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Practical manual for Income Tax 2022.

Example: contributions to social security systems

Mr. SMG single, in 2021 he contributed the amount of 2,000 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 4,000 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 IRPF for the year 2021, to reduce in the following five 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 the collective dependency insurance.

For the 2022 financial year, the taxpayer has made contributions to the private pension plan amounting to 500 euros. For its part, the company has made contributions of 1,500 euros to its employment pension plan and 1,000 euros to the collective dependency insurance.

Furthermore, the company where Don SMG works has implemented, in agreement with its employees, a "Flexible Remuneration System", under which they can replace monetary remuneration with remuneration in kind or remuneration in kind with other remuneration provided that the total amount allocated to flexible remuneration does not exceed 30% of their total annual remuneration. Specifically, employees are offered the opportunity to contribute amounts on their own behalf to the same pension plan of the company's employment system. Based on the above, Don SMG requests that they contribute 2,500 euros to the company's employment system pension plan.

Determine the applicable reduction for contributions to pension plans in the 2022 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. Check that the amounts contributed in 2022 do not exceed the maximum annual contributions permitted by article 51.6 and the Sixteenth Additional Provision of the Personal Income Tax Law:

    • Contributions to the Individual Pension Plan made in 2022: 500 euros.

      The maximum annual amount of contributions and employer contributions is 1,500 euros.

      Therefore, contributions to the Individual Pension Plan made in 2022 are within the aforementioned limit.

    • Business contributions and employee contributions under the Flexible Remuneration Plan made in 2022: 1,500 euros + 2,500 euros.

      The previous limit (1,500 euros) is increased by 8,500 euros provided that such increase comes from employer contributions to employment systems or from employee contributions to the same employment system for an amount equal to or less than such employer contributions.

      Regarding the employee's contributions to the employment pension plan (2,500 euros):

      • Up to 1,500 euros, which is the amount of employer contributions, would be included in the increase in the limit.

      • The remaining 1,000 euros (2,500 – 1,500), which exceed the amount of employer contributions, are subject to the general limit, taking into account that this, the general limit, has already been reduced by the amount of contributions to the Individual Pension Plan (1,500 – 500 = 1,000).

      Therefore, all amounts for contributions and contributions are within the annual limit.

    • Premiums for collective dependency insurance made in 2022: 1,000 euros.

      For collective dependency insurance, an additional limit of 5,000 euros per year is established for the premiums paid by the company. The premiums paid in 2022 are then within this limit.

  2. Determination of the joint maximum limit for reductions :

    The maximum joint limit for reductions (both for the excesses corresponding to the 2021 financial year and for contributions to pension plans made in the 2022 financial year) is the lowest of the following amounts:

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

    2. Limit on contributions and contributions: 10,000 euros for contributions and contributions + 5,000 euros for collective dependency insurance.

      • 1,500 euros per year for contributions and contributions.

      • Increase of the previous amount by 8,500 euros, provided that such increase comes from employer contributions, or from employee contributions to the same social security instrument for an amount equal to or less than the respective employer contribution.

      • Additionally, 5,000 euros for contributions to collective dependency insurance.

    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 2021: 5,000 euros

    The amount pending reduction from 2021, 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 2022 (which is 9,150 euros) and is applied first to the taxable base and for its full amount.

    Once the excess for the 2021 financial year has been applied, the amount entitled to be reduced in the tax base for the contributions corresponding to the 2022 financial year cannot exceed 4,150 euros (9,150 maximum joint limit – 5,000 excess from the previous financial year).

  4. Reduction for contributions and contributions corresponding to the 2022 fiscal year: 4.150 euros

  5. Amounts eligible for reduction for contributions in 2022:

    • Amounts from contributions: 500 euros.

    • Amounts from business contributions: 1,500 euros.

    • Amounts contributed by the worker under the concept of Flexible Remuneration: 2,500 euros.

    • Amounts from contributions to collective dependency insurance: 1,000 euros.

    Total contributed: 5,500 euros.

Of the total contributed in 2022, €5,500, it is only possible to reduce up to €4,150 (€9,150 – €5,000 of excess from the 2021 financial year), which are distributed as follows:

  • For business contributions and contributions 4,150 euros.

  • For contributions to collective dependency insurance: 0 euros.

Note: As regards the distribution of the 4,150 euros, the employer contributions and contributions are reduced first, as this is more beneficial for the taxpayer, since there is a separate limit for collective dependency insurance, but nothing prevents the taxpayer from applying the amounts corresponding to these premiums first.

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

EXCESSES FROM THE 2022 FINANCIAL YEAR TO BE REDUCED IN THE FOLLOWING 5 FINANCIAL YEARS

By reducing the amount of 4,150 euros in contributions, the following amounts would remain pending for the next five years, completing the corresponding subsections of Annexes C.3 and C.4 of the declaration:

  • 4,500 euros contributed - 4,150 (remaining joint limit) = 350 euros of contributions.

  • 1,000 euros in contributions to collective dependency insurance.

Since in future years the application of excesses does not require distinguishing between contributions and contributions, it is not necessary to know which part corresponds to each concept; Only contributions to collective dependency insurance have a differentiated limit.

In short:

General tax base = 30,500

Reduction for contributions and business contributions to pension plans:

  • Reduction of excesses 2021 = -5,000

  • Remaining tax base (30,000 - 5,000) = 25,500

  • Reduction for contributions and contributions 2022 (*) =  -4,150

    • Contributions made (500 + 1,500 + 2,500 + 1,000) = 5,500

    Contributions made = 500

    Business contributions = 1,500

    Flexible remuneration = 2,500

    To the collective dependency insurance = 1,000

    • Applicable limit = 4,150

General taxable base (30,500 - 5,000 - 4,150) = 21,350

Surpluses for fiscal year 2022:

For contributions and contributions = 350

For contributions to collective dependency insurance = 1,000

(*) The amount corresponding to the remainder of the joint limit is less than the sum of the contributions and contributions made in 2022 to the set of social security instruments, so it can only be reduced up to said amount, 4,150 euros, with the excess pending reduction for the following 5 years as previously specified.