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Practical manual for Income Tax 2024. Part 1

Example: contributions to social security systems

Mr. SMG single, contributed in 2023 the amount of 2,000 euros to the employment system pension plan promoted by the company where 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 the PIT from the 2023 financial year, reduce over 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.

For the 2024 financial year, the taxpayer made contributions to the private pension plan amounting to €500. For its part, the company has made contributions of 1,400 euros to its employee 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 2,300 euros to the company's employment system pension plan.

Determine the applicable reduction for contributions to pension plans in the 2024 fiscal year, knowing that in that year the taxpayer obtained total employment income from the company "RP" where he works of 35,000 euros, and that his net employment income 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 2024 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 2024: 500 euros.

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

      Therefore, contributions to the Individual Pension Plan made in 2024 are within the aforementioned limit.

    • Employer contributions and employee contributions under the Flexible Compensation Plan made in 2024: 1,400 euros (contributions) + 2,300 euros (“Flexible Remuneration System” contributions) = 3,700 euros.

      The previous general limit (1,500 euros) can be increased up to 8,500 euros provided that such increase comes from employer contributions to employment systems or from contributions from the worker to the same employment system for an amount equal to or less than the amount resulting from the table included in article 52.1.1 of the Law of PIT.

      For the purposes of this additional limit, as Mr. SMG has obtained total earnings from work in the year of less than 60,000 euros and the annual amount of the contribution made by the company does not exceed 1,500 euros, the maximum amount that he can contribute to the occupational pension plan is:

      1,250 euros + 0.25 (1,400 euros - 500 euros) = 1,475 euros.

      In view of the above, with regard to the reduction in contributions made by Mr. SMG to the employment pension plan (2,300 euros), we find the following:

      • Up to 1,475 euros, corresponding to the maximum contributions of the worker calculated above, would be included in the increase of the general limit for contributions of the worker to the same social security system and,

      • The remaining 825 euros (2,300 – 1,475) 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 group dependency insurance made in 2024: 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. Premiums paid in 2024 are then within this limit.

  2. Determination of the joint maximum limit for reductions :

    The maximum joint limit for reductions (both for the excess corresponding to the 2023 financial year and for contributions to pension plans made in the 2024 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 contributions from the worker to the same social security instrument for an amount equal to or less than the amounts resulting from the table provided for in article 52.1.1 of the Law of the PIT based on the annual amount of the business contribution and the gross income from work obtained by the taxpayer from the company making the 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 2023: 5,000 euros

    The outstanding amount to be reduced from 2023, which amounts to €5,000 (€3,500 for contributions and €1,500 for contributions to collective dependency insurance) does not exceed the maximum joint reduction limit applicable in 2024 (which is €9,150) and is applied first to the taxable base and for its total amount.

    Once the excess from the 2023 tax year has been applied, the amount entitled to be reduced from the tax base for contributions and contributions corresponding to the 2024 tax year cannot exceed 4,150 euros (9,150 maximum joint limit – 5,000 excess from the previous tax year).

  4. Reduction for contributions and contributions corresponding to the 2024 fiscal year:

    9,150 euros (30% RT) – 5,000 euros (excess fiscal year 2023) = 4,150 euros

  5. Amounts subject to reduction in the tax base for contributions and contributions in 2024:

    • Amounts from contributions to the private pension plan: 500 euros.

    • Amounts from business contributions: 1,400 euros.

    • Amounts contributed by the worker under the concept of Flexible Remuneration: 2,300 euros.

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

    Total contributed: 5,200 euros.

Of the total contributed in 2024, which amounts to 5,200 euros, it is only possible to reduce up to 4,150 euros (9,150 euros – 5,000 euros of excess from the 2023 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, it has been decided to reduce the employer contributions and contributions 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 first applying the amounts corresponding to these premiums.

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

EXCESSES FROM THE 2024 FINANCIAL YEAR TO BE REDUCED IN THE NEXT 5 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:

  • 4,200 euros contributed - 4,150 (remaining joint limit) = 50 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 2023 = -5,000

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

  • Reduction for contributions and contributions 2024(*) =  -4,150

    • Contributions made (500 + 1,400 + 2,300 + 1,000) = 5,200

    Contributions made = 500

    Business contributions = 1,400

    Flexible remuneration = 2,300

    To the collective dependency insurance = 1,000

    • Applicable limit = 4,150

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

Excesses for the year 2024:

For contributions and contributions = 50

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 made in 2024 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.