Is my previous employer overcharging tax on a refund of contributions?

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blackthorn

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Hi,

I've recently changed jobs. I had joined the employers pension scheme (which is with Irish Life) in June last year, and made 11 contributions before I left the company in May this year. I opted to take a refund of contributions - an option Irish Life provided me with as I was a member of the scheme for less than 2 years.

They said that the refund would be taxed at 20%. Everything I've found on the revenue site and Irish Life site agrees with this.

My employer initially refunded me an amount that looked like it was taxed at 30%. I queried it and they now tell me I was overpaid by them and that it should be taxed at 40% (sic - I presume they mean 41%) as my pay cheque for the last month I worked (May) exceeded the standard cut off point, and it has to be treated as a lump sum.

I cannot find anything to support this. As far as I see it, the Revenue are quite clear.... refunds taken within the first two years are taxed at the standard rate of tax - currently 20%.

I believe my employer owes me EUR555 - they are claiming I owe them.

I have a good relationship with them so I believe its just ignorance of the situation.

So, firstly, am I right or are they right? And secondly, if I'm write, how can I convince them that they owe me money and not the other way around?

Thanks in advance!
 
You're correct that a refund of the value of employee contributions is only taxable at 20%. Scroll down to "Leaving the Employer" on this link. http://www.pensionsboard.ie/index.asp?docID=189#4

I have a suspicion that your employer may have under-deducted tax and is trying to recoup that - if so, it's not a pensions issue as the 20% tax on employee contributions is clear.

Regards,

Liam D. Ferguson
www.ferga.com
 
Is it possible for you to provide the details? e.g. the amount you paid into the plan, and the surrender value of these contributions

It may be possible that your employer applied the 20% to the contributions paid rather than to the surrender value:

Simplistic example:

Contributions made by employee of €100 * 20% = tax of €20

Or

Surrender Value of employee contributions was €120 * 20% = tax of €24

Would need to know the details before judging who is right in this case, but it sounds like you employer is wrong. It doesn't matter if you earn €10K or €100K, if you are entitled to a refund of contributions, then it is taxed at 20%
 
thanks for answers so far.

I contributed EUR500 a month for 11 months, and the Leaving Options letter from Irish Life said the value of my contributions was EUR5599. They said tax at 20% would be deducted meaning a refund to me of EUR4479. I was refunded EUR3924. When I queried, the company said the refund should have been EUR3026 and that i owe them EUR898. In fact there's something wrong there anyway because taking 41% off EUR5599 would leave EUR3303.

For clarity, here is the text of my companies response:

"Your pension repayment is in fact just treated as a lump sum payment and therefore is taxed at 40% (sic) as you have used your 20% threshold for part of your salary. As a result of this you should have received €4010.00 for your salary (BLACKTHORN WRITES: I did receive this as my final salary payment incl holiday pay due and that amount is correct) and only €3026.13 as your pension repayment. Unfortunately you will have to reimburse the company for the difference between €3924.06 and €3026.13 (€897.93)."
 
blackthorn said:
I contributed EUR500 a month for 11 months, and the Leaving Options letter from Irish Life said the value of my contributions was EUR5599. They said tax at 20% would be deducted meaning a refund to me of EUR4479. I was refunded EUR3924.
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No chance the fund fell in value in the meantime so that 80% of the full value was €3,924?

Also does the transfer value include any employer contributions (and growth) which would not be refundable since you can only claim back your own personal and AVC contributions net of 20% tax in this situation?

For clarity, here is the text of my companies response:

"Your pension repayment is in fact just treated as a lump sum payment and therefore is taxed at 40% (sic) as you have used your 20% threshold for part of your salary"
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Sounds completely wrong.
 
The more you post, the more it looks like your employer got this wrong. If your Irish Life pension was cashed in at a gross value of €5,599 (and hadn't fallen between the time this value was quoted and the day it was actually cashed in, as was posted above) then you should receive a refund of €5,599 x 80% = €4,479.20. End of.

This payment should have come from the pension scheme Trustees and should never have been mixed up with your salary at all.
 
While you may be on good terms with them, if you continue to have trouble explaining this situation or sorting it out then the time may come when it's worth contacting the likes of the the DETE employment rights section, Pensions Board, [broken link removed] etc. At this stage I would also be checking past P60s and payslips from this company to check for anything dodgy...
 
If there is a broker/intermediary involved (which there probably is if it's a group scheme), you should put your case to them also. They should be able to clarify the matter for you

If you're not getting anywhere with the Employer then you can put your case to the Pensions Ombudsman [broken link removed]
 
All very helpful responses... thanks again.

One further issue... the company insisted the refund had to come through regular payroll, and therefore have been withholding my P45 until the payment is made. As of yesterday they are withholding the P45 until I refund them the EUR898 they claim I owe them.

Regardless of the amounts involved, I would have thought this is entirely separate to PAYE or anything that should impact on my P45?

To answer the questions raised in response:

Maybe the fund fell in value - I'm trying to get in contact with Irish Life to find out what value was on the cheque they issued - but there was a maximum of 2 weeks between me getting the leaving options letter quoting a fund value of 5599 and Irish Life issuing the cheque. That would still not explain the 40% tax the company is trying to apply though.

The transfer value doesn't (I believe) include any employer contributions. Over the 11 months I contributed EUR5,500 to the fund, the employer an additional EUR1650, but the rules of the scheme prevented me from keeping this EUR1650 until I was in it two years. So my understanding was that Irish Life would refund the EUR1650 to the company who'd have to pay tax on that, and refund the EUR5500 to me... well of course I mean the appropriate amounts relative to the final fund value. Again, if I can find out from Irish Life exactly what value they sent to the company it will help with that question.

I fear that while I may satisfy myself as to what the correct procedure is, convincing my company might be more difficult.
 
Just to clarify also. Irish Life's leaving options letter states:

"In your case, you do not qualify for the employer's fund, under either statutory rules or the rules of the plan. As a result, the contributions and fund values shown above are based on your own contributions only".

They quote the surrender value as 5599.97 and the contributions paid as 5500. So I think this answers ClubMan's second question.
 
I'd consider it fairly unlikely that your fund dropped in value so significantly in the two week period - I'm not aware of any Irish Life funds that suffered such heavy losses in recent weeks.

Yes your employer gets a refund of the value of their contributions and yes it's a taxable trading receipt when they do, but under no circumstances are they permitted to pass such a tax liability on to you.

If you want to remain amicable, you could suggest to your employer that they make a quick call to the Pensions Board who are very helpful and should be able to confirm the correct procedure for dealing with refunds of employee contributions immediately. Your employer can make a general enquiry if s/he likes, without identifying themselves.

But witholding your P45 is serious, so if your employer refuses to get this cleared up today you'll need to start considering not-so-amicable means.

Liam D. Ferguson
www.ferga.com
 
blackthorn said:
The transfer value doesn't (I believe) include any employer contributions.
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But you are not sure? You need to double check this so. If I recall correctly the leaving options form should clarify the value of the fund broken down by personal/AVC and employer contributions or the current value of the benefits secured by same.
 
ClubMan,

I am sure now... see my most recent post at 9.40am.

I've had a phone call with the person responsible in the company and they have emailed the Revenue and CC'd me to ask the question but said they had been verbally told it should be 20%.

I suggested to them that the whole refund should be beyond the scope of the PAYE system and hence not affect my P45 and I think they are coming around to the same view.

The also clarified that the repayment of my contributions amounted to 5740.19 so the fund grew by 2.5% in the two weeks between Irish Life issuing the leaving options letter and refunding the amount. So my payment should be 4592.15 meaning they owe me EUR668.09. Better than me owing them EUR898. It pays to follow these things up!

Hopefully the Revenue will reply soon and I can get this all sorted finally.

Thanks again everyone. Much appreciated!
 
Hope you get everything sorted Blackthorn

It's rather worrying that the Employer / Trustee do not know how to administer the payment of benefits - something that is a requirement of the Pensions Act, 1990
 
There are probably 20 ~ 25 staff in the pension scheme. I'm the first to depart since it was set up. Still haven't heard back from the email the company sent to the Revenue so going to give them a call myself today. Will keep ye posted on any progress.
 
OK this is getting complicated.

I was on to Revenue and they asked if my contributions were an AVC or not as that would make a difference. I checked the Leaving Options letter from Irish Life. This details the fund as follows:

Employee: 0
AVC: 5599.97

According to one person I spoke to in the Revenue, the refund should be taxed at 20% but according to another, the AVCs have to be refunded through payroll. Irish Life don't know about this and are going to ring me back.

I explained to Revenue that the situation was that this was the only pension I was contributing to, that the employer set it up so that they contributed 3% and then I contributed 10%. If I didn't contribute, I would not get the employers contribution. I would have expected this to translate to an Employer contriubtion of 3% and an Employee contribtion of 10%.

Is it correct that a pension fund can be set up to have an Employee contribution of 0% and an AVC of 10%? It seems to me that there is a tax disadvantage to me if what the second Revenue guy said is correct.

Does any of this make sense to anyone here?

The most significant thing I've learned over the last 3 days is there is a lot of confusion about pensions and tax amongst people who should know better!
 
blackthorn said:
According to one person I spoke to in the Revenue, the refund should be taxed at 20% but according to another, the AVCs have to be refunded through payroll. Irish Life don't know about this and are going to ring me back.
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Sounds wrong. I got personal and AVCs contributions refunded in the past and there was no difference in treatment. But that was c. mid 80s probably so maybe the rules were different then?
The most significant thing I've learned over the last 3 days is there is a lot of confusion about pensions and tax amongst people who should know better!
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Indeed! :(
 
blackthorn said:
I explained to Revenue that the situation was that this was the only pension I was contributing to, that the employer set it up so that they contributed 3% and then I contributed 10%. If I didn't contribute, I would not get the employers contribution. I would have expected this to translate to an Employer contriubtion of 3% and an Employee contribtion of 10%.

Is it correct that a pension fund can be set up to have an Employee contribution of 0% and an AVC of 10%? It seems to me that there is a tax disadvantage to me if what the second Revenue guy said is correct.

The most significant thing I've learned over the last 3 days is there is a lot of confusion about pensions and tax amongst people who should know better!
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I have spoken to a pension lawyer about this before!

If the Employer will only contribute if you contribute - i.e. the employer 3% is only paid if you pay your 10%...then the Employee Part must be classified as a regular (NOT AVC) contribution - so they have got it COMPLETELY This post will be deleted if not edited to remove bad language ways!!
 
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