Tax Relief on Pension Contributions

If a pension scheme or product is approved by the Revenue Commissioners then contributions to such a pension are allowable as an expense when being assessed for income tax. Put another way if you put some of your earnings into a pension those earnings are not subject to income tax. This is currently allowed at the individuals marginal rate of tax, so if you pay tax at 41% you can claim tax relief on pension contributions at 41%.

Note that this is the tax relief on entry only. It is important to look at the tax situation in accessing the money in retirement. There is also PRSI relief which can be claimed which is dependant on the individuals rate of tax.  

Example 1

A single teacher aged 50 earning €60,000 has the choice to invest €10,000 into an AVC.

• If they choose to invest the €10,000 in the AVC, that amount is not subject to income tax at 41% and so €10,000 would be saved for the future.
• If the money was instead taken home it would be subject to income tax at 41% and so be worth €5,900 to the teacher before other deductions.    

Age Related Limits

The amount of tax relief available to an individual is limited in several ways however. One important such way is by age related limits. Essentially the closer someone is to retirement the more tax relief they are allowed. 

Earnings Limit

For the purposes of calculating relief, there is an overall aggregate earnings limit on an individual’s tax relieved contributions in a tax year. The limits have recent reduced dramatically. A limit of €254,000 applies for the tax years 2006 and prior. The limit for 2007 was €262,382 and the limit for 2008 was €275,239. From last year 2009 and this year 2010 the maximum earnings limit is €150,000.

Example 2

So if a nurse aged 45 is earning €50,000, they can claim a maximum tax relief of 25% of €50,000 or €12,500 per annum. If they invest €12,500 per annum in pensions and are earning at the 41% rate of tax, their tax bill will reduce by €5,125.

Example 3

A hospital consultant aged 55 earning €180,000 in a HSE public capacity may only invest a maximum of 35% of the maximum earnings limit of €150,000 or €52,500. This will reduce the income tax  bill by €21,525 per annum.

Absolute Pension Fund/ Pension & Lump Sum Limit

There are also absolute limits which an individual cannot surpass or "over-fund" in relation to pensions. With private sector pension it can be straightforward enough, the  Standard Fund Threshold for 2009 being €5,418,085. With a defined benefit scheme the maximum allowed is 40/60ths.

This is however a complex area and it is important to receive the correct advice here, particularly if you have a combination of defined benefit and defined contribution schemes, be they occupational pension schemes, AVCs or private pensions or be they related to different employments or incomes.  

Dual Income Rule

For those who earn in a public capacity and in a private or self-employed capacity it is also necessary to adhere to the recent Revenue Tax Briefing 74 which can be accessed here. This ruling will apply to those who have both a public and private practise, for example hospital consultants. If this is not closely adhered to, tax relief may not be granted on pension contributions

To see how the above rules apply to your situation and discover how you can minimise your tax liability and maximise your retirement funds request a call from a PSRA pension advisor.