Pension Tax Relief

k76

tldr;
I am looking at PRSA, Pension Tax Relief and I am unsure of a few things.

A quick yes/no answers are all I am looking for, but ofcourse if I made a mistake somewhere, misunderstood something or missed anything, I would be greatful if you could point it out!

How is the pension tax relief calculated on a €40,000 income?
1) Is it in bands, with the maximum contribution amount being split into lower (about €1,765) and higher (about €470) rates, where the total relief is €2,235?
2) Relief is going to be 40% for the whole maximum contribution, with no bands, giving a total relief of €4,000?

What happens if circumstances change, and where I was once looking at earning €40,000 for the year, paying higher taxes in my weekly payslips for half of the year, but my hours were then reduced and I will only earn €30,000 for the year. Can I still get that 40% tax relief or does it drop to 20%?

If I earn €35,299. Should I try and negociate a pay of €35,301 to hit that higher tax bracket?

Thank you!





##### Bit of background, a few questions, numbers and calculations #####

Hi,

I am looking at different Personal Retirement Savings Accounts (PRSA), and I am unsure of how the Pension Tax Relief works.

A quick yes/no answers are all I am looking for, but ofcourse if I made a mistake somewhere, misunderstood something or missed anything, I would be greatful if you could point it out!

I understand that there are different maximum % of earning that can be used as tax relief by age, such as 25% in the 40 to 49 age bracket. I am confused what is meant by the "marginal" or the "prevailing" rate of income tax when calculating the tax relief. Does it mean "use the 40% rate for everything once you are over the standard cutoff point"?

In a scenario where I am single, earn €30,000 gross annually, and am in the 40 to 49 age bracket, from my understanding my relief rate would be 25%, so for every €1,000 paid, I would get €200 back. And my optimal payments would be upto €7,500 (25% of €30,000), where I would recieve €1,500 in tax relief.



Now, what happens if I was in the same scenario, except earning €40,000, putting a portion of my income in the higher tax bracket? I understand that my optimal payments would be upto €10,000 (25% of €40,000).
Option 1) My tax relief works similar how income tax works with different rates and bands. For example, get 20% tax relief on my payments upto €8,825 (25% of €35,300), giving me €1,765 in tax relief. Then the remainder of my income (€35,300 to €40,000) is going to get relief at 40%, giving me about €470 (40% of (maximum relief allowable - lower band)... i.e, 40% of (€10,000 - €8,825)). This would result in total tax relief of €2,235.

Option 2) The tax relief is 40% on everything, upto €10,000 (25% of €40,000). Which would mean a total tax relief of €4,000.


From my reading around, option 2 describes how it works - but it seems a bit too good to be true! Can anyone confirm?



Should option 2 above be correct, this raises a few more questions:
Q 1) Say I earn €35,299. Should I try and negociate a pay of €35,301 to hit that higher tax bracket?

Q 2) What happens if you were looking at €40,000 annual income but lost your job 9 months into the tax year (the tax year being 1st Jan to 31st Dec?). This would mean an earning of €30,000. Does this mean the tax relief would instead be 20% (on 25% of €30,000), as at the end of the year income taxes would be adjusted and taxes paid at 40% would be refunded?

Q 3) Provided my Q2 understanding is correct, starting a job 3 months into the tax year would also give me 20% tax relief since my potential earning would be capped at 9/12 of €40,000 (9 out of 12 months left). Similarly, if my hours were reduced (as is now the case for some due to COVID), one could also not pass that €35,300 income threshold and only be entitled to 20% tax relief on their earnings?



Thank you!

cdeb

If you earn, say, 36k in the year, and put, say, 3k into your pension, then your taxable income is 33k.

You can work out the tax you would pay on basic pay of 33k and 36k, and the difference is the tax relief you'll get. If tax works out as (say) 9k on the former and 10k on the latter, then you've saved 1k in tax by putting 3k into the pension pot.

So there is no point negotiating to €1 over the tax band limit as it isn't the case that all tax relief is granted at the higher rate you pay.

Option 2 is not correct.

(Edit - that's PAYE only. You would still have to pay PRSI/USC as normal)

k76

Hi cdeb,

Thanks a million for your reply. That makes a lot more sense.

Those "Personal Pension Tax Relief Calculators" that come up with a quick google search where they ask for gross income, age, pension amount paid and then have a dropdown of either 20% or 40% income tax rate make it seem like it's either one rate or the other, and that the amount is not subtracted from your taxable income as you mentioned. Thank you very much for clearing that up for me, it makes more sense the way you explained it.

I also managed to find a calculator that takes more variables into account, and does it the way you explained. For example, a single person, with €40,000 gross income, and tax credits of €3,300, who pays 0% pension would have total taxes of €8,362.97, and a net salary of €31,637.03. But if they instead paid 25% into pension, the taxes would be €5,422.97 and net salary of €24,577.03. From my understanding, the difference between those two taxes (€8,362.97 and €5,422.97) is €2,940, which would be my tax relief.

I am not sure what the rules are about posting links to other websites (especially since it seems that the calculator is a teaser of a full product that the website offers) so I won't post the link here. Ofcourse, if it is not issue, I can post it here for future reference if someone comes across this thread.

Once again, thank you for your explaination and clearing things up for me.

coylemj

k76 wrote: »

I am not sure what the rules are about posting links to other websites (especially since it seems that the calculator is a teaser of a full product that the website offers) so I won't post the link here. Ofcourse, if it is not issue, I can post it here for future reference if someone comes across this thread.

I'm not a mod so please consider this as peer feedback...

Do us all a favour and do not post links to those websites.

silent_spark

Google ‘tax calculator Ireland 2020’ and you’ll get several options, including ones from PWC and Deloitte.