Pensions and Deferred Taxed Income
Personal pension schemes (retirement annuity accounts) and PRSAs enjoy significant tax advantages. Contributions to these pension schemes / vehicles are allowed as a deduction for income tax purposes, thereby affording relief at the holder’s top rate of tax. These reliefs have been curtailed, but largely remain in place.
The funds / policies themselves also benefit from exemption from most taxes. Accordingly, the fund accumulates tax free. There was a levy on funds during the financial crisis period.
With the exception of the lump sum that may be permitted under an occupational pension scheme), personal pension scheme or PRSA (usually on retirement, payments from the pension fund, whether converted into an annuity or an approved retirement fund, is subject to income tax on payments to the beneficiary. In essence, the substantial tax breaks on contributions are clawed back by the income tax on payments from the funds.
The 2011 legislation severely limited the tax-free lump sum that may be taken on retirement. After 3rd December 2010, only €200,000 is allowed tax-free. Above that and on sums up to €575,000, tax at the standard rate 20 percent applies. Sums above this are taxed at the recipient’s marginal tax rate.
Tax Relief of Personal pension schemes and PRSAs
There have always been caps on permissible contributions by employees and other eligible persons, based on percentages of the contributor’s employment or trade earnings for the relevant year. Further severe and limitations caps have been applied since the financial crisis. There are maximum percentages of taxable income that may be contributed.
Subject to the above cap, the maximum percentages of “relevant” earnings that may be contributed to a pension scheme are as follows:
- Under 30 years of age, 15%;
- 30 to 39 years of age, 20%;
- 40 to 49 years of age, 25%;
- 50 to 55 years of age, 30%;
- 55 to 59 years of age, 35%;
- Over 60 years of age, 40%.
The maximum amount income / salary on which a person may obtain tax relief for annual contributions to a personal pension, PRSA or an occupational scheme (as an employee) was limited in 2010, to €150,000. This limit was reduced to €115,000 in 2011. Earnings above this maximum do not count in the calculation of the maximum annual contribution.
Extent of Relief
Further contributions may be made in excess of the above limits. However, they do not qualify for tax relief in respect of that tax year.Unrelieved contributions can be carried forward, and they may be granted relief, where contributions in later years are less than the earnings cap.
Certain categories of persons, with shorter career spans, such as professional sports people, may make high levels of contributions at earlier ages.
Employer and employee contributions to a PRSAs are subject to this limit. Employer funded contributions to a personal pension would not be usual, but would in principle be treated in the same way, in so far as they might arise.
As and from 2011, relief from PRSI and Universal Social Charge did not apply to personal pension and PRSA contributions. Those levies remained payable on the contributed income Employer’s PRSI does not apply to employer’s contributions. Since 2016 USC does not apply to contributions.
The same limitations apply to employee contributions to occupational pension schemes. The earnings limit of €115,000 applies in respect of employee’s contribution. The limits do not appear to apply to employer funded contributions to an occupational pension scheme, which are limited by overall limits on the pension fund
In the case of contributions to PRSAs and personal pensions, the employment must be “non-pensionable”. This means that there must not be a superannuation scheme for service in that employment or office. Once there is a pension scheme in place in relation to the employment, the entitlement to make personal pension contributions to a pension policy does not apply.
Where the occupational benefits are limited to lump sums in the event of death or disability before 70, the scheme is sufficient to constitute “non-pensionable” employment. However, schemes that provide minimal retirement benefits may be such as exclude the right to contribute to a personal pension scheme.
Where an occupational pensions scheme does not provide the maximum Revenue limit benefits, an employee may make additional voluntary contributions (AVCs) to an AVC structure, which has many of the same features and same limits as a personal pension. In the same manner, the requirement that there be non-pensionable employment does not apply to PRSAs which are used as a quasi AVCs. Each may be used as a means of topping up the total pension fund, where the pensionable employment does not make the maximum provision possible under Revenue rules.
In order to qualify to contribute to a personal pension policy, the individual must have trading profits (self-employed) or earnings from employment, other than the pensionable employment. Pensionable employment is that where the employee is included in an occupational pension scheme other than a scheme that is limited to spouses or dependant’s pensions or a lump sum benefit on death.
Contributions to a retirement annuity contract/personal pension may be made by the employer or the employee. Contributions made by the employer are a benefit to the employee and would be taxable in the absence of tax relief. Employer’s contributions may be tax relieved, provided that they fall within the scope of employee’s available tax relief. Revenue may permit payment to be made on a net salary basis so as to avoid the withholding of income tax under the PAYE and subsequent reclaim.
Employees and proprietary directors of investment companies are excluded from entitlement to undertake a personal pension contract. Proprietary directors and employees are those who are directly or indirectly interested in more than 15% of the ordinary share capital of the relevant company.
Mechanics of Relief on Contributions
Tax relief is given on the contributions of premiums and payments. The insurance company or other provider issues a certificate which enables the person making contributions, to reclaim tax. The contributions reduce the total amount of taxable income and the income subject and USC.
The amount of tax relief on contributions is determined by reference to the individual’s net relevant income. Net relevant income refers to employment and trading income, subject to Irish tax. Investment income does not qualify. This is consistent with the principle that that pensions are intended to provide replacement income upon retirement from non-pensionable employment or a trade.
Contributions may be made until 31st October in the year following the tax year in which the trading income or earnings was earned. Accordingly, it relief can be backdated to the previous calendar tax year provided that contributions are paid before that date. This accords with the last date for reporting and returning taxable income for the previous year. They may be made up to the later date (mid-November) for electronic filing, where this applies.
Where the contributions paid exceed the contribution limit for tax relief, any unrelieved contributions can be carried forward to the next available tax year until all contributions have been given tax relief or until no source of relevant earnings exists.
Net Relevant Income on which Contributions Allowed
The entitlement to make contributions to a PRSA or a personal pension / retirement annuity contract is dependent upon having “relevant earnings”. In broad terms, relevant earnings are employment income or trading/professional income, subject to Irish tax. Tax relief of €1,525 (adjusted from time to time) is allowed for annual contributions to a PRSA, irrespective of income / earnings.
Net relevant earnings comprise the trading and services income of self-employed persons. They are effectively the taxable trading profits. They are net of losses, tax deductible interests. and capital allowances, which are deducted in the calculation of taxable profits.
The net relevant earnings of employees comprise all taxable employment income and benefits in kind of non-pensionable employment. Allowable employment expenses which are not taxed are not reckonable.
Husbands and wives are considered separately. This is the case, even if they are jointly assessed.
Deductions from Income in Calculating Limits
Most deductions allowed in calculating taxable income are excluded. The rules are complex and reflect the fact that tax legislation treats different kinds of deductions in different manners. Some are deductible at an earlier stage in the process of reckoning final taxable income, whereas other deductions are allowed in a different manner.
The following are deductible in calculating net relevant income.
- tax deductible covenants; these are now subject to severe restrictions including, in particular, that they may not exceed 5% of income and may only be paid to limited categories of persons;
- maintenance payments to estranged and divorced spouses (not children);
- losses and capital allowances allowed in calculating trading and professional services income. Losses may be set off against total income or carried forward. This will impact net relevant income.
Contributions to PRSAs enjoy tax relief to the same extent as personal pensions. They must be made by the due tax return filing day in respect of the relevant tax year.
A minimum allowance of €1,525 per annum may be made to a PRSA by all individuals, irrespective of whether he or she has net relevant earnings. Subject to this, the personal pension provisions apply.
Employers may contribute to a PRSA within the above limits. The possibilities of contribution are significantly more limited than in the case of occupational pension schemes. The total contributions of employer and employee must not exceed the relevant thresholds. The employer contributions will usually be deductible in calculation its tax liability by it.
PRSAs may be used for the purpose of making additional voluntary contributions where there is an occupational pension scheme. The total contributions must not exceed the overall fund and benefit limitations applicable to occupational pension schemes.
References and Sources
Irish Pensions Law & Practice Buggy, Finucane & Tighe 2nd Ed (2005) Ch.2
Pensions; Revenue Law and Practice (ITI) Dolan et al (2013) Ch.6
Trustee Handbook the Pensions Authority 5th Ed 2016
Statutory Guidance the Pensions Authority (Various)
Pensions Law Handbook 12 Ed Nabarro Nathanson Bloomsbury
Corporate Insolvency 6e: Employment & Pension Rights (6th Revised edition)
Occupational Pensions (Subscription) Lexis Nexis
Pensions Law and Practice with Precedents (Subscription) Sweet & Maxwell
Sweet & Maxwell’s Law of Pension Schemes (Subscription)
The Guide for Pension Trustees World Economics Ltd
The Guide for Pension Trustees website, you can:
Tolley’s Pensions Law Looseleaf Service (Subscription)
Pensions Act, 1990
Pensions (Amendment) Act, 1996
Pensions (Amendment) Act, 2002
Pensions (Amendment) Act, 2006
Social Welfare and Pensions Act, 2005 (Part 3)
Social Welfare Reform and Pensions Act 2006
Social Welfare and Pensions Act 2007
Social Welfare and Pensions Act 2008
Social Welfare (Miscellaneous Provisions) Act 2008
Social Welfare and Pensions Act 2009
Social Welfare and Pensions (No. 2) Act 2009
Social Welfare (Miscellaneous Provisions) Act 2010
Social Welfare and Pensions Act 2010
Social Welfare and Pensions Act 2011
Social Welfare and Pensions Act 2012
Social Welfare and Pensions (Miscellaneous Provisions) Act 2013
Social Welfare and Pensions Act 2013
Social Welfare and Pensions (No. 2) Act 2013 49/2013
Social Welfare and Pensions Act 2014
Social Welfare and Pensions (No. 2) Act 2014 41/2014
Social Welfare (Miscellaneous Provisions) Act 2015 12/2015
Social Welfare and Pensions Act 2015 (Part 3)