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

[3CC]

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

I read this a few times to try and understand your point.

I think the issue might be that USC/PRSI and income tax are applied fully and separately. So, using the figures in your example, you pay €1500 PRSI/USC on the full 12.5k and then you also pay 5k income tax on the full 12.5k. If you contribute the full 12.5k to your pension, you will get the full 5k back, and that would cost you 7.5k nett. But you are not doing that - you are only contributing 6k nett because this is what you have cleared from the original 12.5k because of the additional deductions of PRSI and USC.

So, if you consider a contribution of 12.5k at a nett cost of 7.5k (i.e. 5k tax back), the figures work out.
Likewise, if you consider a contribution of 10k at a nett cost of 6k (i.e. 4k tax back) , the figures also work out.

But is not correct to start with a nett cost of 6k and then wonder why you are only getting 4k tax back and not 5k.

You just can't deduct income tax, PRSI and USC and the hope to get back to the same gross figure when only the first of these is relieved.

 

[jimmij]

Say income is constant at €12.5k
Say tax is 40% and USC+PRSI is 12% then your net is 6k and your 40% avc tax rebate on that would be 4k, government hangs onto €1k of the tax you paid
Now increase USC+PRSI to 24% then your net is €4,500 and your 40% avc tax rebate would drop to 3K, government hangs onto €2k of the tax you paid.
Increasing the rate of USC/PRSI not only reduces net income directly but it additionally reduces the portion of the income tax paid that gets refunded for AVCs.
That doesn't make sense and I find it hard to believe that no one recognised this consequence.
That's the reason why I think that they should be added back in when calculating the tax refund due.

 

[S class]

Tax is always relived at the marginal rate for Pension contributions up to your age allowed yearly amount.

In your example you have 12.5k taxed at a marginal rate of 40%.

The marginal rate refers to the % rate of the tax deducted.

It does not refer to the amount of earnings relieved at 40%.
It refers to the fact that the tax rate deducted is at 40%.

You start off with 12.5k of 40% marginal rate taxable earnings and when you make your 10k pension contribution you effectively reduces your taxable earnings by 10k and end up with only 2.5k of 40% marginal rate taxable earnings.

Your USCable and PRSIable pay doesn't reduce.

 

[3CC]

Say income is constant at €12.5k
..., government hangs onto €1k of the tax you paid...

The government is not the problem. They problem is that you are using a lower pension contribution than you should because you are not grossing up properly.

EDIT: In both those examples, you could just contribute 12.5k into your pension and get a 5k rebate leaving you with a nett cost of 7.5k. You just keep reducing your pension contribution level due to an unrelated cost.

 

[S class]

Say income is constant at €12.5k
Say tax is 40% and USC+PRSI is 12% then your net is 6k and your 40% avc tax rebate on that would be 4k, government hangs onto €1k of the tax you paid
Now increase USC+PRSI to 24% then your net is €4,500 and your 40% avc tax rebate would drop to 3K, government hangs onto €2k of the tax you paid.
Increasing the rate of USC/PRSI not only reduces net income directly but it additionally reduces the portion of the income tax paid that gets refunded for AVCs.
That doesn't make sense and I find it hard to believe that no one recognised this consequence.
That's the reason why I think that they should be added back in when calculating the tax refund due.

In a fair tax system either of the following should apply.

The USC and Prsi should be refunded on the pension contributions.

Or

The USC and Prsi should not be deducted from the pension drawdowns.

In our unfair tax system there is double taxation of USC and Prsi on pensions.

The double USC applies to all types of pensions.

The double Prsi only applies to certain pension types.
Occupational pensions and Anniuities are zero rated for Prsi.

ARF drawdowns are rated at 4.1% (and increasing) for people up to the time they claim the State Contributory pension or age 70.

This is the type of convoluted practice carried out by the Irish State.

 

[ClubMan]

Clubman seemed to be suggesting a bit otherwise earlier though I most likely misunderstood his point.

Sorry - I have no idea what you're referring to here.

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?

Yet again this is incorrect.
€12.5K taxed at 40% = 5K.
Put that €12.5K into a pension and your get ALL of the €5K tax back.
That IS all of it.
QED and (hopefully) end of story.

I have no idea why you started this thread talking about €10K but then switched to €12.5K but maybe that's part of the reason for your confusion?
The rest of your confusion comes from using incorrect calculations and not taking heed of corrections that many people have posted.

 

[jimmij]

I might not be understanding things correctly.

In a fair tax system either of the following should apply.

The USC and Prsi should be refunded on the pension contributions.

Or

The USC and Prsi should not be deducted from the pension drawdowns.

In our unfair tax system there is double taxation of USC and Prsi on pensions.

The double USC applies to all types of pensions.

The double Prsi only applies to certain pension types.
Occupational pensions and Anniuities are zero rated for Prsi.

ARF drawdowns are rated at 4.1% (and increasing) for people up to the time they claim the State Contributory pension or age 70.

This is the type of convoluted practice carried out by the Irish State.

I can't disagree with any of that.
It doesn't bother me too much because we're all in the same boat or at least most of us are.
But ideally you would like the system to be logical.

 

[jimmij]

Sorry - I have no idea what you're referring to here.

Yet again this is incorrect.
€12.5K taxed at 40% = 5K.
Put that €12.5K into a pension and your get ALL of the €5K tax back.
That IS all of it.
QED and (hopefully) end of story.

I have no idea why you started this thread talking about €10K but then switched to €12.5K but maybe that's part of the reason for your confusion?
The rest of your confusion comes from using incorrect calculations and not taking heed of corrections that many people have posted.

I thought I'd laid it out well.
The chunk of gross income being considered for investment for AVCs is 12.5k
If taken immediately this results in a net income of 6k
If put into AVCs it results in a sum of 10k in the AVC owing to the 40% tax refund
Of the original 12.5k income, 10k is in the retirement fund, 1.5k has gone in PRSI and USC.
That still leaves 1k of the income tax paid which the government gets to keep.
Bizarrely, the amount of income tax it doesn't repay, is proportional to the levels of USC and PRSI

 

[Fortune]

Say income is constant at €12.5k
Say tax is 40% and USC+PRSI is 12% then your net is 6k and your 40% avc tax rebate on that would be 4k, government hangs onto €1k of the tax you paid
Now increase USC+PRSI to 24% then your net is €4,500 and your 40% avc tax rebate would drop to 3K, government hangs onto €2k of the tax you paid.
Increasing the rate of USC/PRSI not only reduces net income directly but it additionally reduces the portion of the income tax paid that gets refunded for AVCs.
That doesn't make sense and I find it hard to believe that no one recognised this consequence.
That's the reason why I think that they should be added back in when calculating the tax refund due.

If you had 12.5k marginal income, you'd get 6k net. If you paid that 12.5k into a pension, you'd have 11k in a pension after PRSI and USC

 

[_OkGo_]

Bizarrely, the amount of income tax it doesn't repay, is proportional to the levels of USC and PRSI

The only thing bizarre is your logic.

You are incorrectly correlating the net income from €12.5k (€6k) with how much net income you are willing to sacrifice to make a pension contribution.

If you are only willing to reduce your net income by €6k, then you need to contribute €10k to your pension. It is 40% relief no matter what way you try to calculate it

 

[jimmij]

If you had 12.5k marginal income, you'd get 6k net. If you paid that 12.5k into a pension, you'd have 11k in a pension after PRSI and USC

The only thing bizarre is your logic.

You are incorrectly correlating the net income from €12.5k (€6k) with how much net income you are willing to sacrifice to make a pension contribution.

If you are only willing to reduce your net income by €6k, then you need to contribute €10k to your pension. It is 40% relief no matter what way you try to calculate it

Fortune seems to be suggesting that the €12.5k marginal income would result in €5k added to your pension
_OkGo_ seems to be suggesting that the €12.5k marginal income would result in €4k added to your pension

Fortune likes _OkGo_'s post even though it appears to contradict his own.
Clubman likes both even though they appear contradictory.

Maybe there's a way of squaring that circle but I don't see it.

 

[ClubMan]

Maybe there's a way of squaring that circle but I don't see it.

If you stopped misinterpreting and misrepresenting what others have posted it might help.

Anyway, I'm out as this is pointless as this stage.

 

[_OkGo_]

_OkGo_ seems to be suggesting that the €12.5k marginal income would result in €4k added to your pension

That's not what I have said at all. It is only you suggesting that and you've been told you are wrong in pretty much every reply so far...

but still you persist

 

[Dave Vanian]

I thought I'd laid it out well.
The chunk of gross income being considered for investment for AVCs is 12.5k
If taken immediately this results in a net income of 6k
If put into AVCs it results in a sum of 10k in the AVC owing to the 40% tax refund
Of the original 12.5k income, 10k is in the retirement fund, 1.5k has gone in PRSI and USC.
That still leaves 1k of the income tax paid which the government gets to keep.
Bizarrely, the amount of income tax it doesn't repay, is proportional to the levels of USC and PRSI

No matter what you do, you will pay the PRSI and USC €1,500. That's gone and there's nothing you can do about it.

Pay €10,000 into an AVC and you'll get €4,000 Income Tax relief, leaving you with €6,000.
Pay €12,500 into an AVC and you'll get €5,000 Income Tax relief, leaving you with €7,500.

The less you put into the AVC, the less Income Tax relief you'll get. Expressing it in a different way only serves to confuse yourself.

 

[jimmij]

No matter what you do, you will pay the PRSI and USC €1,500. That's gone and there's nothing you can do about it.

Pay €10,000 into an AVC and you'll get €4,000 Income Tax relief, leaving you with €6,000.
Pay €12,500 into an AVC and you'll get €5,000 Income Tax relief, leaving you with €7,500.

The less you put into the AVC, the less Income Tax relief you'll get. Expressing it in a different way only serves to confuse yourself.

€12,500 is the chunk of gross income we are considering.
Of that,
€ 1,500 goes in PRSI and USC.
€ 5,000 goes in tax (40% of 12,500).

That leaves €6,000. Say your wife lends you €4,000 to make up the €10,000
You put that in an AVC and the government refunds you €4,000 with which you repay your wife.

Final situation
Government has €2,500 of the original €12,500 and your pension fund has €10,000

I'm not disputing the €1,500 PRSI and USC that the government hangs onto
But additionally it has hung onto €1,000 of the income tax you paid.

The government takes 40% of €12,500 as income tax but only returns 40% of €10,000 as a tax refund.
You aren't getting relief of 40% on the gross salary you earmarked for AVCs, you're getting relief of 32%.


That's the LOGICAL way to look at it.

As an analogy, if I take 10% of your money and then claim I'm giving it back to you by returning 10% of what you have left then I'm deceiving you.

 

[ClubMan]

€12,500 is the chunk of gross income we are considering.

That leaves €6,000. Say your wife lends you €4,000 to make up the €10,000
You put that in an AVC and the government refunds you €4,000 with which you repay your wife.

The government takes 40% of €12,500 as income tax but only returns 40% of €10,000 as a tax refund.

Yes, because you have put €10K and not €12.5K into the pension. Yet again you're comparing apples with oranges and coming to a misconceived conclusion. The €12.5K figure is completely irrelevant in this example.

 

[Fortune]

€12,500 is the chunk of gross income we are considering.
Of that,
€ 1,500 goes in PRSI and USC.
€ 5,000 goes in tax (40% of 12,500).

That leaves €6,000. Say your wife lends you €4,000 to make up the €10,000
You put that in an AVC and the government refunds you €4,000 with which you repay your wife.

Final situation
Government has €2,500 of the original €12,500 and your pension fund has €10,000

I'm not disputing the €1,500 PRSI and USC that the government hangs onto
But additionally it has hung onto €1,000 of the income tax you paid.

The government takes 40% of €12,500 as income tax but only returns 40% of €10,000 as a tax refund.
You aren't getting relief of 40% on the gross salary you earmarked for AVCs, you're getting relief of 32%.


That's the LOGICAL way to look at it.

As an analogy, if I take 10% of your money and then claim I'm giving it back to you by returning 10% of what you have left then I'm deceiving you.

The logical way to look at it is to do it the way Revenue do it, and not get hung up on the notion of "40% tax relief". All the do is reduced your taxable income in the calculation of income tax.

In your example (using your logic):

USC and PRSI is 12,500 x 12% is 1,500
Income tax is 12,500 x 40% is 5,000
Net income is 6,000

If you subsequently make a 10,000 contribution, tax is recalculated.
USC and PRSI is 12,500 x 12% is 1,500
Income tax is (12,500 - 10,000) x 40% is 1,000

Tax refund is 5,000 less 1,000.

Tax relief as a percentage is 4,000 /10,000 is 40%.

In reality, you are looking at 10k and then deciding it's (somehow) really 12k.

Looking at 12.5k:

USC and PRSI is 12,500 x 12% is 1,500

Income tax is 12,500 x 40% is 5,000

Net income is 6,000

If you subsequently make a 12,500 pension contribution, tax is recalculated.

USC and PRSI is 12,500 x 12% is 1,500

Income tax is (12,500 - 12,500) x 40% is 0

Tax refund is 5,000 less 0.

Tax relief as a percentage is 5,000 /12,500 is 40%.

 

[Fortune]

As an analogy, if I take 10% of your money and then claim I'm giving it back to you by returning 10% of what you have left then I'm deceiving you.

40% is taken, then that figure is given back to you. You're asking for the government to give back tax they didn't deduct.

You sound like the Airtricity guy who came to my door claiming that 25% off electricity and 25% off gas was a 50% discount.

 

[S class]

Try doing it this way

Take your 6k take home from your 12.5k earnings.
Then borrow 6.5 K from your wife.
Make a 12.5k AVC.
Claim back 5k tax refund.
Give the tax refund plus 1.5k (taken from your tax credits, generously provided by the government) back to your wife.

Your 12.5k AVC will have cost you 7.5k.
You have received a 40% tax refund.

 

[Dave Vanian]

That leaves €6,000. Say your wife lends you €4,000 to make up the €10,000
You put that in an AVC and the government refunds you €4,000 with which you repay your wife.

That's where you're repeatedly making the mistake. Borrow €6,500 from your wife and put €12,500 into the AVC. Get €5,000 back in tax relief.