€10K PRSA example, doesn't sound all that great a deal

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Thanks very much I understand now.
I was thinking that it would be money taken from your pay without you ever seeing it.
 

Belated response but I have come to the conclusion that, in fact, they give you relief of 32%, ie not 40% as is implied.

Say that on the marginal €12,500 of your annual PAYE salary, you are deducted 40% in income tax, 8% in USC and 4% in PRSI.
So you are deducted €6,500, comprising €5,000 tax and €1500 in combined USC and PRSI.
This would leave you with €6,000 to put in your pocket or €500 every month.

Instead of taking the money you decide to have it put into AVCs every month.
At the end of the year you will have put in €6000 and the government will put in €4,000 in refunded tax
(because they calculated that you had paid 40% income tax on an imaginary €10,000 gross).
So they are with verbal sleight-of-hand, diddling you out of the €1,000 you actually paid in income tax on the extra €2500 above €10,000.

The €1,500 PRSI and USC have to be paid in any case as you say but not considering them when working out the tax refund leads to an incorrect result.
 
jimmij said:
Belated response but I have come to the conclusion that, in fact, they give you relief of 32%, ie not 40% as is implied.
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This is incorrect. If you paid 40% tax on money which is then paid into a pension and the amount is under your age related tax relief percentage amount then you get 40% of it back. If you paid 20% then you get 20%. If you paid a mix of the two rates then you get whatever tax you actually paid back.
You're comparing apples with oranges - or €12.5K with €10K.
 
I don't get what you are saying.

If you had marginal earnings of 12500 euro and make AVCs of 10000 euro, you still remain with marginal earnings of 2500 and these marginal earnings remain liable to 40% tax

There is no sleight of hand here.

Where the sleight of hand occurs is when you eventually drawdown your pension and you are charged USC and Prsi on the drawdowns.

This is a double taxation because you have already paid USC and Prsi on the AVC contributions.
 
So using your figures, you can have 6k in your hand or 10k in your pension.

Assuming that you make the contribution immediately before your retirement, you quickly get 2.5k back tax free so the nett cost to you is 3.5k in return for which you get 7.5k in your pension. This will grow tax free indefinitely and you will pay tax at your marginal rate on drawdown.

It's hard to envisage any scenario where that is a poor deal. Even in the most severe scenario which is unrealistic, you will benefit. In any reasonable scenario, the benefits are significant.

Yes - you get relief from tax but not from PRSI and USC. You can call that a 'diddle' or a benefit. The overall result is positive either way.
 
I don't disagree with anything you guys say but I am still inclined to
think that the way the tax refund is typically presented is misleading.
Whether it's deliberately so or not, I don't know.

By pitching the refund rate at the taxpayer's marginal tax rate it's designed to suggest to people
that you get ALL your income tax back.
So you put in 6K from your pocket into an AVC and the 4K you originally paid in tax is refunded.
Sounds great except that to have 6K in your pocket you actually had to pay 5k in income tax (at 40% of a higher figure).

So you're only getting 80% of your tax back and the real income tax refund rate is 32%.
 
jimmij said:
I don't disagree with anything you guys say but I am still inclined to
think that the way the tax refund is typically presented is misleading.
Click to expand...
It's not.
jimmij said:
By pitching the refund rate at the taxpayer's marginal tax rate it's designed to suggest to people
that you get ALL your income tax back.
Click to expand...
You do, assuming that the contributions for the year are under the relevant age related pension contribution tax relief limit.
Are you mixing up income tax and PRSI/USC or something? I don't understand your figures otherwise.
 
ClubMan said:
It's not.

You do, assuming that the contributions for the year are under the relevant age related pension contribution tax relief limit.

Are you mixing up income tax and PRSI/USC or something? I don't understand your figures otherwise.
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Hi Clubman
I don't think that I am.
I find it easiest to make my point via an example.
Say the top €12,500 of a person's income is liable for 40% Tax, 4% PRSI and 8% USC.
After all deductions (€5,000 tax, €500 PRSI and €1,000 USC) this leaves them with a net of €6,000
This then then put into an AVC and the government adds back €4,000 in a tax refund which is
€1,000 less of a refund than they'd earlier been deducted in tax.
 
You do get all your income tax back.
You are correct that you don't get all Irish levies and deductions back.

In the good old days you also got your prsi refunded.

Then they invented the USC and no refund is given for this.

Now there is sleigh of hand regarding double taxation of USC and Prsi on pension drawdowns.

There was also sleight of hand for 5 years when the government stole funds from private pensions.

The reason given at the time to justify this pension theft was because the public finances were in an emergency situation.

Now when the public finances are in large surplus the present government has made no attempt to return the stolen private pension money.

The raid on the private pensions was implemented by a Fine Gael / Labour government.

The USC was invented by a Fianna Fail government.

You will have the opportunity to deal with these parties on 29th November.
 
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jimmij said:
I am still inclined to
think that the way the tax refund is typically presented is misleading.
Click to expand...

I suppose it depends on where you get your information. I just did a Google for 'tax refund on pension contributions' and the first link at the top of the result page is this.

I didn't even need to scroll down to get to the part where it says:

'Income Tax relief is given at your ‘marginal’ (highest) tax rate. There is no relief from Universal Social Charge (USC) or Pay Related Social Insurance (PRSI) for employee pension contributions.'

I can accept that a lot of people probably don't know this but I don't think you can blame the authorities for their financial apathy.

That's a bit like Homer blaming Mr Burns cos nobody told him 'inflammable' and 'flammable' mean the same thing...
 
No I understand that the PRSI and USC aren't refunded. It's just that not all the tax is refunded which I find misleading. As per my example 4 posts up, you pay 5k in tax but only get 4k back.
If you charge tax at 40% on 12.5K then if a taxpayer foregoes that income now in order to fund an AVC the tax refund calculation should also be calculated on €12.5k and not on a lower amount, that's if you really want to refund them the tax they paid
 
jimmij said:
€1,000 less of a refund than they'd earlier been deducted in tax.
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Your maths is wrong. Its like one of those spare change riddles where you are adding the wrong numbers together to get your answer.

It's very simple, using your €12.5k example. You have paid €5k in IT. If you want to reclaim all of that €5k, you need to contribute €12.5k to your pension...simple

You pay PRSI and USC on your income so your net does not line up with the gross number as you have calculated but that doesn't change the fact that you get relief at 40%
 
jimmij said:
Say the top €12,500 of a person's income is liable for 40% Tax, 4% PRSI and 8% USC.
After all deductions (€5,000 tax, €500 PRSI and €1,000 USC) this leaves them with a net of €6,000
Click to expand...
And if you put that €12,500 into a pension plan you'd get back the full 40% (€5,000) income tax. You seem to be doing some mental gymnastics where you feel you should be able to put €10,000 into a pension plan but still be entitled to income tax relief on €12,500.
 
This is wrong - if they contribute €12,500 to the pension then they get €5,000 tax relief (assuming that they have paid 40% tax on the full €12,500 and they haven't exceeded their age related pension contribution tax relief limit).

There's no sleight of hand here.
 
Really? That's good news. I was thinking that since all deductions would leave this as a net €6,000 take-home pay that putting this into an AVC would only attract a €4k income tax refund.
 


As others have said, your maths is incorrect.

40% of 12,500 is 5,000 of an income tax refund.
 
jimmij said:
Really? That's good news. I was thinking that since all deductions would leave this as a net €6,000 take-home pay that putting this into an AVC would only attract a €4k income tax refund.
Click to expand...

If you have earned 12.5k already, that has already had 40% tax applied to it, and you have already paid 5,000 tax on the 12.5k, then you can get all that 5,000 income tax back, if you subsequently put 12.5k into a pension.
 
Protocol said:
If you have earned 12.5k already, that has already had 40% tax applied to it, and you have already paid 5,000 tax on the 12.5k, then you can get all that 5,000 income tax back, if you subsequently put 12.5k into a pension.
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The 12.5K is gross, it hasn't had the PRSI and USC of 1.5K deducted yet, nor the 5k in tax.
After those 3 deductions you're left with 6k and my assumption was that it was this 6k that would attract the relief.
Grossing 6k back up from a 40% deduction only gets you to 10K though
 
You want to make a 10k pension contribution.

You can do this two different ways.

You could pay directly from your wages and get tax relief at source.
You would have 6k less in your pocket at the end of the year.
So it cost you 6k to make your 10k contributions and you got tax relief at 40%

Do you agree with this ?


If you had decided not to contribute from your pay you would have an extra 6k in your pocket at the start of the next year.

You could then decide to make a 10 K pension contribution directly to the pension provider.

So you hand over the extra 6k in your pocket and dip into your savings for the extra 4k and hand this to the pension company.

You then submit your tax return and get a 4k tax refund which you return to your savings.

So you contributed 10k and got a 4k refund.
The 10k contribution cost you 6k.
You got tax relief at 40% on your directly funded contribution.

Do you agree with this ?
 
Hi S class
I think you are correct in both cases though I only have direct experience of the second example.
Clubman seemed to be suggesting a bit otherwise earlier though I most likely misunderstood his point.
My point (and I suspect that I'm driving people mad with it) is that that 6k in your pocket in both examples is the residue of 12.5k gross income on which 5k was paid in tax and not all of that is being returned to you to put into your AVC. Do you agree with that?
The way it's worded, i.e. tax refund at your marginal tax rate is suggestive that all your tax is being refunded but it isn't.
If it was they'd be putting 5k into the AVC on your behalf.
I happen to find that misleading that's all. I understand it now and in my own mind it's a 32% rebate on the foregone immediate income i.e. less than the 40% that was actually deducted.
Of the 12.5K the government is still hanging onto €1k of the tax you'd paid. Incidentally that €1k that is withheld only occurs because of the effect that the other deductions have on the calculations. If they were to increase the effective rates of those, not only would those deductions increase but your 40% refund would decrease in addition. So in my mind it's a deceit to not include them when calculating the rebate due.
 
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