Simon Harris (Wicklow, Fine Gael) | Oireachtas source

I thank Senators Feargal Quinn and Katherine Zappone for tabling this recommendation. I know that recommendations are tabled in this House, but the concept is the same as amendments and I take them seriously. It has been useful to hear a wide range of views on this issue. Senator Feargal Quinn is correct that we must address the issue of pension scheme take-up. As Senator Aideen Hayden and others said, the demographic profile shows that the population is ageing and the take-up of pension schemes will only become more important as an economic and societal issue.

I am not in a position to accept the recommendation, but I want to highlight the fact that there is a Government commitment to carry out a full review of all State supports for pensions. There is a window of opportunity to examine this issue and I will take the views of this House into account and ask that the Minister for Finance and the Government do so too when considering the road map to be published on universal pension provision.

I will go through my technical note because it is useful. The recommendations tabled by Senators Feargal Quinn and Katherine Zappone would, if accepted, provide an exception from USC for employer contributions to personal retirement savings accounts. It is important to note that the tax treatment of contributions to PRSAs and the contribution and benefit limits that apply differ, in some respects, from the tax treatment and limits applying to occupational pension schemes. This reflects the fact that they are, essentially, different pension products.

Occupational pension schemes are sponsored and supported by employers. However, as Senator Fidelma Healy Eames outlined, the Pensions Act requires that employers that do not provide an occupational pension scheme for their employees offer them a standard PRSA contract. While there is no obligation on employers to make contributions to the PRSA contract on behalf of employees, they may do so. It is in the context of employment-related PRSAs that the issue of USC arises.

Employee contributions to occupational pension schemes and PRSAs are relieved from income tax at the employee's marginal income tax rate but, reflecting the broad-based nature of the USC, PRSAs are not subject to relief from USC. Age-related percentage limits of annual earnings, subject to a maximum annual earning of €115,000, act to limit the amount of tax relief contributions that an individual employee can make towards pension saving in any one year, whether through an occupational pension scheme or a PRSA. The tax treatment of employer contributions to occupational pension schemes on behalf of employees differs from that for PRSAs. In the case of an occupational pension scheme, employer contributions do not come within the age- and earning-related restrictions on tax relief for pension contributions mentioned above. In contrast, employer contributions to PRSAs come within those limits, which is quite an important and technical difference. This difference in treatment reflects the fact that in the case of occupational pension schemes, the principal control that has applied to limit funding of benefits is the requirement that such schemes cannot produce a fund that exceeds the amount that will provide a maximum pension on retirement to any scheme member of two-thirds of their final salary. The application of age- and earnings-related restrictions to employer and employee contributions was, therefore, not considered necessary given this benefit limit control. In the case of PRSAs, however, because they are largely structured as personal pension products, there is no benefit limit as such and benefits are regulated through a contribution-based control. In other words, the age-related and earning limits apply to the combined employer and employee contributions to a PRSA, which acts to restrict the size of the PRSA tax relief pension fund from which benefits can be funded. If employer contributions to a PRSA were not brought within these limits, there would be no restriction on the amount that an employer could contribute to an employee's PRSA contract. To ensure adherence to these contribution limits, the PRSA legislation treats employer contributions on behalf of an employee as a benefit-in-kind of the employee but also deems it to be a contribution made by the employee for tax relief purposes. This means that where the aggregate amount of employer and employee contributions does not exceed the age- and earnings-related limits already mentioned, no effective benefit-in-kind tax charge will arise. This is because any benefit-in-kind on the employer contribution in the hands of the employee is exactly matched and offset by the employee's tax relief on the additional deemed employee contribution. It is only where the combined employer and employee contributions exceed the relevant age- and earning-related limits that an effective benefit-in-kind tax charge will arise. I put this on the record as it is useful for people who have an active interest in this area. There is an awful lot of technical detail to take in, but it is important for people to be able to go back and reference this in terms of our debates on pensions.

In contrast, employer contributions to occupational pension schemes on behalf of employees are specifically exempt under tax law from being charged as remuneration of the employees concerned in the form of benefit-in-kind, reflecting the operation of the benefit limit mentioned earlier. That an employer contribution to a PRSA is subject to benefit-in-kind in the hands of the employee means that it attracts an actual USC charge. It can be argued that this treatment is consistent with the treatment of employee contributions to occupational pension schemes, which, as already mentioned, are not exempt from USC. In the case of a PRSA, neither the actual employee contribution nor the deemed employee contribution is USC-exempt. The USC treatment of employer contributions to PRSAs has been looked at before. It was examined in 2012 as part of the review of the USC undertaken by the Department of Finance at the instigation of this Government. This review was published on the Department's website. Following that review, the Minister decided not to make any change to the USC for employer contributions. The Minister used the fiscal space available to him and the Government at the time to instead remove 330,000 individuals from liability for USC altogether. Senators will be aware, as already outlined, that this year's budget fiscal space was used to exempt a further 80,000 individuals from USC and to lower the tax burden for lower and middle income earners.

To allow an exemption from USC in respect of employer contributions to PRSAs would be to breach one of the fundamental features of USC, which is that it applies to a very wide income base. This could quickly lead to claims for exemptions from the charge from other individuals and groups who would consider themselves equally deserving of special treatment. For example, it could lead to demands from self-employed contributors to PRSAs for USC relief from their contributions and could conceivably lead to demands for USC relief on contributions to all pension products, including occupational pension schemes. There is also the risk that it could lead to arrangements between employers and employees, particularly employees who are in a position to influence their remuneration packages, whereby the employer contribution to the PRSA is maximised as part of the employee's overall remuneration package and the employee contribution minimised or eliminated altogether, thus avoiding USC on that effective income.

In view of the issues outlined, and taking everything into consideration, the Minister has decided not to make any changes to the treatment of PRSAs in respect of the USC at this time. However, as with all taxes, he is keeping the matter under review, and in this regard I note, as I outlined at the beginning of my contribution on this recommendation, the recent Statement of Government Priorities 2014-2016, which confirmed that during 2015, as part of a priority to deliver better living and working standards, the Government will agree a roadmap and timeline for the introduction of a new universal supplementary pension saving scheme. It is envisaged that as part of this work all State supports for private pension provision will be reviewed. For the above reasons, the Minister cannot accept the recommendation. I respectfully suggest that there is scope for a detailed debate on the whole issue of pensions. In the context of the 2015 review of all State supports to pensions, there will be a window of opportunity.

Senator Aideen Hayden raised the general issue of USC. We have only begun on part one of a three-part tax reform plan. We have seen changes to the USC. Those changes have been targeted at the two lower rates and at lower income earners, but as the reform process continues, I am sure the Minister will take her comments into consideration.