What are the tax savings associated with a pension plan

A pension plan does not just help ensure ongoing income during your retirement, it can also provide tax savings during your working years

Spain imposes high levels of taxes on the income you earn from working. For example, if your tax base for 2017 was €20,000 per year, 24% of this amount would be withheld for tax purposes. However, did you know that you can reduce your taxable income level on your annual tax return by investing in a pension plan and, as a result, pay lower taxes? In this article, we will provide further details about the tax savings you can obtain by investing in a pension plan.

Spain's tax authority allows you to deduct your contributions to a pension plan from your income on your annual tax return. You can subtract an amount of up to €8,000, or 30% of the net income you earn from working and from other economic activities. You can directly subtract the money you invest from the taxable income reported on your income tax return, and by doing this, take advantage of tax benefits simply by planning for your retirement.

Therefore, the tax savings generated by a pension plan represent more than just a deduction; they are produced by a direct “subtraction” applied to your taxable income.

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This is how you can save on taxes by investing in a pension plan

Every year, employees who are required to file an annual tax return ask themselves the same questions: how can I lower my taxes? There are many possible ways to save on the taxes you owe, but one of the best of these is to take advantage of the reduction allowed for contributions made into a pension plan.

In other words, Spain's government rewards those who are planning for their future by funding a pension plan during their working years, and it does this by allowing a direct reduction on the taxable income amount used to calculate personal income tax. On the annual tax return form, these investments are entered in boxes 400 and 409, which causes them to be directly subtracted from the final taxable income declared.

Tax savings in numbers

It is easy to find out how much you could save on taxes with a pension plan. Therefore, BBVA has designed a simple tool that anyone can use to find out exactly how much they could save on their taxes.

For example, in just a few clicks, our tax deduction calculator indicates your tax savings based on how much you plan to invest. For example, with a pension plan that receives an investment of €2,000 per year (€166.60 each month), the savings with a income tax rate of 24% (under €20,200 in annual income) would be €480. Or in other words, an amount almost equal to three of these monthly contributions.

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The direct reduction allowed for contributions made into a pension plan can significantly decrease the amount of taxes you owe. As you can see for yourself by using this calculation tool, the more money you invest in the plan, the more savings you will receive when filing your annual tax return. In other words, each euro invested into a pension plan is directly subtracted from the total amount of the income you are charged taxes on, so the final amount of your tax is lower as well.

The BBVA range of pension plans offers attractive and flexible programs for investing your money. You can learn more about the pension plans we offer at our website, then enter your own numbers into our calculation tool. Start saving on your income taxes on your next annual tax return, just by planning ahead for your retirement.

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