Tax Relief on Pension Schemes

[DELLBOY 08]

I have two questions which I'd greatly appreciate responses to.

1.) If you are paying into a Defined Contribution Pension Scheme & are earning a basic gross salary of lets say €35,500 (ie. only €100 of salary taxed @ 41%), will you only receive tax relief @ 41% on the first €100 contributed or on all of your contributions?

2.) If the above is correct (ie. tax relief only @ 41% on the first €100 of your contributions), is there any way of making an annual bonus work to your advantage? Is it possible to make only one annual payment into your pension fund in the month you receive your annual bonus so that all your contributions receive tax relief @ 41%?

 

[Don_08]

If you are paid PAYE - any contributions made to a pension scheme are taken out before tax and the tax rates are applied after that. It should not matter how your pay the contributions. If, after you have paid your conts, you earnings are still on the high band, then you would have could the full 43% relief (41% + 2%).

If you are paying them yourself and claiming tax relief at year end, the same will apply.

 

[LDFerguson]

I have two questions which I'd greatly appreciate responses to.

1.) If you are paying into a Defined Contribution Pension Scheme & are earning a basic gross salary of lets say €35,500 (ie. only €100 of salary taxed @ 41%), will you only receive tax relief @ 41% on the first €100 contributed or on all of your contributions?

2.) If the above is correct (ie. tax relief only @ 41% on the first €100 of your contributions), is there any way of making an annual bonus work to your advantage? Is it possible to make only one annual payment into your pension fund in the month you receive your annual bonus so that all your contributions receive tax relief @ 41%?

1.) Yes

2.) You don't have to re-arrange things. In the example you give, let's say you're paying €1,500 per year to the pension scheme, in monthly contributions. Your taxable income is thus reduced to €34,000. So you then get a bonus of €1,400. Your bonus is only taxed at 20%.

If you hadn't been paying the monthly contributions, you'd end up paying tax at 41% on the bonus.

 

[DELLBOY 08]

1.) Yes

I thought as much. I needed confirmation because after examining a recent payslip I noticed that my employer is giving me 41% tax relief on my pension contributions even though I currently earn a basic salary of just €35,500 with a bonus of €2,000 (paid later in year). Is there any possible justification for this or is it more likely to be an error by the accounts department?

2.) You don't have to re-arrange things. In the example you give, let's say you're paying €1,500 per year to the pension scheme, in monthly contributions. Your taxable income is thus reduced to €34,000. So you then get a bonus of €1,400. Your bonus is only taxed at 20%.

If you hadn't been paying the monthly contributions, you'd end up paying tax at 41% on the bonus.

My pension contributions are 5% or €1775 per year. After tax/PRSI relief it costs me €800 per year which reduces my taxable income to €34,700. This means that €1,300 of my €2,000 bonus will be taxed @ 41%. Is it possible to make 1 annual lump sum contribution in lieu of regular contributions? If so I could make it in the same month that I receive my bonus to maximise tax relief.

 

[LDFerguson]

I don't know why your payroll people are allowing you tax relief at 41% on the entire contribution. Usually such calculations are done by the payroll software package they use, unless they're doing the calculations manually.

Incidentally, a contribution of €1,775 per year effectively reduces your gross salary by €1,775 per year for the purpose of calculating your tax and PRSI.

 

[DELLBOY 08]

I don't know why your payroll people are allowing you tax relief at 41% on the entire contribution. Usually such calculations are done by the payroll software package they use, unless they're doing the calculations manually.

Incidentally, a contribution of €1,775 per year effectively reduces your gross salary by €1,775 per year for the purpose of calculating your tax and PRSI.

Thanks for your response. I think I'll just keep quiet about it for the moment & see whats happens.

 

[ClubMan]

If you mean you will ignore the potential under taxation and hope for the best then this is foolhardy. The onus is ultimately on YOU the individual to make sure that your tax affairs are kept up to date. Ignoring the issue is probably simply postponing the inevitable of having to pay back underpaid tax.

 

[DELLBOY 08]

If you mean you will ignore the potential under taxation and hope for the best then this is foolhardy. The onus is ultimately on YOU the individual to make sure that your tax affairs are kept up to date. Ignoring the issue is probably simply postponing the inevitable of having to pay back underpaid tax.

Point taken.

Clubman can you offer any input to my queries above? I've read on other threads (by Brendan I think) that unless you can claim tax relief @ 41% you shouldn't bother with a pension. Should I discontinue my contributions?

 

[ClubMan]

Point taken. Clubman can you offer any input to my queries above?

I thought that they were already answered?

1.) If you are paying into a Defined Contribution Pension Scheme & are earning a basic gross salary of lets say €35,500 (ie. only €100 of salary taxed @ 41%), will you only receive tax relief @ 41% on the first €100 contributed or on all of your contributions?

The former.

2.) If the above is correct (ie. tax relief only @ 41% on the first €100 of your contributions), is there any way of making an annual bonus work to your advantage? Is it possible to make only one annual payment into your pension fund in the month you receive your annual bonus so that all your contributions receive tax relief @ 41%?

Your tax/PRSI relief will be the same and based on total taxable income regardless of the salary/bonus split.

If you didn't max out your pension tax relief in 2007 then you could backdate your claim for relief on contributions made before October 31st 2008.