Dual Income Tax Briefing

Messages on September 2nd, 2010 No Comments

Tax Briefing 74: Crunch Time

Do not contribute to the wrong pension arrangement.

In September 2009, The Revenue Commissioners issued Tax Briefing Note 74: Tax Relief for Pension Contributions: Application of Earnings Limit. This briefing detailed how the earnings limit for pension contributions operates where an individual has two sources of income i.e. income from employment and income from self-employment and is making contributions to both an occupational pension scheme and a Personal Pension plan. The most obvious example of this would be a Medical Doctor / GP who has GMS income as well as earnings from his/her Private Practice.

It now transpires that if an individual has more than one source of income, they need to look very carefully at how their pension contributions qualify for tax relief. Having two sources of income (e.g. HSE and Private Practice) now means an individual can no longer contribute to a Personal Pension until their maximum capacity for AVC’s from their pensionable income has been used up.

In short, if income from pensionable employment is over €150,000 per annum an individual can no longer fund a Personal Pension or PRSA. This is because the earnings limit €150,000 has been used up through income earned through, for example, the HSE and therefore there is no more room to invest in a Personal Pension.

This applies not only to the current Tax year but also to pensions contributions being back-dated to 2009 for Tax relief purposes.

An example of how this operates is as follows:

An individual has the following income in 2009

1. HSE Income €100,000

2. Private Practice Income €100,000

Earnings Cap applicable €150,000

Current contribution to employer’s scheme 5%

Age 52 – Age related limit 30%

In this example the income of €100,000 is “pensionable” and the contribution rate is 5%. Therefore, the balance of the age related limit (30%) is 25% of €100,000 and this must be used as an AVC/PRSA or AVC contribution firstly.

This leaves a ‘residual earnings cap’ of €50,000 (i.e. €150,000 earnings limit less €100,000 HSE income).

30% of the €50,000 of earnings can be used to fund a Personal Pension or PRSA. Contributions relating to the excess over the €150,000 earnings cap (€150,000 to €200,000) would not be entitled to tax relief.

The result is that some contributions being made to Personal Pension plans and PRSAs are no longer eligible for tax relief from 7th September 2009 (subject to certain criteria).

So, it is crunch time.

Individuals will have to decide which contract they should be contributing to. If they are still contributing to a Personal Pension plan or PRSA they may not be able to get tax relief when they submit their tax return.

It is not all bad news. Individuals affected by this change can contribute to AVC PRSAs to get many of the same tax relief benefits which are associated with Personal Pensions or PRSAs and, they are also entitled to PRSI/Health Levy relief on their contributions. AVC PRSAs can be used for the following purposes on retirement:

• Increase tax-free lump sum where full service is not expected.

• Increase tax-free lump sum where there is scope to increase due to difference between maximum pension entitlement and actual pension entitlements.*

• Use the PRSA AVC Fund to transfer to an ARF on retirement to get the benefits associated with an ARF.

• Use the PRSA AVC fund to increase pension income by annuity purchase.

* For example all recent public sector recruits are now paying PRSI rates giving entitlement to the old age contributory pension. This benefit is integrated with the public sector superannuation scheme benefit, resulting in a reduction in “Pensionable Salary”. This reduction in “pensionable salary” provides significant further scope for AVC PRSAs as the state contributory old age pension may be ignored for the purposes of  calculating the Revenue Maximum Allowance Pension Benefits.

Contact Your Local Independent Financial Adviser

Lucas Financial Consulting Ltd is based near Carrickmacross Co Monaghan. As we straddle four counties – Louth, Monaghan, Cavan and Meath we are ideally placed to become your new Local Independent Financial Adviser.

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