The self-employed quota in Spain is a matter of eternal debate. Probably, it is because we are one of the countries in Europe that pays more. Today we want to help you reflect on what is more convenient for a self-employed person: to raise their contribution base to the level of their income (as some experts advise) or to complement the minimum base with private options: sick leave insurance, life insurance, savings plans.
The rights of the self-employed linked to their contributions
The contributions that the self-employed worker pays monthly to the Social Security are a percentage of a kind of “base salary” (the contribution base). Based on this, a series of rights are generated.
We are mainly talking about the following:
- Temporary disability benefit
- Widow’s, widower’s and orphan’s pension
- Pension for permanent disability
- Retirement pension
These benefits are calculated by applying formulas and percentages of the contribution base decided by the self-employed. The higher the contribution base, the higher the amount of these benefits.
Based on this statement, logic would dictate that all self-employed workers should increase this base. The problem is the disproportionate monthly cost of the increase. Hence, the dilemma arises as to whether there are cheaper alternatives to the public system.
The cost of being self-employed in Spain
Between 80-90% of the self-employed are contributing at the minimum rate (more than 90% if we only consider those under 40 years of age). This means a contribution base in 2021 of 945 € and a monthly cost for the self-employed, the quota, of about 290 € per month.
This has changed in the year 2023, as the Government has launched some changes that make us pay contributions in relation to our income. Why has it done so? Because it wants to reduce the unprotected gap that exists between salaried workers and the self-employed in Spain.
However, this does not really change the situation of the self-employed to any great extent, since the new contribution brackets place the entitlements well below the worker’s actual income and earnings.
Depending on these yields, we are placed in one of the 12 available contribution brackets. However, within each bracket, there is a minimum and a maximum that can be chosen, and the vast majority will choose to take the minimum, which means that we are still in a very precarious situation.
And, if you want to go to the high brackets, let’s suppose you choose to pay contributions based on 1,850 € instead of 1,013 €, that means an approximate cost of between 250-300 € more per month, and people are not willing to assume it
Let’s see it in detail in this chart, where you can see these brackets, and the minimum and maximum bases for each year:
There you can see that even if you earn 4,000 € in the cases of higher income, you can contribute for 1,300 €, so on that basis the rights are much lower. Or you can earn €2,500 and contribute for less than €1,100. Little has been solved with this reform.
In the case of the corporate self-employed, they continue to maintain a somewhat special situation, and their minimum contribution base is set at €1,000 per month.
In the following section we will see how this increase in the base helps us, in comparison with the minimum for self-employed workers, to see if it is worthwhile or not.
The increase in the contribution base and its benefits
People who contribute to the self-employed regime have rights and social benefits that are important to know. As mentioned above, the amount of these will depend on the contribution base.
Self-employed on minimum bases
Let’s suppose a self-employed person who has an income of 1.000 € and who contributes for a minimum base of 899 €/month. He receives for the different main contingencies offered by the S.S., the following:
- Temporary sick leave: €530.23 per month. This figure is very, very low, if we contrast the monthly expenses we have. Uncoverage rate: 47%.
- Widowhood: 539.21 €/month. Coverage reduction rate: 46%.
- Orphan: 179.74 €/month. Coverage reduction rate: 82%.
- Total Permanent Disability: 494.28 €/month. Decoverage rate: 51%.
- Absolute Permanent Disability: 898.69 €/month. Decoverage rate: 10%.
- Retirement Pension: 898.69 €/month (we should know that the average pension of a self-employed person has always been very close to 700 €, 500 € less than the average for employees).
Of course, these figures are assuming that we comply with the minimum number of months of contributions required by the S.S. and the different requirements to accrue them. These are approximate figures, but beware of the lack of coverage they represent… most of them are dramatic situations.
Self-employed with 2,000 euros of net income
Benefits do not necessarily increase, as the self-employed can choose, and most will opt to contribute at the minimum, which would be €1,029.41 in 2023:
- Temporary sick leave: we would receive €607.35/month. Decoverage rate: 70% (beware…)
- Widowhood: €617.65/month. Coverage reduction rate: 69%.
- Orphan: €205.88/month. Coverage reduction rate: 90%.
- Total Permanent Disability: 566.18 €/month. Decoverage rate: 72%.
- Absolute Permanent Disability: 1,029.41 €/month. Coverage reduction rate: 49%.
- Retirement Pension: €1,029.41/month. Coverage reduction rate: 49%.
As we can see, the benefits are a little higher, but the gap in terms of monthly yields increases significantly. This is a truly dangerous situation that needs to be corrected.
In Spain we have a pay-as-you-go system, especially in the case of the retirement pension. This means that we know what we have to pay according to our base, but not what we will collect.
In recent years, in view of the permanent deficit of the Social Security, corrective factors have been introduced to collect retirement benefits, reducing previous amounts. Therefore, we can in no way guarantee that the figure indicated above is the one that will be collected, because more and more years are also taken into account in the calculation of the contribution base.
Expert opinion: Miriam Almazán (Afiris)
To clarify the importance of this article, we wanted to consult Miriam Almazán, as director of Afiris, and specialist in advising freelancers and entrepreneurs, who highlights the importance of this decision for freelancers.
When we have a business, the generation of income depends on us, and it is essential to have adequate information on the benefits we would receive in the event of certain situations. Let’s think about a long illness that prevents us from working or, in case we miss work, to know the amount that our family would receive to keep going.
Normally we consider contributing more or choosing private options with retirement in mind and, in my professional experience, I see that many times we overlook other types of situations that may occur. In these cases, if we do not have good coverage, it can lead to serious economic difficulties for the self-employed and their families.
Whether to go private or public is a decision that has a personal component. It is undoubtedly important to crunch the numbers and also consider the business and family situation in order to choose the most appropriate option.
Miriam Almazán (Afiris)
We have seen what is involved in increasing the contribution base, the public option; now we explain what is involved in the private option, through insurance.
Insurance as an alternative to improve our performance
The alternative to a simple increase in the contribution base would be to keep it at the minimum, and to supplement benefits through private insurance.
We would talk about these 3 fundamentally:
- Sick leave insurance for the self-employed
- Health insurance for the self-employed
- Accident insurance for the self-employed
- Retirement savings plans
- pension plan
Thanks to the three, we would be covering the fundamental benefits of Social Security, derived from:
- Temporary leave,
- Death or permanent disability
- Retirement.
Let’s see if it is worthwhile to go the private route versus increasing the S.S. contribution base to 2,000 euros. We have an annual budget of about 3,600 euros to do so. Let’s check that by subscribing to these insurances, the cost is:
- Sick leave insurance → capital of 500 €/month, cost: 138 €/year
- Life insurance → capital sum of 112,000 € for death and total and absolute permanent disability, cost: 222 €.
- Accident policy →capital of €112,000 (so we also cover partial disabilities). Cost of € 100 per year.
- Savings → as we have spent €460 on the three policies we would have €3,140 left to invest in savings plans.
We have made this assumption for a 35 year old, married with one child. If we do it with a 45 year old, the margin for savings would be 2,726 € (insurance increases in price with age). If we do it at age 55, we would save 2,011 €.
Assuming a person who starts as we have indicated at the age of 35, the accumulated savings with the mentioned progression would be approximately €64,000 at the age of 65. To which we would have to add all the profitability that could be accumulated in those 30 years from the beginning, which would be interesting since it takes so long.
Our suggestion on how best to choose
As we have seen, the additional cost of increasing the contribution base is very high. However, insurance is much more flexible and we can also take advantage of free competition to choose among economic alternatives. Always choosing among good insurers.
The essential difference is the capitalization system in private savings: we know that whatever we put into the savings plan, if we are conservative, we will recover it with a return. However, with Social Security we do not have this certainty. Given that the experts predict a bad future for our pensions, it seems that we would probably be paying much more than we would receive in the future (especially if we are young).
Do not hesitate and ask for a quote for these insurances. Protect yourself well against all these risks, adapting your coverage to your income and expenses.. The problem of many self-employed is that they may have a high income and yet their contribution base is minimal; therefore, they maximize the risk.
PIB Group Iberia will help you calculate your benefits and assess how to complement it correctly. “We manage your insurance, we secure your future”.
