Awkward pension question

USC is applied to all gross income from your employer.

The rate band for your income (in 2024) covers gross pay between €26K and €70K, round figures. I think you are mixing up Income Tax and USC with your reference to €40K.

39,200 was your taxable salary, after pension contributions were deducted from the gross earnings.

The 39,200 is taxed.

The tax relief on the pension cont is done at source, you don't need to claim it.

USC is separate, there is no relief from USC on pension contributions.

When you read about tax relief on pensions contributions and that you will get relief 'at your marginal rate', that can be misread to mean that if you pay 40% PAYE on the top €1 of your income then you will get 40% relief on all of your contributions. This is not the case. You will only get 40% relief on the amount of your income that falls into the 40% band.

I think that answers the OP's question.

Basically the OP will get 40% relief on €800 and 20% relief on the other €800?

I don't understand this. And all the websites such as Revenue that I look at, seem to contradict what you are saying.

"The rate of tax relief on your pension contributions is at the highest rate of income tax you pay, known as the marginal rate." (From the Revenue site).

Anyway the query was about USC being applied to all gross pay, where the OP thought that it should be gross pay less pension contributions. Which is incorrect, they mixed up Income Tax where there was a change to the rate at €40,000 (in 2023) with USC. It wouldn't matter if they got gross pay of €30,001, €40,001, or €50,001, all of those fall into the same USC band.

Gross pay 2023 = 40,800

Pension conts 2023 = 1,600

Taxable pay = 39,200

Tax relief as follows:

800 @ 40% = 320

800 @ 20% = 160

If the pension was deducted at source through payroll, then tax relief is automatically applied. No need for employee to do anything.

If pension deductions are made through payroll, then tax relief is applied at source.

By that I mean, in the same pay run.

Employee pays contribution in August, tax bill falls in August.

The relief comes in the form of taxable pay falling below gross pay.

The employee submits documents that are supplied by PRSA company, when the employee is doing their normal, regular Form 12 tax return.

Good discussion here on whether those only paying tax at 20% should make a pension contribution

https://www.askaboutmoney.com/threads/should-someone-paying-tax-at-20-contribute-to-a-pension.232596/

You seem to be implying that at the stage during the year when an employee reaches 40,000, their net pay should rise, as they start getting more tax relief on their pension contribtions?

It doesn't work like that.

You tell your employer how much (gross) contribution you want to make. That number is deducted before PAYE is calculated so for most of the year, you are saving the 20% tax that you would have paid on that income. Looking at your numbers, at the end of 2023 you would have dipped into the 40% band if you were not paying any pension contributions and you would have paid more more tax in December compared to November but you didn't. Because your pension contributions were deducted from your gross income before PAYE was calculated and this kept you in the 20% band.

But say you did go well into the 40% band, for the November and December payrolls. What you seem to think is that you would then get more net pay because the amount of tax you saved on the pension contributions would go from 20% to 40%. It would, but you would now be paying 40% on all of your net salary so your net (take-home) pay would reduce, not increase.

The extra tax relief on the pension contributions would be swallowed up by the increase in PAYE from 20% to 40% on the rest of your income.

Thank you for your reply with the information.

I'm still unsure as to how the tac benefit is applied.

Makes sense. Thanks for that. Much appreciated.