- A person’s own contributions reduce the tax base by up to €2,000, and employer contributions allow a total of €10,000.
- The regulation clarifies to which kind of contribution the excess is attributed when limits are exceeded.
- Excesses from previous years are reduced first, a detail that matters when planning.
On 20 October 2021 Royal Decree 899/2021 of 19 October was published in the BOE, amending the Personal Income Tax Regulation on reductions for contributions to social-welfare schemes and on payments on account. It came into force the next day. It is a technical rule, but it affects the tax planning of millions of savers and of companies that sponsor occupational plans. In general terms, the better these limits are understood, the lower the risk of contributing too much and being left with excesses that cannot be used.
The reform develops the changes introduced by the 2021 Budget Law, which cut to €2,000 the annual limit on individual contributions to pension plans but allowed €10,000 in total if employer contributions of up to €8,000 are added. The regulation specifies how those rules should apply when limits are exceeded or contributions from different years coincide.
Own and employer contributions
The law distinguishes between two types of contribution. Those of the taxpayer, which reduce the taxable base by up to €2,000 a year, and contributions by the sponsor, that is, the company, which are attributed to the worker as employment income and have their own additional limit of up to €8,000. Together they cannot exceed €10,000 a year in reduction. That is why it is worth knowing, besides what one contributes, what the company has contributed on one’s behalf.
When the overall limit is exceeded, the regulation clarifies that the excess is attributed to the taxpayer’s contributions. That precision matters because it determines which part can remain pending reduction in later years and avoids divergent interpretations between taxpayers, fund managers and the tax administration.
How excesses are calculated
If in a year contributions from that year coincide with excesses pending from previous years, the regulation provides that contributions from previous years are deemed reduced first. The order is not a minor point: it determines how much of the year’s limit is used up and how much remains available for new contributions.
The rule also includes a transitional provision and adjusts some rules on payments on account. Overall, it offers more certainty to those with a history of contributions and accumulated excesses, who now know in what order they will be applied. Even so, the exact calculation requires keeping each year’s figures in mind. Fund managers are expected to adapt their certificates to these rules.
What to review
Before the year ends, it is worth calculating the available margin, taking into account what the company has contributed, one’s own contributions and the excesses pending from previous years. It is also a good time to check whether employer contributions are properly reflected in the payslip and in the fund manager’s certificates. Anyone with excesses pending from previous years should also check how much remains to be used and over how many years.
The draft 2022 Budget provides for lowering the individual limit to €1,500 and raising the employer one to €8,500, without changing the €10,000 total, according to the Government. This note is for information only and neither recommends contributing nor refraining: the decision depends on each person’s situation and should be taken with advice. Withdrawals and benefits from these plans are taxed as employment income, so the timing and form of payment should also be taken into account.
In social-welfare savings, knowing the limits and the order in which they apply is part of planning well.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
