Exceeding earning cap

[anon123456]

Can anyone tell me how it should work if your earnings exceed the max pension contribution salary (€115,000) if you contribute say 20% on a monthly basis. Should your monthly contribution and tax relieve just stop at €1916.66 per month (€115,000/12 * 20%) even if you were on €200,000. Or would you just still contribute 20% per month tax free €3333.33 (€200,000/12* 20%) and the revenue would require you to pay back the tax at the end of the year?

 

[Blackrock1]

For employee contributions you are capped at the 115k, so if your age based % is 20% that is 23k per annum you can invest in a tax efficient manner, therefore if you earn 200k you shouldnt be doing any more than 11.5% per month if you want to stay within this.

If your employer is matching up to 20% it may still make sense however even if your EE contributions are entirely tax efficient.

 

[ClubMan]

For employee contributions you are capped at the 115k

Isn't it employee contributions for an occupational scheme but employer + employee contributions for a PRSA?

The original poster doesn't say what sort of pension is involved here. Or, indeed, if there is any employer contribution matching.

 

[bish123]

Firstly, congratulations for being in a comfortable position at relatively young age. Based on 20% limit, you are under 40 most likely.
Tax relief is capped at max of €115,000 per year even if your income exceeds more than that. It simply means if you add more into pension, you won't get tax relief beyond €1916.66 per month (€115,000/12 * 20%) in your case. For corporate employees, this is settled by payroll at source so it is already reflected in net take home per month. In this case there is no due tax at year end.

The other point is benefits (if any?) of AVC beyond limit as you won't get tax relief after max age limit.

 

[irishguy]

.

 

[Conan]

If you do contribute more than the tax relief limit in any year(s), the excess can be carried forward to future years, when your % limit increases. But clearly you should not continue to "over-contribute".

 

[anon123456]

Thanks. It's an occupational scheme so I can put in 20% of my earning tax free.

The reason I asked is that I noticed it's putting in 20% of my full earnings tax free and disregarding the earnings cap. Not sure if that would kick in later on in the year (1st year where I will be over the limit)when I approach the actual contribution limit and my monthly payment would reduce/stop or if revenue would ask for it back when I ask for a P21.

I guess I should ask the pension company, but deep down I was hoping it was an error and I was getting a bit more tax free

It's a large MNC and pensions company so I doubt it's incorrect.

 

[ClubMan]

If you want to contribute strictly 20% of €115k then you should probably make your monthly contribution €115k × 20% ÷ 12 = €1,917.

But note what @Conan says above about contributing more and carrying it forward to future years when you may not make such generous contributions and can claim tax relief on the excess.

With regard to your key question about what happens if you contribute more than 20% over year I don't know if you stop getting relief when you hit the limit or if it only gets sorted when Revenue balance your account after year end and you pay back the excess tax relief then or via reduction of your tax credits going forward. I suspect that it only happens at balancing time. But Revenue should be able to clarify.

 

[Dave Vanian]

The reason I asked is that I noticed it's putting in 20% of my full earnings tax free and disregarding the earnings cap. Not sure if that would kick in later on in the year (1st year where I will be over the limit)when I approach the actual contribution limit and my monthly payment would reduce/stop or if revenue would ask for it back when I ask for a P21.

I guess I should ask the pension company, but deep down I was hoping it was an error and I was getting a bit more tax free

This sounds like a query for whoever runs the payroll system rather than the pension company. The payroll software SHOULD notice mid-year when your contribution goes over €23,000 (€115,000 x 20%) and start sounding alarms, klaxons, flashing red lights etc. But that depends on how good the payroll software is.

Even if the payroll software isn't smart enough to notice this and continues allowing you tax relief on 20% of the full salary, I think it would picked up at the end of the year. If you've got too much tax relief, you'd be obliged to pay it back, even if it was your employer's payroll software error.

 

[fayf]

Some of the more advanced Payroll systems, can stop tax relief, during the tax year, as they check, not only the employee age, at the date of the payrun,(for age related max contribution %) but also check the pro rated max earnings cap of 115k, but in addition, the year to date amounts, so will stop any tax relief on a calendar pro rata basis. So, for example, if you are already on max avc %, and a bonus is paid out in say March, and you opt to add all of the bonus to AVC’s it will disallow any tax relief, subject to your age max relief & pro rated earnings limit also, on the bonus.

Megapay is one such system, which has these controls, which operate on a cumalative basis, so it restricts and denys tax relief to the income portion that exceeds the relief rules, but will refund tax, if later on in the tax year, the employee falls below the upper limits, eg if they reduced their AVC’s later in the year, having previously exceeded the age related limit, or annual earnings cap - on a calendar pro -rated basis.

Some other systems, have no such controls, and will allow full tax relief irrespective of any exceeding of the limits, this can be tricky as employee has a potential year end liability, but the employer also could be in hot water with the revenue, as this is strictly, against the rules. Employers have a responsibility, to check that sufficient controls are put in place.

 

[ClubMan]

Some of the more advanced Payroll systems, can stop tax relief, during the tax year, as they check, not only the employee age, at the date of the payrun

They shouldn't do that. They should check what the employee's age is on 31st December. That's what counts for age related tax relief limits.

 

[anon123456]

I'll raise it with payroll to understand what's actually happening, as there isn't much point in contributing without the tax relief.

 

[ClubMan]

I'll raise it with payroll to understand what's actually happening, as there isn't much point in contributing without the tax relief.

Well, as mentioned earlier, if you exceed the tax relief cap you can carry the excess forward and claim tax relief at a later date should the opportunity arise.

 

[fayf]

They shouldn't do that. They should check what the employee's age is on 31st December. That's what counts for age related tax relief limits.

Actually, its 100% fully revenue compliant, you are supposed to get the age related tax reliefs, when you hit the age, not, in advance of reaching the age. As it works cumulatively, it will give a tax refund, once the age is reached, later in the tax year.

 

[ClubMan]

Actually, its 100% fully revenue compliant, you are supposed to get the age related tax reliefs, when you hit the age, not, in advance of reaching the age. As it works cumulatively, it will give a tax refund, once the age is reached, later in the tax year.

That's incorrect.
You can avail of the the higher age related tax relief amount in the year that you turn the relevant age.
So if you turn 50 on December 31st 2022 you can contribute 30% for the full 2022 tax year and get full tax relief on it and not just on the age 40-49 limit of 25%

 

[fayf]

“As it works cumulatively, it will give a tax refund, once the age is reached, later in the tax year.”