Is there such a thing as an autonomo free lunch?

Going self-employed in Spain - "autonomo" in the local parlance - has many attractions for foreigners living here, not least of which is that good paying contracted jobs are in short supply, particularly for foreigners without much Spanish. Many foreigners in Spain run their own business, er, "informally" without registering or paying any tax but would prefer to be legal either because they fear investigation and prosecution or because of the limitations of working in the black economy e.g. not being the equivalent of "VAT registered" and being able to issue proper invoices or not being able to sign a lease, take a loan or employ people.

That all points to registration and formalising your business but many people are put off by the taxes and social security. Without going into massive detail (there is a guide on the firm's website which covers all of this - Autonomo Guide) the main sticking point is social security for most people. It is a minimum of 251€ per month and can be more if certain unemployment, sickness insurances are taken in addition to the basic cover. Even if you don't make a profit (or make losses) this monthly payment never goes down, although younger autonomos can get a 30% discount for their first 15 months registered.

The "solution" if you want to register as autonomo but don't fancy this hefty outlay is sometimes touted as opting out due to low earnings. Spain has a national minimum wage and theoretically autonomos who earn less than it can apply to opt out of social security. But there are conditions which make it only applicable to a minority.

- you must always earn under the minimum wage so anyone earning irregular amounts which sometimes exceed the minimum could not apply

- you must be working occasionally - if you are doing a regular contract or regular work you cannot apply

- you cannot have a permanent place of business

This is why the bulk of people continue to have to pay social security if they are self-employed in Spain. Besides unless you pay into the system you cannot apply for the benefits, mainly health and pensions related which could ultimately be worth hundreds of thousands of euros (see article Spanish pension benefits )

When will the Spanish pensions system collapse?

You might notice my deliberate and provocative use of the word "when" in the title rather than "might" or "if". I have just been doing an article for my website about Spanish pensions ("Spanish Pension Benefits") and was shocked by some of the figures I found during my research.

The article talks about how much someone in Spain can expect to get by way of a state pension, the answer being somewhere between 340€ a month up to nearly 3.000€ a month if you have made the maximum contributions. The majority will I guess be retiring on something between the minimum and double that, and bear in mind that in Spain you get 14 monthly payments (double at Christmas and Summer holiday time which is a nice system I think.

Not overly generous then but as everyone knows there is a pensions timebomb ticking in every developed country due to population ageing. Spain's ageing profile was what really surprised me and it is this and not the generosity of the payments that will sink the system. These are some UN figures comparing the ratio of working age Spaniards with oldies in 2050 with the ratio at the turn of the century:

2000

Spain Working age (15-65) 27 million

Spain retirement age (65+) 7 million

Spain ratio - 4 workers to every pensioner

2050

Spain Working age (15-65) 16 million

Spain retirement age (65+) 12 million

Spain ratio - 1.4 workers to every pensioner

(source UN Ageing Report

http://www.un.org/esa/population/publications/worldageing19502050/)

So, Spain has an 11% public sector deficit now ( ie is borrowing to pay current pensions) and that is barely 10 years into this dramatic demographic shift. It seems inconceivable that Spain will be able to finance state pensions with 11 million fewer workers and 5 million more pensioners. It just can't happen. So what will happen?

A big shift towards encouraging rather than deterring immigration? That may partially happen but the problem is rich countries tend to attract the poor and unskilled who may not exactly be an unmitigated economic boon.

Cuts in benefits and later higher retirement ages? For sure and these are being talked about at the moment with a report from 100 economists suggesting reforms along these lines (http://www.valenciaplaza.com/ver/10894/El-modelo-sueco-y-los-100-economistas.html) but the reforms seem quite timid, with a rise of only 2 years in the retirement age and an increase of 5 years in the number of years' contributions required to get the maximum pension (it is now 35). Hardly enough to rescue the system you would have thought.

Essentially the government is making promises it cannot keep and cannot renege on explicitly for fear of a political backlash. The outcome will eventually be a default on its pensions promises by stealth - pensioners will get the nominal pension they have paid for but the government will borrow and print the money to pay for it so inflation erodes its effective value. At some point in the next couple of decades 70s style inflation will wipe out much of the real value of state pensions.

Other recent articles: Spanish non resident tax

Social Security exemption for autonomos

A lot of people living in Spain and thinking of starting their own business are put off going self employed by the high fixed social security contributions. Anyone registering as “autonomo” with the Tax Office is also obliged to sign up for self-employed social security which costs a minimum of €250 a month. If you are starting a small business with uncertain revenues or if it is only a minor concern where you know the income is going to be pretty minimal this is very offputting.

The situation is worse when you do not need the social security because, for example, your family has private health insurance or you do not need to make any more state pensions contributions (e.g. because you paid the maximum already in the UK).

There is a possible exemption which may make a small business viable in this position. If your are registered autonomo but this is not a full time regular income generating occupation then you can be exempt from joining autonomo social security (known as “RETA” or Regimen Especial Trabajadores Autonomo ). The law does not give a hard and fast definition of how an “occasional” autonomo should be classified but case law has suggested that, in the absence of any other factors, earning less than the annual minimum wage would suffice.

The minimum wage, or the “salario minimo” or “salario minimo interprofesional” (“SMI”), is €7,599.60 for 2010. It is most commonly referred to as a monthly amount ( currently 633,30), and is changed annually by the Bank of Spain.

Once someone earns more than this monthly amount they won’t be able to claim the exemption from social security. It should also be noted that they won’t be able to claim any benefits or benefits from social security while they are not making payments.

More information can be found at the new Autonomo page of the Advoco website which also includes a video guide to the autonomo.