, so they will not count as unemployed and will be registered with Social Security. If the worker is part of an ERO that affects employees over the age of 55, the company is obliged to finance this agreement, which in other circumstances is not mandatory.
Miscellaneous taxation
For tax purposes, early retirement has the same consideration as normal retirement. The worker stops receiving a salary and receives a state pension, to which some deductions are applied and at the end of the year he ends up being taxed as an income from work (with the disadvantage that the first year will probably have to pay more, because the Treasury will consider that it has had two payers: your company until the time of retirement and the Social Security once retired).
Early retirement – as a dismissal – does have particularities, specifically on compensation. Any compensation of less than 180,000 euros must not pay personal income tax. Anyone who exceeds this figure must pay taxes. However, when this threshold is exceeded, a 30% reduction is applied if the dismissal is by decision of the company and the employee has been working there for more than two years. If the payment of the indemnity is divided into several years, the reduction may also be applied. Conversely, if it is an agreed departure or early retirement, any compensation received by the worker will normally be taxed.
What regarding EROs? Workers may be admitted to the proceedings on a voluntary basis, but the Supreme Court nevertheless considers that these are not agreed-upon departures, but forced ones. The high court’s argument is that employees would continue to work for the company if the case was not filed and, in addition, the affected jobs are lost. That is why the 30% reduction can also be applied on any early retirement compensation with an ERO.
If the early retirement is bilateral, on the other hand, and is left out of a file, then the worker will have to pay the corresponding personal income tax, without any additional reduction.
