Calculation of Personal Income Tax (IRPF) withholding on the redemption of insured pension plans

The redemption of benefits from insured pension plans frequently raises questions regarding the correct way to apply Personal Income Tax (IRPF) withholding. A recent binding ruling from the Directorate General of Taxes (DGT) has clarified the procedure for determining the applicable withholding rate when the reduction provided for in current regulations applies.

What the DGT has ruled

The inquiry asked whether the withholding should be applied to the total gross amount or if it was possible to apply the 40% reduction directly to the withholding base. The DGT has determined that the benefits from these plans are considered employment income.

To calculate the withholding rate, the obligated party must follow these steps:

• Reduction for the rate: The total amount of remuneration must be reduced by applying the 40% reduction established in the twelfth transitional provision of the Law on Personal Income Tax (LIRPF).
• Application base: The withholding rate resulting from that calculation shall, however, be applied to 100% of the benefit, as this is the amount actually received by the beneficiary.

What this means for you

If you are an individual who is going to redeem an insured pension plan, this criterion is fundamental to avoid errors in the settlement. The regulations allow the 40% reduction to act as a mechanism to reduce the withholding percentage applied to you, but it does not reduce the gross amount upon which said percentage is calculated.

In practical terms, this implies that the withholding is not applied to the net amount after the reduction, but to the total benefit, using a lower tax rate thanks to the benefit of the reduction.

What you should do

In the event of this type of redemption, it is necessary to verify that the withholding calculation complies with this dual criterion: using the reduction to determine the rate and applying said rate to the total amount received. Since the application of the regulations can be complex, it is recommended to assess each particular situation to ensure that the tax treatment is correct according to the IRPF Law and its Regulations.