Pension AVC taxation when AVC is above tax relief threshold

G

gonesp

Registered User
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Hey everyone,

I've got a pension plan at work where I contribute a percentage of my monthly earnings and the company covers a certain amount. From what I understand, there is a pension tax relief in which my contributions are done tax free. This amount of tax relief is a percentage of my annual salary and that percentage varies according to how old I am.

This year, I was given the opportunity to add part of my annual bonus as a one-off AVC to my pension, but after doing so I have reached my tax relief limit.

I've been looking everywhere, but I can't find what is the tax I'll be paying on every AVC from here on.

Can anyone help me understanding this?

Thanks!
 
Some figures might help.
But if you contribute more than your age related pension tax relief limit in a year then you simply don't get any tax relief on the excess.
 
You will get tax relief at your marginal rate up to your maximum age allowance each year. If you decide to pay a larger amount into your AVCs which is in excess of your age limit, you can carry the surplus AVC tax relief forward to future years.
 
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I didn't realize you could overpay now and claim tax relief against a future year. This would be interesting in a downturn for buying more units when the price is lower.
 
ClubMan said:
Some figures might help.
But if you contribute more than your age related pension tax relief limit in a year then you simply don't get any tax relief on the excess.
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From what I gathered if, for example, I'm between 30 and 39 years old my tax relief is of 20%, and if I earn €100,000 a year, my relief would be €20,000. Any AVC above those €20,000 would be charged.

Question is, given this example, what taxes am I going to be charged?
 
S class said:
You will get tax relief at your marginal rate up to your maximum age allowance each year. If you decide to pay a larger amount into your AVCs which is on excess of your age limit, you can carry the surplus AVC tax relief forward to future years.
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What is my "marginal rate"? Income tax + PRSI + USC?

I'm not sure where to find that information.
 
gonesp said:
From what I gathered if, for example, I'm between 30 and 39 years old my tax relief is of 20%
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Yes.
gonesp said:
and if I earn €100,000 a year, my relief would be €20,000.
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This is not strictly correct - your relief is not €20K.
You get full tax relief on the €20K.
So, if you were otherwise paying 40% of €20K = €8K in income tax then if you contribute €20K to your pension you get that €8K relieved.
In effect, the €20K contribution has cost you €12K.
gonesp said:
Any AVC above those €20,000 would be charged.
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Yes.
gonesp said:
Question is, given this example, what taxes am I going to be charged?
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If you contribute, say, €25K then you will still pay 40% tax on the €5K over your age related limit.
 
Marginal tax is the rate you pay on your topmost income. Either 20% or 40%.
If your total earnings are for instance 5000 euro above your 20% tax band you have marginal earnings of 5000 euro taxed at 40%.

So in this example if you made AVCs of 7k . You would get relief at 40% on 5k and 20% on 2k.

After paying your AVCs you effectively then have a marginal tax rate of 20%.
 
Great! Makes sense! Thanks for the help!
 
Would you say it's still worth keeping AVCs going even above the tax relief threshold?

I'm a bit torn on wether I should keep adding to my pension or not this year.
 
In general it doesn't make sense to make pension contributions if you're not getting tax relief on the way in as you'll probably pay tax on the way out.
But, as mentioned earlier, you can carry any "overpayments" forwards and claim tax relief at a later date if the opportunity arises.

Also - do you have any debts or other needs for money that should take priority over pension contributions (in particular contributions in excess of your tax relief limits)?
 
You should definitely keep whatever regular contributions you need to get the employer contribution, even if you're above the tax relief threshold.
 
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I don't have any other need for the money at the moment, mortgage is under control and I have no debts, but very much to @Corola's point, I am getting Employer contributions as well, would this be something I should consider in the equation?
 
Are you saying that the pension contribution over your age-related percentage maximum will be matched by your employer?

If so, then absolutely you should contribute even if you’re not getting tax relief - otherwise you are leaving money on the table.

But that would be a very unusual scenario.
 
BTW, for the avoidance of doubt, employer contributions don’t count toward your maximum, tax-relieved, employee contributions.

So, in theory both you and your employer can contribute 20% (or whatever percentage limit is relevant to your age) of your salary (subject to a €115k cap) to your pension.
 
Their regular employee pension contribution would be under the age-related maximum, but the one-off AVC has pushed them over the maximum for the year already. But they should still keep that regular employee pension contribution if it is matched by the employer, even if the remaining employee pension contributions are not getting tax-relief this year (otherwise leaving money on the table).
 
Alternatively, if the contribution above your age-related maximum is not attracting tax-relief or an employer match, then you shouldn’t make that contribution.

Just pay the tax on your bonus and use the net amount to pay down your mortgage ahead of schedule.
 
Can I just double check this bit: are employer contributions limited by the €115k cap like personal contributions are? I thought employees could contribute according to their age, e.g 30% at age 53 up to the 115k limit, but that the employer contribution can be (say) 20% of gross salary, regardless of that limit.
 
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