Many workers are surprised when they review their tax data or their Income tax draft and discover that the contributions their company makes to their pension plan appear added to their salary, that is, to their returns. It is easy to think that there is an error, since that money has not reached the checking account at the end of the month, but has been saved for retirement. Now, for the Tax Agency, that money counts today, although with an important advantage for tomorrow.
The Personal Income Tax Law explains in its article 17 (available in this BOE) that contributions paid by pension plan promoters (i.e. your company) are considered full returns from work in kind. This means that, technically, that money is part of your annual salary and should appear as another income on your return, increasing your initial tax base.
This mechanism responds to the logic that these contributions are a form of deferred salary. Instead of paying you in cash now, your employer is paying you in future savings. Therefore, the Treasury accounts for it as if you had collected it. But this is where the second part of the equation comes into play, designed so that this savings does not penalize you fiscally in the present.
The reduction mechanism that balances the scales
Although the Treasury forces you to add these amounts as earned income, it immediately offers you the tool to neutralize that increase. Article 51 of the law allows contributions and contributions to social security systems to be reduced in the general tax base. This specifically includes contributions made by the promoting companies that have been attributed to the worker.
The way it works is almost like a zero-sum game in your statement. First you add the contribution as earned income (which would raise your taxes), but then you subtract that same amount in the reductions section (which lowers your taxes). In this way, the immediate tax effect is nullified or considerably mitigated, allowing that money to grow in the pension plan without having been taxed at the time of contribution.
Thus, if your company’s contributions respect these limits, you will be able to enjoy this tax benefit without problems, deferring the payment of taxes until the moment you redeem the plan, either for retirement or for one of the permitted contingencies.
Boundaries
It is important to explain and clarify that this tax advantage has maximum annual limits set by law, both for individual and business contributions.
Individual plans
For contributions that you make personally to your own pension plan, the maximum reduction limit in your personal income tax base is the lower of the following two amounts:
- 1,500 euros per year.
- 30% of the sum of the net income from work and economic activities.
Employment plans
In the case of additional limits, this limit can be increased by an additional 8,500 euros (reaching a total of 10,000 euros per year) as long as it comes from business contributions or contributions from the worker to the same employment instrument.
Now, your contribution as a worker is limited depending on what your company contributes, according to this table of coefficients:
| Annual company contribution | Maximum contribution allowed to the worker |
|---|---|
| Equal or less than €500 | The result of multiplying the company’s contribution by 2.5. |
| Between €500.01 and €1,500 | €1,250 + (0.25 x (Company Contribution – €500)). |
| More than €1,500 | The same amount contributed by the company (coefficient 1). |
Keep in mind that if your total income from work exceeds 60,000 euros, you will only be able to contribute the same amount as the company (coefficient 1), regardless of the amount it contributes.
Self-employed (Simplified Employment Plans)
Self-employed workers, that is, the self-employed, have a specific total limit of 5,750 euros per year, which is broken down as follows into what is known as simplified employment plans:
- 1,500 euros general limit (individual contribution).
- An additional 4,250 euros for contributions to simplified employment pension plans for the self-employed.
Contributions to Spouse
You can reduce personal income tax by up to 1,000 euros per year for contributions made to your spouse’s pension plan, as long as he or she does not obtain net income from work or economic activities, or these are less than 8,000 euros per year.
People with Disabilities
For people with disabilities (physical ≥ 65% or mental ≥ 33%), the limits are much broader:
- General limit: Up to 24,250 euros per year (including contributions from the owner and family members).
- Contributions from relatives: Relatives in a direct or collateral line can contribute up to 10,000 euros annually to the plan of the person with a disability.
To take into account in the Basque Country
Keep in mind that if you reside in the Basque Country, the limits are different (for example, up to 5,000 euros for individual contributions and 8,000 euros for companies) due to its own regional regime.