Séamus Kirk (Louth, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

62. To ask the Minister for Finance if retirees who participate in a pension scheme are permitted to claim tax relief for the full year in which they retire, or only up to the date of retirement; and if he will make a statement on the matter. [33804/15]

Michael Noonan (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

I am assuming that the Deputy's question relates to retirees who were formerly, as employees, members of their employer's sponsored occupational pension scheme.

I am advised by the Revenue Commissioners that the legislation governing tax relief for contributions to occupational pension schemes is set out in section 774 of the Taxes Consolidation Act 1997 (TCA 1997). Relief for contributions is granted to an employee against the remuneration from the employment in respect of which the pension scheme is effected. The relief is given by way of deduction of the pension contributions as an expense in determining the employee's income tax liability for the year in question. In any tax year, the amount of contributions on which relief can be granted is limited to an age-related percentage (ranging from 15% to 40%) of the employee's remuneration (subject to an overall annual earnings' cap, which currently stands at €115,000).

Employee contributions can take the form of ordinary annual contributions, additional voluntary contributions (AVCs) or special contributions. AVCs allow employees to improve the retirement benefits provided by their occupational pension scheme at their own expense (i.e. without a corresponding employer contribution)provided the benefits stay within Revenue maximum limits. A common circumstance in which special contributions arise is in the context of payments to AVC schemes at or near the point of retirement (known as "last minute" AVCs) to enhance benefits (normally the lump sum). Irrespective of the type of contribution (ordinary, AVC or special) overall relief on contributions in any year cannot exceed the relevant age- related percentage limit of earnings.

In the case of ordinary annual contributions (and regular additional voluntary contributions) relief is normally provided by an employer under what is known as the net pay arrangementwhereby employee pension contributions are deducted from gross pay before tax is calculated. In the case of special contributions, relief is normally granted by way of a claim made by the taxpayer to Revenue at the end of the relevant tax year. Any unrelieved special contributions made in a year can be carried forward and treated as a contribution made in future years for the purposes of tax relief (subject to the relevant limits applying for those years). This spreading forward continues until the full amount had been granted relief or until it is no longer possible to carry the relief forward.

The inability to carry relief forward would occur, for example, where the employee has retiredin which case, as the relief for pension contributions is only available against the remuneration in respect of which the pension scheme is effected, the retirement results in a cessation of the roll forward of relief.

In that regard, however, section 774 (8) of the TCA 1997 provides for a limited spread-back provision for special contributions whereby a contribution made before the return filing date for a year (generally 31 October) can, where the taxpayer so elects, be treated as having been made in the previous year with tax relief granted in that earlier year (subject to the relevant age-related and earnings limits applying in that earlier year).

This is particularly useful where an individual is close to retirement, as he or she may have insufficient taxable income in the year in which the contributions are paid (i.e. the year of retirement) to absorb the full amount of the special contribution. In addition, the carry forward of unrelieved contributions to later years is not an option for such individuals, as pension income is not taken into account in computing income for pension contribution tax relief purposes. This facility, therefore, effectively allows the retiree to use the tax relief available to him or her in the year of retirement and, where necessary, to take advantage of any unused tax relief in the previous year.

In recognition of the fact that retiring employees who are not chargeable persons (within the meaning of Part 41A TCA 1997) may overlook the 31 October deadline for making an election, Revenue, in such cases, treats an election as being timely where it is received on or before the 31 December of the year of retirement, once the special contribution has been made by the earlier of the return filing date (i.e. 31 October) and the date of retirement.

[1]The legislation only refers to ordinary annual contributions and contributions that are not ordinary annual contributions but the latter encompass AVCs and special contributions. AVCs can be made on a regular basis (like ordinary annual contributions) or on a once off or occasional basis in which case they are generally referred to as special contributions.