Arrears of DSP Pension - When are they Taxable?

[JohnKelly]

A relative recently received a payment of arrears on a Department of Social Protection contributary pension. He became entitled to the pension in January 2012 but received nothing until last week when he received the entire amount for 2012 and for the first 2 or 3 months of 2013.

My quesiton is when is the 2012 portion of the pension taxable? Should it be be taxed in 2013 when it was received, or should it be allocated to 2012 and an amended tax return filed with Revenue to report the additional income. This person is self employed now and can claim a PAYE credit on the DSP pension. If the entire amount is taxable in 2013 then he will only be entitled to 1 PAYE credit against the total amount. However, if the 2012 portion could be allocated to 2012 and an amended Form 11 filed with Revenue, then he could claim 2 PAYE credits against the total amount (1 against the 2012 portion in the amended 2012 tax return and 1 in the 2013 tax return). Obviously this would be more beneficial.

 

[Joe_90]

I would certainly consider including it in 2012. But you need to consider the impact it may have on exemption limits and marginal relief over the 2 years.

 

[JohnKelly]

Thanks Joe. His income is over the exemption limits/marginal relief level, and most if not all of the DSP pension will be taxable at 41%. The only real benefit I see from splitting it over the 2 years is the ability to claim 2 PAYE tax credits against it instead of 1, as these credits are granted on an annual basis. It would probably be reasonable to re-file the 2012 tax return and include a cover letter explaining that the arrears of pension income is now included and that the PAYE credit is now being claimed against it (he wouldn't otherwise be claiming a PAYE credit in 2012 or 2013 as the rest of his income is from self-employed sources).