In December 2020, the Spanish government passed Law 11/2020, introducing changes to tax relief on contributions to individual and occupational tax-qualified pension plans.

With effect from 1 January 2021, the general limit on contributions to supplementary pension plans that are deductible for income tax is the lower of:

• 30% of total net income received by the individual in the year, and
• €2,000 per year (reduced from €8,000 previously).

For tax-qualified occupational pension plans, the combined total employer and employee contributions are tax deductible up to €10,000 per year, if the additional €8,000 is contributed to the plan by the company.

Where the taxpayer also contributes to their spouse’s pension plan and the taxpayer’s spouse has no income or an income of less than €8,000 per year, the maximum tax-deductible limit for those contributions is reduced from €2,500 to €1,000 per year.

The separate tax-deductible limit of €5,000 per year in respect of premiums paid by the company for group long-term disability insurance in respect of their employees remains in place.

With these changes Spain’s government has made a clear move to encourage employer-sponsored retirement savings, while encouraging higher paid individuals to seek alternative options and diversify their investments for retirement savings above the new, lower €2,000 limit for personal pension contributions.

Companies will wish to review the contributions to their tax-qualified occupational pension plans to confirm the impact of these tax changes and potentially consider changes where an alternative contribution structure may offer their employees more tax efficient retirement savings opportunity.

Example

The Spanish operation of a large multinational operates a tax-qualified pension plan whereby the employer makes contributions of 10% of pensionable salary, while employees contribute 3%.  Pensionable salary is defined as annual salary above the maximum Spanish social security contribution base (with this base being around €49,000 per year in 2021).

This means that currently only those employees with annual salary of more than around €115,000 would be likely to be affected by the changes in the law (as the new limit of €2,000 would bite at that salary point with respect to the employee’s 3% contribution).

Even though this is a simple worked example, it can indicate that these changes may only affect relatively few employees, and these might be the most senior staff (for whom supplementary arrangements might already be in place for handling excess contributions).