Key Post Can a low paid spouse get 40% tax relief on their pension contributions?

S

S class

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Brendan Burgess said:
If your wife has no income taxed at 40% and you have income taxed at 40% , you should make the contributions to your fund rather than to hers as you get more tax relief.
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This is not necessarily correct.
One partner can be taxed at 20% and still achieve tax relief on pension contributions at 40% if the joint income is taxed at a marginal rate of 40%.
 
S class said:
This is not necessarily correct.
One partner can be taxed at 20% and still achieve tax relief on pension contributions at 40% if the joint income is taxed at a marginal rate of 40%.
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Thanks S class

This was a point I was not sure about and reading other threads on Askaboutmoney suggested that she could only get tax relief at her marginal rate. I did wonder how that could operate in practice.

His income €100k
Her income €40k
Pension contribution €20k - for one or the other but not both.

Will the tax return simply be
Total income €140k
Less pension contribution: €20k
Taxable income : €120k

So they are getting tax relief at 40%

I am assuming that they are jointly assessed as separate assessment makes no sense in this case.

Brendan
 
In your example joint earnings are 140k.
They have marginal income of 56k taxed at 40%.
The wife can transfer 7k (40k - increase of 33k) of her 20% tax band to her husband.
She is now paying 40% on 7k of her earnings and she can make 7k of pension contributions at 40% tax relief.

If her earnings were 42k she could transfer the maximum allowable 9k.

I always get confused by this but I think this is correct.

In practice she doesn't need to actually transfer the 7k tax band because the proper pension tax relief is automatically calculated on form 11 or in myaccount when a statement of liabilities is requested.
 
S class said:
One partner can be taxed at 20% and still achieve tax relief on pension contributions at 40% if the joint income is taxed at a marginal rate of 40%
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That's correct.

However!

Brendan Burgess said:
So if the wife has €10k income, then she could pay all €10k into a pension fund and it would be allowed at their marginal rate?
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Not in the same tax year.

There is a limit to the allowable deduction based on age-related limits.

If the wife is in her 30s, the allowable % of income is 20%.

In the quoted example, the couple can take a deduction in their joint assessment return for only €2,000 of the €10,000 pension contribution in the tax year that the €10k contribution is made.

€8,000 of non-relieved contribution can be carried forward.

If the wife's income is €10,000 in the following tax year, €2,000 of the unused pension contribution is available as an allowable deduction, leaving €6,000 to be carried forward (and so on).
 
That is great folks - thanks for clarifying.

So the amount a person can contribute is limited by their age and their net relevant earnings.

But the tax relief is at the couple's marginal rate.

I will update the Key Post accordingly.

Brendan
 
I have put this summary in the Key Post.

Is it correct and comprehensive?

The maximum either spouse can contribute is a percentage of their salary. This percentage is determined by their age.

It is better to max the contribution for the lower paid spouse especially if there is any danger that the higher paid spouse's fund is approaching the €800k limit on which 25% can be taken tax-free.

Of course, where either spouse has an employer who matches their contributions, that spouse should contribute the maximum which the employer will match. This takes precedence over all other considerations.

The first €33k of her income is taxed at 20% irrespective of his earnings.
So her pension contributions should not bring her income below €33k.
It is better for him to make the contributions and get 40% tax relief.

For example, if she is earning €40k, she should not contribute more than €7k to a pension.
 
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Brendan Burgess said:
So the amount a person can contribute is limited by their age and their net relevant earnings.
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The person can contribute as much as they want to a pension but it might be more precise to reword this as:

"the amount a person can deduct for tax relief is limited by their age, earnings (and the earnings cap if applicable)."
 
The wife would need income of over 33k in order to gain some relief at 40%.
If she had income of 34k she could get pension tax relief of 40% on 1k of contributions.
 
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So I have added the following wording to it.

The first €33k of her income is taxed at 20% irrespective of his earnings.
So her pension contributions should not bring her income below €33k.
It is better for him to make the contributions and get 40% tax relief.

For example, if she is earning €40k, she should not contribute more than €7k to a pension.
 
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