Every year we expect changes regarding Social Security Contributions and general procedures and this year is no exception. There have been many delays on this subject because a number of new measures were supposed to be introduced but it looks as though these may be delayed a few months so that Social Security Delegations can learn how to implement these new procedures, and another issue is as usual, the State Budget was not published on time and was only made available on the 14th January 2019.
Instead of going through all the various changes that may or may not take place, I want to highlight the most important changes that affect you directly at this moment.
As you know, as Sole-Traders, we do not have a fixed income or a monthly salary and in Spain, our Social Security contributions are not calculated according to our actual income; instead they are based on a scale established by Social Security. They determine a minimum monthly “salary” we would need to live on and from there they calculate minimum and maximum base rates for our monthly contributions, which usually increase a little each year either in January or in July.
Most sole-traders pay into the system on the minimum base rate which in the latter half of 2018 amounted to 932,70 euros but it increases this month by 1,25%, setting it at 944,40 euros. Another important change is to do with the concepts that we pay for each month within our contribution. The monthly contribution automatically includes a concept called General Contingencies or “contingencias comunes” which incorporates an insurance policy via the Mutua in the event the sole-trader is unable to work due to non-work related accidents or illness and it also includes an amount that goes towards their future pension. There were two optional concepts that could be paid for on top of that, Professional Contingencies (Professional Accidents or Illness) and Closure of Business.
Upon registering the business activity, I would normally recommend to those business owners who carry out high risk activities such as construction to pay extra for Professional Contingencies so that if they were to suffer a work-related accident, they would receive payment from day one and for a higher amount. Closure of Business was always a difficult topic because it is similar to a sole-trader receiving unemployment benefits if the business had to close but the catch was that you would have to prove to Social Security that the business failed on all levels which as you can imagine was virtually impossible to achieve and Social Security would ultimately reject more than half of the applications received so many thought it was pointless to pay this extra amount.
From January 2019, however, it becomes obligatory to contribute General Contigencies, Professional Contingencies as well as Closure of Business in the following way:
- General Contingencies: 28,30%
- Professional Contingencies: 0,90%
- Closure of Business: 0,70%
- Professional Training: 0,10%
If we apply these amounts to the new Mínimum Base Rate of 944,40 euros, the breakdown would be as follows:
- General Contingencies: 267,27 euros
- Professional Contingencies: 8,50 euros
- Closure of Business: 6,61 euros
- Professional Training: 0,94 euros
TOTAL CONTRIBUTION: 283,32 euros per month (an increase of approximately 5 euros per month)
Those business owners who are registered to a limited or public company, are also liable to these increases. in their case, the minimum base rate is 1.214,08 euros, an increase of approximately 7,22 euros per month and situates the monthly contribution at 364,22 euros.
This new format allows for better cover and increased benefits:
- Receive payment for work-related accidents or illness from the first day in which your doctor signs you off from work
- The ability to stop paying Social Security contributions if you are unable to return to work from the second month of temporary incapacity (non-work related accidents or illness) until your doctor declares you are fit to work again
- To access professional training/ courses
- Better access to closure of business benefits, whose duration increases from 12 months to 24 months
This increase in the percentages applied to the minimum base rate is expected to continue over the next four years to 30,30% in 2020; 30,60% in 2021 and 30,90% in 2022 to cover the additional benefits included within the monthly contribution.
Another expected improvement that has been studied for a number of years because of pressure from Business Associations and Colleges is to change the way Social Security contributions are calculated. This means there is a possibility that sometime during 2019, the system I have just explained again to you may be completely abolished and a new system that allows sole-traders to pay contributions based on their actual income as practiced in many other European countries begins which would particularly Benefit those sole-traders who earn less than the established minimum wage. As you can imagine, this concept is not so easy to implement. There are many factors to consider and personally, I think that one of the major problem areas is fear that sole-traders will underdeclare their income to pay less Social Security, which in turn could cause the whole Social Security Administration to collapse (no unemployment benefits, no sick-pay, no pensions…). We will have to wait to see what will happen this year but this concept was recorded in the Sole-Trader Reform approved in October 2017 so it could only be a matter of time.
I sincerely hope this blog post has clearly explained the way in which sole-traders pay their monthly contributions, the increases, additional benefits and expected changes to come but if you have queries, please feel free to contact me for a consult.