- The general cap on the tax reduction falls by a quarter compared with the previous year.
- Employer contributions allow the room to be extended well above the general limit.
- It is worth recalculating annual savings and comparing alternatives before the next tax return.
Law 22/2021 of 28 December on the State Budget for 2022, published in the BOE on 29 December, lowers from 1 January the limit on pension plan contributions that entitles taxpayers to reduce their taxable income. The combined cap for individual and employer-sponsored plans falls from €2,000 to €1,500 a year, or to 30% of net employment and business income when that amount is lower.
An additional margin of up to €8,500 exists, provided it comes from employer contributions or from employee contributions that do not exceed the employer’s. It is the second cut in a row: in 2021 the limit had already dropped from €8,000 to €2,000. For anyone who uses these plans as a savings and tax-management tool, the calculation of how much it pays to contribute each year changes once again.
How the reduction works
Contributions to a pension plan are deducted from the general taxable base of personal income tax, so the tax saving depends on each taxpayer’s marginal rate. By way of example, with a marginal rate of 40%, a contribution of €1,500 means a tax bill up to €600 lower. The higher the rate, the greater the effect, which is why the lower cap mainly affects the upper brackets.
It is worth remembering that this is a deferral and not an exemption. When the plan is redeemed, whether as a lump sum or as income, the benefits are taxed as employment income. The real advantage lies in the difference between the rate at which the deduction is made today and the rate at which tax will be paid on redemption, plus any return the savings generate in the meantime.
The role of the employer
The additional €8,500 margin makes employer-sponsored plans the most efficient route for larger contributions. The tax authority’s directorate for tax rulings has clarified that the general €1,500 limit covers both the taxpayer’s own contributions and employer contributions, and that the excess over that figure can only be used when it comes from the employer or is matched by it.
In practice, if the employer contributes €4,250, the employee can contribute up to another €4,250 and reach the €8,500 total. For companies that offer employer plans or are considering them, this opens a tax-advantaged form of remuneration for staff and for shareholders who work in the business, provided it is designed carefully and well documented.
What to review
The first step is to check the regular contributions already scheduled for 2022, because many were set under the previous limit. Amounts above the maximum will not qualify for the reduction, and it is best to spot this early rather than build up contributions with no tax benefit. Then consider whether the amount still fits the savings strategy, taking into account liquidity, time horizon and the tax treatment of redemption.
It is also a good moment to compare other long-term savings and investment options, which are not subject to this limit, and to review the company’s employer plans. Every case depends on income, marginal rate, age and goals, so the prudent course is to consult your adviser before changing amounts or moving savings from one vehicle to another. And if income or family circumstances have changed, it is also worth recalculating which family member gets the greater tax advantage from contributing.
A lower cap does not take away the plan’s usefulness as a long-term tool, but it does require recalculating how much it pays to contribute each year.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
