I agree with all of that. But what has that got to do with the subject of this thread; the real cost of Pension Levies?
Thanks, though I'm not sure we're any closer to getting a definitive answer. I didn't think it was that complicated a question.Yes, this puzzles me as well!
I have changed the title with the OP's explicit question. (but have changed the word sector to service as the Public Service Pension Levy does not extend to large parts of the Public Sector.. ESB, Bord Gas etc).
Public Service Employees, does your before tax salary show a 7-8% cut or a 3-4% cut?
Public Sector employees, does your, before tax, salary show a 7-8% cut or a 3-4% cut? (@55K)
Howitzer,
The pension levy does not affect salary before tax i.e. someone on 55K will still be on 55K after the introduction of the pension levy. However, their after-tax pay will be reduced to the equivilant if they have received a 7.5 pay cut.
A pay cut is on gross pay so because someone on the higher rate of tax pays half of it in tax their net pay will only be redcued by 3.5 - 4%. Similarly, because someone on 55K a year is entitled to full tax relief on pension related payments, the 7.5% levy will reduce net pay by 3.5 - 4%.
In other words, the 7.5 % pension levy has the same effect of a 7.5% pay cut on net pay. The advantage for the employee is that pension entitlements are calculated on gross salary and the advantage for the government is it did not affect PS pensioners and it can be used to 'convince' PS workers to take early retirement.
Sorry I must be thick but I still don't get it.
My reading of the situation is that the government had two options. Implement a 7.5% pay cut (which would have been more straight forward) or impose this pension levy, which reduces net pay on a graduated level.
In option one, a 7.5 pay cut would have reduced gross pay for someone on 55K by about 4K. However, at this level of income someone pays tax and prsi on almost half their income (over 34k I think) so although their gross income is reduced by 4K, they are paying less tax and their net income only reduces by approx 2K. So a 7.5% pay cut on gross income will only result in an approx 3.75% redcuction in net pay.
In option two, someone on 55K will still receive 55K gross but now has a pension levy which is approx 4K spread over the year e.g €330 a month if paid monthly.
However as all pension contributions and therefore this new pension levy is allowed tax relief, someone on 55K will be entitled to tax relief at the higher rate for their pension levy i.e. the net cost of the pension levy will be approx half of the original 4K. So although the pension levy may be 7.5%, the reduction in net pay will be approx 3.75%.
My reading of it is that the 7.5% pension levy for someone on 55K has the same (or very similar) effect on net pay than a 7.5% pay cut. The difference is that gross pay is unchanged with the pension levy and therefore pension entitlements will not be affected.
Cheers. Understand what you are saying now. I think we all agree that the impact on peoples net pay is less than the actual headline pension levy figure that public sector unions love throwing out.
Absolutely, but pay cuts are as far as I am aware are always quoted on gross pay so if someone says their pay was cut 10%, their net pay would be reduced by less than 10%, depending on what tax band they are on.
I think it is also fair to say the same works with pay increases. The last pay agreement was 10% I think, so for someone like myself on the higher rate of tax, my net pay would ahve increased approx 5%.
The problem for the government is that it is an employer and collector of tax. If a private company cuts pay bill by 10%, they will save 10%. If the government does it, it will save 10% on spending but lose out a good bit on the revenue collection side.
I think this a problem the government is going to encounter if and when they cut PS pay.
Cheers. Understand what you are saying now. I think we all agree that the impact on peoples net pay is less than the actual headline pension levy figure that public sector unions love throwing out.
I don't want to distract from the debate but this isn't correct. If gross changes by 10%, the net change will be less than 10% but not much less (8%-9%).if someone says their pay was cut 10%, their net pay would be reduced by less than 10%, depending on what tax band they are on.
I think it is also fair to say the same works with pay increases. The last pay agreement was 10% I think, so for someone like myself on the higher rate of tax, my net pay would ahve increased approx 5%.
I don't want to distract from the debate but this isn't correct. If gross changes by 10%, the net change will be less than 10% but not much less (8%-9%).
As a simplified example, if tax was a flat 50%, someone earning 40,000 gross would take home 20,000 net. A 10% increase would increase gross to 44,000 and net to 22,000 - both are 10% increases even though one is a 4,000 increase and one is 2,000 increase. The structure of our tax system is not this simple and the progressive nature means that pay increases will pay more tax than existing pay - but the impact is still similar. I put some salaries into an online tax calculator and at a €40K salary, a gross 10% increase would feed through to a 9% increase in net. Even at a €200K salary, a 10% gross increase would give an 8.5% net increase.
Why would anyone want to know what their net € pay change was as a % of their gross?
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