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

ClubMan - so have I and I believe that guy in the Revenue is wrong also.

I believe the relevant section of the Tax Consolidations Act is Part 30 section 780 (Notes for Guidance: [broken link removed]) which states:

"780 Charge to income tax on repayment of employee’s contributions

This section imposes a general charge to tax, at the standard rate in force at the time of payment, on the repayment of any contributions to an employee during his/her lifetime.
...
The refunded contribution is not to be regarded as income for any other purpose of the Income Tax Acts."

Note the "standard rate in force at the time of payment" is 20%.

CapitalCCC - I should clarify that the employer would only pay 3% if I paid 3%, but I opted to pay 10%. I can see how it should therefore be 3% Employee + 7% AVC. However, I still don't think this should impact the tax situation.

No it should not - as long as they don't suspect you were trying to pull a fast one!

As discussed before, if you know you're leaving a company soon and you pay marginal tax, a great way to save tax is to max out AVCs and then refund them at 20%...but I'm sure that is not what you did

If only I had that foresight ;o)

blackthorn said:

I was on to Revenue and they asked if my contributions were an AVC or not as that would make a difference.

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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.

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This is even MORE worrying

To be clear - when it comes to a refund of contributions, it makes absolutely no difference whether the contributions are Employee or AVC (or both) - they should be taxed at 20%.

The following department (formally Retirement Benefits District) in the Revenue is where you should be contacting:

Revenue Commissioners
Large Cases Division
Financial Services (Pensions)
4th Floor
Grattan House
Lr. Mount St
Dublin 2

Tel: 01 6474022

Got there in the end....

Just to let you all know, the appropriate section of the Revenue finally got back on to the company and confirmed the tax was due at the standard rate (20%).

Due to a limitation in the company's payroll software it looks like they may have to refund me the full amount, in which case it is my responsibility to pay the 20% due to the Revenue.

Stupid question but don't suppose anyone has advice on the easiest way to do this? Do I wait for next year's tax return? Ideally I'd like to pay the tax bill straight away.

blackthorn said:

Stupid question but don't suppose anyone has advice on the easiest way to do this? Do I wait for next year's tax return? Ideally I'd like to pay the tax bill straight away.

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I would just write to Revenue explaining matters and including a crossed cheque for the amount due.

I'm afraid you're still not quite there, although it is progress.

The refund is not coming to you from your employer; it's coming to you from the Trustees of your employer's pension scheme. It might happen that the company acts as Trustee, but this is irrelevant.

Such a refund should not pass through your employer's payroll system at all - Irish Life write the Trustees a cheque for the refund. Depending on the scheme set-up, Irish Life may have already deducted the 20% tax, in which case the Trustees write you a corresponding cheque. (Irish Life return the tax to Revenue.) If Irish Life wrote the refund cheque to the Trustees for the full value, then the Trustees write you a cheque for 80% of this and they (not you) return the other 20% to Revenue.

Your employer seems to be getting the roles of employer and pension scheme Trustee mixed up.

Liam D. Ferguson
www.ferga.com

I agree with LD - this should have nothing to do with the payroll system.

Irish Life would have processed your claim in one of two ways:

1) Produced 3 cheques, the first made payable to you (being your refund net of 20% tax); the second made payable to the Collector General (in respect of the tax on your refund), and the third made payable to the TRUSTEES of the scheme (the employer refund).

OR

2) Produced 1 cheque for the total surrender value, made payable to the TRUSTEES of the scheme. The trustees would then write you a cheque for 80% of the employee/AVC surrender value. The trustees should then forward a cheque made payable to the Collector General in respect of the 20% tax and send it, along with your details to the Revenue.

Revenue recently advised that all payments of tax due on refunds of employee pension contributions should be sent directly to:

Office of the Collector General
Revenue
Sarsfield House
Limerick.

LD, boaber - that's what I would have expected also. However, seeing as this has dragged on so long, I'm not going to push it any more. My employer is going to refund me the extra I'm owed, plus the 20% tax due to the Revenue, tomorrow. I will send a cheque to the Revenue (thanks for the address boaber) for the 20% with a letter explaining what it's for, and hopefully that will be the end of it.

Once again, thanks all for the helpful replies over the last few weeks... I don't think I'd have convinced my employer to look into it without the informative advice I received here.

Cheers.

Hi Blackthorn

Glad to hear that you got your refund sorted out.

When you leave service with entitlement to a refund of contributions, the tax payable is 20% of the gross refund, end of story. It has nothing to do with PAYE, P45s or standard rate tax thresholds.

The only circumstance in which a refund would be subject to income tax is where someone had overfunded by reference to Revenue limts and was receiving a refund of excess AVCs. This usually only happens on retirement and is not supposed to happen at all as the administrator of the pension scheme is supposed to restrict your AVCs so that you stay within Revenue limits. This may have been what caused the confusion with Revenue as they may have misunderstood the circumstances when you raised it with them.

BTW, I've never heard of an employee being asked to settle his own tax bill on a refund of contributions. If Irish Life were processing the claim, they should have been able to issue a cheque directly to Revenue. It's not you who is liable for the 20% tax, it's the trustees/administrator.

Homer

Hi Homer,

Thanks for your post. You could well be right in what caused confusion with the Revenue... I had been curious as to what they might have thought my situation was.

Regarding the settlement of tax, unfortunately I am in the situation of having to settle this myself as the company refunded me 100% (rather than 80%) of the value of the refund as detailed above. This is a pain, and something I did try to avoid having to deal with.

However, I believe the company are within their rights on this.

I've become somewhat familiar with the relevant legislation since all this started, and the relevant piece is Part 30 of the Taxes Consolidation Act 1997.

Chapter 12, section 12,9 states:

"The tax is the liability of the administrator and the amount charged is not income of the employee for any purpose of the Income Tax Acts. Being charged at a compound rate, the tax is not related to the amount of tax relief given to the particular member on his contributions. It is, of course, open to the scheme to give the administrator discretion whether or not to pass on the burden of the tax to the employee".

So in my case I would interpret that the company has passed the burden of tax onto me (the employee).