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Practical Guide to Income Tax 2025. Part 1.

Example: contributions to social security systems

Mr. SMG Single, he contributed the amount of 2,000 euros in 2024 to the employment pension plan promoted by the company he works for. 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 statement of IRPFABBR of the 2024 fiscal year, reduce in the following five fiscal 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 group dependency insurance.

With regard to the 2025 tax year, the taxpayer has made contributions to the private pension plan amounting to 500 euros. For its part, the company has made contributions of 1,400 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 2025 tax year, knowing that in that year the taxpayer obtained gross 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. Verify that the amounts contributed in 2025 do not exceed the maximum annual contributions allowed by Article 51.6 and the Sixteenth Additional Provision of the Personal Income Tax Law:

    • Contributions to the individual pension plan made in 2025: 500 euros.

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

      Therefore, contributions to the individual pension plan made in 2025 are within the aforementioned limit.

    • Company contributions and employee contributions under the Flexible Compensation Plan made in 2025: 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 long-term care insurance paid in 2025: 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. Therefore, the premiums paid in 2025 are within this limit.

  2. Determination of the joint maximum limit for reductions :

    The maximum combined limit for reductions (both for excesses corresponding to the 2024 financial year and for contributions to pension plans made in the 2025 financial year) is the lower 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 taxpayer's general tax base (30,500 euros)

      Note that the taxable 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 of 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 2024: 5,000 euros

    The amount pending reduction from 2024, which amounts to 5,000 euros (3,500 euros for contributions and 1,500 euros for contributions to the group dependency insurance) does not exceed the maximum joint reduction limit applicable in 2025 (which is 9,150 euros) and is applied first to the taxable base and for its total amount.

    Once the excess from the 2024 financial year has been applied, the amount eligible for reduction in the taxable base for the contributions and payments corresponding to the 2025 financial year cannot exceed 4,150 euros (9,150 maximum joint limit – 5,000 excesses from the previous financial year).

  4. Reduction for contributions and payments corresponding to the 2025 fiscal year:

    9,150 euros (30% RT) – 5,000 euros (excess 2024 fiscal year) = 4,150 euros

  5. Amounts subject to reduction in the taxable base for contributions and payments in 2025:

    • 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 2025, which amounts to 5,200 euros, it is only possible to reduce it to 4,150 euros (9,150 euros – 5,000 euros of excess from the 2024 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 FISCAL YEAR 2025 TO BE REDUCED IN THE FOLLOWING 5 FISCAL 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 2024= -5,000

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

  • Reduction for contributions and payments 2025(*) =  -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 2025 fiscal year:

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 2025 to the set of social security instruments, so it can only be reduced up to that amount, 4,150 euros, leaving the excess pending reduction for the following 5 years as specified above.