Calculation of tax refund after voluntary contribution to AVC PRSA

Caspero

I have a general question on the correct calculation method for determining the tax refund due to someone who made a voluntary contribution to their AVC PRSA during the tax year.

To simplify and illustrate what I'm asking, I've left USC and PRSI out here. The calculations just deal with PAYE.

Let's assume a person has not breached their maximum allowable contribution for the year and their marginal tax rate is 41%, so we know they're due a refund at the 41% rate.

They make a €100 additional voluntary contribution to their self-directed PRSA from the bank account their net salary is paid into. Note that this is a self-directed voluntary contribution, not a regular contribution that comes out of the person's paycheck each month.

To generate that €100 of net income, the person earned gross income of (100/59)*100 = €169.49.

So to generate that €100 net income they paid tax of €169.49 - €100 = €69.49, which of course is 41% of €169.49.

My question is: should the tax refund associated with paying that €100 of net income be the full tax that was required to generate the income, i.e. €69.49 as calculated above, or should the refund be €100 x 41% = €41?

CIARAN_BOYLE

Probably best to leave out usc alright you dont get refunds of usc for pension contribs. Refund should be 41.

Look at it this way your contribution to your prsa is from gross income before tax. So your taxable gross pay falls by 100 your tax willfall by 41.

Humour Me

USC is calculated on your gross salary before pension deductions so will not be affected. Your refund is €41 for each €100 you pay into your pension.

gerrybbadd

Exactly as stated above. Your Standard Rate Cut Off Point would increase by 100, leading to a refund of tax at the marginal rate

Caspero

Thanks for your reply folks. Regarding the USC, the main reason I left that out was to simplify the calculation of difference between gross and net pay.

Anyway, the interpretation you've outlined seems right. However, I'm wondering why this site (ipf.ie/AVC-Investments/why-AVC.asp) says the following:

How much will I save in tax?....
At the higher rate of tax relief your original contribution of €100 would become €169.49 - an increase of 69% on your original investment!

I've been looking for a worked example on revenue's website but couldn't find any - most just dealt with the maximum contributions. Has anyone else seen one?

Or as an alternative - if someone who has signed up with a provider like Cornmarket etc. to pay into a PRSA directly from their monthly paycheck could check the tax treatment they receive by looking at their payslips, that would also be helpful because the tax relief should be the same as in the example I outlined above (except that in my example you'd have to claim the relief yourself whereas it'd automatically be applied if you're a cornmarket customer).

nompere

Caspero wrote: »

Thanks for your reply folks. Regarding the USC, the main reason I left that out was to simplify the calculation of difference between gross and net pay.

Anyway, the interpretation you've outlined seems right. However, I'm wondering why this site (ipf.ie/AVC-Investments/why-AVC.asp) says the following:

How much will I save in tax?....
At the higher rate of tax relief your original contribution of €100 would become €169.49 - an increase of 69% on your original investment!

I've been looking for a worked example on revenue's website but couldn't find any - most just dealt with the maximum contributions. Has anyone else seen one?

Or as an alternative - if someone who has signed up with a provider like Cornmarket etc. to pay into a PRSA directly from their monthly paycheck could check the tax treatment they receive by looking at their payslips, that would also be helpful because the tax relief should be the same as in the example I outlined above (except that in my example you'd have to claim the relief yourself whereas it'd automatically be applied if you're a cornmarket customer).

Look at this bit again:

How much will I save in tax?....
At the higher rate of tax relief your original contribution of €100 would become €169.49 - an increase of 69% on your original investment!

If you put in €169.49, you will get tax relief of €69.49, so that your actual cost is €100.

If you put in €100 then you get tax relief of €41 so that your cost is €59.

They're coming at it from a different direction, but it all works out the same in the end.

Caspero

nompere wrote: »

Look at this bit again:

How much will I save in tax?....
At the higher rate of tax relief your original contribution of €100 would become €169.49 - an increase of 69% on your original investment!

If you put in €169.49, you will get tax relief of €69.49, so that your actual cost is €100.

Hmm the way I read that was that what they call 'your original contribution' was what you put in - i.e. €100. Also, if you put in €169.49 and got tax relief of €69.49, the increase wouldn't be 69% as they stated, it would be 41%.

CIARAN_BOYLE

Caspero wrote: »

Hmm the way I read that was that what they call 'your original contribution' was what you put in - i.e. €100. Also, if you put in €169.49 and got tax relief of €69.49, the increase wouldn't be 69% as they stated, it would be 41%.

If its coming from payroll you have a choice 100 net or 169 in the pension.

So it costs you 100 (original investment) from your take home to get 169 in your pension (ie. 69%)

Not the most logical way to explain it but it sounds the best from the point of view of luring in clients.