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Practical manual for Income Tax 2021.

Example: contributions to social security systems

Mr. SMG single, in 2020 he contributed the amount of 3,000 euros to the pension plan of the employment system whose promoter is the company in which he works. For its part, the company made a corporate contribution of 2,600 euros to the aforementioned pension plan and 2,000 euros to a collective dependency insurance contract that it contracted to implement the commitments assumed with its staff in the agreement.

Not being able to reduce the tax base for all the contributions and contributions, Mr. SMG requested, in his individual declaration of the PIT from the 2020 financial year, reduce in the following five financial years the outstanding excess amounting to 3,500 euros for contributions to the pension plan, and 1,500 euros for the employer's contribution to collective dependency insurance.

As regards the 2021 financial year, the taxpayer has made contributions to the pension plan amounting to 2,000 euros and the company has made contributions to the aforementioned plan amounting to 3,500 euros and 2,000 euros to the collective dependency insurance contract that it contracted to implement the commitments assumed with its staff in the agreement.

Determine the applicable reduction for contributions to pension plans in the 2021 financial year, knowing that the taxpayer's net income from work amounts to 30,500 euros and coincides with his general tax base, which is also 30,500 euros.

Solution:

GENERAL TAXABLE BASE = 30,500

REDUCTIONS FOR CONTRIBUTIONS AND CONTRIBUTIONS TO THE PENSION PLAN

The steps to follow are those:

  1. Determination of the amounts pending reduction from 2020 corresponding to contributions and contributions to pension plans 

    Since among the amounts pending reduction corresponding to 2020 there are contributions made by the taxpayer and contributions imputed by the promoter, it must be determined, first of all, which amount corresponds to business contributions and which to direct contributions from the taxpayer.

    For these purposes, in accordance with the nineteenth transitional provision of the Regulations of PIT, it will be understood that the amounts pending reduction correspond to contributions imputed by the promoter, with the limit of the contributions imputed in said tax periods. Any excess over this limit will be deemed to correspond to contributions from the taxpayer.

    Therefore:

    1. Excess for 2020 fiscal year corresponding to business contributions = 2,600

    2. Excess for 2020 fiscal year corresponding to direct contributions (3,500 – 2,600) = 900

    3. Total (2,600 + 900) = 3,500

  2. Joint ceilings for reductions

    As a joint maximum limit for reductions (both for the excesses corresponding to the 2020 financial year and for contributions to pension plans made in the 2021 financial year) the lowest the following amounts is applied:

    1. Percentage limit: 30% of 30,500 euros of net work income = 9,150 euros

    2. Contribution and contribution limits

      • 2,000 euros for all contributions and contributions, without prejudice to the fact that the amount of the latter may be increased by an additional 8,000 euros

        Taking these limits into account, the reductions will be applied first to the 2020 excess and then to the 2021 quantities (see steps 3 and 4).

      • Additional limit of 5,000 euros for premiums for collective dependency insurance: In this case 2,000 euros from the 2021 financial year + 1,500 from the previous financial year 2020 = 3,500 euros which is within the additional limit of 5,000 euros

    3. The amount of the general tax base of taxpayer (30,500 euros)

      Please note that the tax base cannot be negative as a result of the reductions, so the amount of the general tax base must also be taken into account as a limit for the reduction.

    Therefore , in this case the maximum joint limit of the reduction will be the percentage limit of 30% on the work income which amounts to 9,150 euros.

  3. Reduction of excesses corresponding to the previous year 2020: 5,000 euros

    The amount pending reduction from 2020, which amounts to 5,000 euros (3,500 euros for contributions and 1,500 euros for contributions to collective dependency insurance) does not exceed the maximum joint reduction limit applicable in 2021 (which is 9,150 euros) and is applied first to the taxable base and for its full amount.

    Once the excess for the 2020 financial year has been applied, the remainder of the general tax base must be determined in order to make the corresponding reduction for contributions to pension plans corresponding to the 2021 financial year. Therefore:

  4. Reduction for contributions and contributions corresponding to the 2021 financial year: 4.150 euros

    Having first reduced the outstanding excesses from the 2020 financial year, the amount entitled to reduce the tax base for all contributions and contributions corresponding to the 2021 financial year cannot exceed 4,150 euros (9,150 maximum joint limit – 5,000 excesses from the previous financial year).

    Since the latter amount (4,150 euros) is less than the sum of the contributions and contributions made in 2021 to the pension plan and to the collective dependency insurance that may be subject to reduction (1,100 for contributions + 3,500 for contributions + 2,000 for collective dependency insurance = 6,600), its amount must be distributed in proportion to the amounts respectively contributed:

    Proportional distribution:

    1. For contributions to the pension plan (4,150 x 1,100) ÷ 6,600 = 691.66
    2. For business contributions (4,150 x 3,500) ÷ 6,600 = 2,200.75
    3. For contributions to collective dependency insurance (4,150 x 2,000) ÷ 6,600 = 1,257.57

GENERAL TAXABLE BASE (30,500 – 9,150) = 21,350

EXCESSES FROM THE 2021 FINANCIAL YEAR TO BE REDUCED IN THE FOLLOWING 5 FINANCIAL YEARS

The amounts contributed that could not be subject to reduction in the tax base by applying the percentage limit of 30% applied in this case may be reduced in the following five years.

In this case, the excesses to be reduced in the following years will be:

  • For contributions to the pension plan 2,000 - 691.66 = 1,308.34
  • For business contributions 3,500 - 2,200.75 = 1,299.25
  • For contributions to collective dependency insurance: 2,000 - 1,257.57 = 742.43

The amount of these excesses may be reduced in the following five financial years by completing the corresponding subsections of Annexes C.2 and C.3 of the declaration.