Contributions to pension plans

Individual plans

Firstly - and as the most common scenario - individuals can make contributions to their ownindividual pension plan(which they can establish at any financial institution). However, the maximum contribution eligible for a reduction has been decreasing significantly in recent years. Currently, it is the lesser of 1, 500 euros annually or 30% of the sum of the taxpayer's net annual income from work and economic activities [Personal Income Tax Law, art. 52, 1].

For example, if a taxpayer with high income, who is taxed in their Personal Income Tax at a marginal rate of 45%, contributes 1, 500 euros to their pension plan before the end of the year, by claiming a reduction for that amount they will save 675 euros on their income tax return (1, 500 × 45%).

In the case of married individuals, in addition to the reduction for contributions made to their own plan, they can also benefit from the reduction for contributions made to thespouse's plan. In this case, the maximum contribution eligible for a reduction is 1, 000 euros [Personal Income Tax Law, art. 52, 1], and to benefit from the incentive, it is necessary for the spouse not to earn net income from work or economic activities, or if they do, that it is less than 8, 000 euros annually.

Company plans

Companies can also set up plans with financial institutions for the benefit of their employees. In this regard, contributions made to the company plan, along with contributions made by the employee to their individual pension plan, cannot exceed 10, 000 euros (the excess is not eligible for a reduction).

Therefore, if an employee has contributed the maximum allowed of 1, 500 euros to their individual plan, the maximum contribution to the company plan eligible for a reduction will be 8, 500 euros. Contributions made to the spouse's pension plan are not taken into account when calculating the previous limit.

To determine contributions to the company plan eligible for a reduction, in addition to respecting the previous limit, a special rule must be followed:

• Contributions made by the company "at its own discretion" are fully eligible for a reduction.

• Contributions made by the employee or by the company "at the employee's discretion" are only eligible for a reduction up to the result of multiplying the company's contributions by the following coefficients:

 1. In the case of workers with gross income from work exceeding 60, 000 euros, the coefficient is always 1.

2. The maximum contribution from the worker (or by their decision) is 1, 250 euros, plus the result of multiplying by 0, 25 the difference between the employer contribution and 500 euros.

For these purposes, the Tax Office has provided some clarifications:

• Company contributions made because they are provided for in the collective agreement and without individual workers being able to alter their terms are considered employer contributions (made by decision of the company).

• On the other hand, contributions to company plans made through flexible remuneration programs, in which the employee chooses what they want the company to contribute each year on their behalf, are considered to be made by decision of the worker.

See what the maximum reduction a worker could apply based on the contributions that the company has made to the plan by their own decision (considering that said worker has work income below 60, 000 euros):

1. Taking into account the contribution freely made by the company, this is the maximum additional amount
that the worker could decide to contribute and would be entitled to a reduction.

2. Result of 1, 250 + [(1, 000 - 500) × 0, 25].

3. In this case, between the contribution to the individual plan and the contributions made to the company plan

Self-employed plans

Other pension plans whose contributions are eligible for reduction from 2023 arespecific plans for self-employed individuals promoted by associations or federations of self-employed individuals or by trade unions, professional associations or mutual societies, in which their participants are exclusively self-employed individuals. For these purposes, individual entrepreneurs, in addition to being able to make contributions to their individual plan (which they can contract on their own with a financial institution, like any other taxpayer), can alsomake additional contributions of up to €4, 250 to these self-employed plans. Therefore, their total contributions eligible for reduction can be up to €5, 750.

Plans for people with disabilities

Finally, it is also possible to make contributions on behalf of relatives with a physical disability of at least 65% or a mental disability of at least 33%, or with a disability declared judicially. And the person with a disability can also make contributions to this plan:

• Thecontributions they make to their plan are eligible for a reduction ofup to €24, 250.

• Thosemade by their relatives or legal guardians are eligible for an individual reduction (per contributor) ofup to €10, 000 annually, which is compatible with the reduction corresponding to them for their contributions to personal pension plans.

In these cases, the total reduction for contributions made jointly by the person with disabilities and their family members cannot exceed 24, 250 euros. For these purposes:

• First, contributions made by the person with disabilities themselves are entitled to a reduction in income tax.

• If these contributions do not reach 24, 250 euros, the rest contributed by family members can also be subject to reduction, up to said limit and respecting the individual limit of 10, 000 euros.

• If the limit is exceeded, the excess is lost and cannot be applied in the following years.

If the 24, 250 euros limit is exceeded, family members who have contributed money can enjoy the reduction in proportion to their respective contributions.

Thus, if a person with disabilities and their two parents each contribute 10, 000 euros to the pension plan (30, 000 euros in total), the person can enjoy a reduction of 10, 000 euros, and the parents of 7, 125 euros each (24, 250 euros in total).