The income tax return for the 2025 tax year arrives in April 2026 and, for sole traders, it is a far more consequential filing than it is for employed workers. The draft return that the AEAT provides via Renta WEB reflects only the withholding tax suffered and the data that payers have reported to the tax authority — but it does not incorporate business expenses, equipment depreciation, Social Security contributions or the vast majority of the deductions that determine a sole trader's actual tax liability. Confirming the draft without reviewing it is, in practice, equivalent to gifting hundreds or even thousands of euros to the tax authority. This guide covers everything a sole trader needs to know to file the 2025 return with the most favourable result that the law permits.
Why the draft return does not work for sole traders
The draft income tax return is built from data the AEAT has received from third parties: employers (payroll withholdings), financial institutions (investment income), investment funds (redemptions and switches) and properties (cadastral value imputations). For an employed worker with a single income source and no complex assets, the draft is usually a reasonable starting point.
For a sole trader, the situation is radically different. The AEAT does not have information on the deductible business expenses because that information does not flow automatically from any third party — it is held by the sole trader in their invoices, receipts and accounting records. The draft will show income declared via third-party information returns from payers (if working with legal entities that apply withholding) or the quarterly returns already filed, but the expenses section will be blank or only partially populated.
Confirming the draft without completing the expense section means paying tax on gross income, or close to it. The difference between correct filing and confirming without review can easily represent 15% to 30% of the tax liability, depending on the cost structure of the business.
Direct assessment vs objective assessment: a detailed comparison
Direct assessment (normal and simplified)
The direct assessment method calculates the net income from the activity as the difference between gross income and deductible expenses incurred during the year. It is the method most closely aligned with the actual economics of the business.
Normal direct assessment: Applies when net turnover exceeds €600,000 in the prior year, or when the trader has renounced the simplified variant. Requires full bookkeeping in accordance with the Commercial Code.
Simplified direct assessment: The most widely used method among sole traders. Does not require formal bookkeeping, but does require income, expense, investment asset and provision registers. The key differentiator is the 5% additional deduction on net income for expenses difficult to justify, subject to a maximum of €2,000 per year. This percentage avoids the need to individually justify minor expenses.
Objective assessment (módulos)
The módulos regime determines net income by applying indices set by the Ministry of Finance based on physical parameters of the activity: floor area of the business premises, number of employees, installed electrical capacity, number of restaurant tables, or similar. The calculated income is independent of the actual income and expenses of the business.
When módulos are advantageous:
- When actual income significantly exceeds the estimated income calculated under módulos — the excess is not taxed
- In activities with very high margins and few documentable actual expenses
- When the business has variable income and módulos offer predictability
When módulos are not advantageous:
- In loss-making years: the trader pays tax on estimated income regardless
- When actual expenses are significant and documentable — direct assessment produces a lower result
- For traders with income above exclusion thresholds: €250,000 in annual income (€150,000 for agricultural activities) or €250,000 in purchases
| Criterion | Simplified direct assessment | Módulos |
|---|---|---|
| Basis of taxation | Actual profit (income − expenses) | Estimated income using physical indices |
| Deductible expenses | All necessary for the activity | Not applicable (income is already net) |
| Bookkeeping | Income/expense registers | Income and expense register only |
| Risk in loss-making years | Zero or loss offset | Still pays on estimated income |
| Income ceiling | €600,000 | €250,000 |
| Expenses difficult to justify | 5% additional, max €2,000 | Not applicable |
Deductible expenses: complete list with amounts and limits
Social Security contributions
All contributions paid to the Social Security Treasury (TGSS) as a sole trader are fully deductible: monthly contributions, voluntary additional coverage (temporary incapacity, cessation of activity) and supplementary liquidations from the annual regularisation under the real-income contribution system.
Office or workspace rental
Rental of premises, office or co-working space used exclusively for the business activity is 100% deductible. For mixed-use spaces, only the proportionate business-use portion is deductible.
Home utilities (the 30% rule)
For sole traders working from home who have communicated the partial business use of their home to the AEAT via Form 036 or 037, Spanish law allows a deduction of 30% of utility expenses (electricity, water, gas, telephone and internet) proportionate to the percentage of the home dedicated to the activity.
Example: if the activity is carried out in a study representing 20% of the total floor area, and annual utilities amount to €3,000, the deductible amount is: €3,000 × 20% × 30% = €180.
Equipment and supplies
IT equipment (computers, tablets, printers) with a unit value above €300 must be depreciated rather than deducted in full in the year of acquisition. For IT equipment, the maximum depreciation rate under simplified direct assessment is 26% per year, though under accelerated depreciation for SMEs up to 78% (triple the maximum) can apply, effectively deducting the asset in one or two years.
Vehicle: the 50% rule
The deductibility of vehicle expenses is one of the most contentious areas. The rules distinguish:
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Exclusive business use: All vehicle costs are 100% deductible if the vehicle is used solely for business purposes — depreciation (maximum 16% annual coefficient), insurance, fuel, repairs, MOT, parking and tolls. Exclusivity is extremely difficult to evidence unless the activity inherently requires it.
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Mixed use: For the vast majority of sole traders, the AEAT does not accept partial vehicle deductibility under direct assessment for mixed-use vehicles, except for a listed set of activities (commercial agents, representatives, healthcare professionals making home visits). However, VAT rules do allow a presumed 50% business use for deducting input VAT. In practice, many advisers apply a 50% criterion for income tax vehicle expenses when business use is clearly predominant and journey records are available — this is a defensible but audit-risk position.
Subsistence and travel
Business travel expenses are deductible within the following limits:
- Spain, no overnight stay: €26.67 per day
- Spain, overnight stay: €53.34 per day
- Abroad, no overnight stay: €48.08 per day
- Abroad, overnight stay: €91.35 per day
Payments must be made by electronic means (card, bank transfer) — the AEAT requires non-cash payment evidence.
Professional services
Fees paid to accountants, tax advisers, lawyers, notaries, consultants or any other professional engaged in connection with the business are 100% deductible. These invoices must include 15% withholding tax (or 7% for professionals in their first years of activity).
The real-income Social Security contribution system and its impact
Since January 2023, sole traders pay Social Security contributions based on their actual net income, not on a freely chosen base disconnected from their earnings. The system works in two phases:
Phase 1 — Provisional contribution during the year. At the start of the year, the trader communicates an estimated net income to the TGSS and is assigned a provisional contribution base within the applicable bracket table. The monthly contribution is calculated on that base.
Phase 2 — Annual regularisation. After the income tax return is filed, the TGSS receives the final declared net income and compares the provisional base against the base that corresponds to actual income:
- If actual income is lower than the provisional base: the TGSS refunds the excess contributions
- If actual income is higher than the provisional base: the trader receives a supplementary assessment for the shortfall
Tax impact: The final Social Security contributions — including regularisation top-ups — are deductible for income tax purposes. This creates a circular relationship: income tax net income determines Social Security contributions; those contributions in turn reduce net income. The regularisation may affect supplementary income tax returns if definitive net income differs significantly from the provisional figures used in the original return.
7 strategies to pay less income tax in 2026
1. Accelerate or defer investment based on the marginal rate
If net income for the year is in a high marginal tax bracket, pulling forward year-end investments reduces the current year’s taxable base. Equipment purchased on 28 December rather than 2 January is deductible a full year earlier.
2. Contribution to the Simplified Employment Pension Plan (PPES) for sole traders
From 2023, sole traders can access simplified employment pension plans (PPES), which allow contributions of up to €4,250 per year with a direct deduction against the income tax base, on top of the general limit of €1,500 for individual plans. This gives a potential total reduction of €5,750 per year through pension provision vehicles.
3. Consider converting to a limited company
When net income from the activity consistently exceeds €50,000–€60,000 per year, converting to a limited company (SL) can reduce the total tax burden, especially in the higher income tax brackets (from 37% upwards). The SL pays Corporate Income Tax at 25% (15% for the first two profitable years), and the sole shareholder can receive a combination of salary and dividends, with dividends taxed in the savings base at 19–28%.
4. Accelerated and free depreciation
The simplified direct assessment method allows free depreciation on new assets with a unit value below €300 (up to €25,000 per year in total). For assets above that threshold, applying triple the maximum depreciation rate (accelerated depreciation for SMEs) brings the deduction forward significantly.
5. Manage the calendar of receipts and payments
Under the cash basis criterion (available for activities with turnover below €600,000), deferring the receipt of a December invoice to January shifts the income to the next tax year. Accelerating the payment of expenses budgeted for January — insurance, annual subscriptions — into December makes them deductible one year earlier.
6. Carry forward losses from prior years
Prior year losses (2020–2024) can be offset against 2025 positive income indefinitely, with no quantitative limit (unlike the 70% limit applicable to Corporate Income Tax). Many sole traders who had losses during the pandemic or in the early years of their activity do not apply these balances because they have not kept track of them.
7. Employee flexible remuneration for sole traders with staff
Sole traders who employ staff can structure part of their employees’ remuneration as IRPF-exempt benefits in kind: meal vouchers (up to €13.29/day), transport vouchers (up to €1,500/year per employee), private medical insurance (up to €500/year per beneficiary) and professional training. This remuneration is deductible for the employer-trader and not taxed for the employee.
Most common mistakes by sole traders in the income tax return
- Confirming the draft without completing business expenses — the most costly and most frequent error
- Not deducting Social Security contributions paid during the year
- Forgetting the Social Security regularisation supplementary assessment (deductible in the year of payment)
- Not communicating the partial business use of the home before applying the 30% utilities deduction
- Deducting personal expenses as business expenses
- Not filing Form 130 on time
- Not applying the 20% reduction for new activity (available in the first profitable year and the following year)
The income tax return for a sole trader requires active management throughout the year: correctly recording expenses, planning investments according to the marginal rate, managing the relationship between quarterly instalment payments and the final tax liability, and coordinating the income tax return with the Social Security contribution regularisation. At BMC we support sole traders and independent professionals in the comprehensive management of their tax affairs — from planning throughout the year to filing the return with the most favourable result possible.
