Max pension contributions for tax relief: PAYE & self-employed income

[Rose321]

Hi everyone,

I'm trying to work out how pension contributions are calculated for tax relief purposes, especially for someone with both PAYE and self-employed income. I'm in the 40-49 age bracket, so my age-related percentage for contributions is 25%.

Am I right that "net relevant earnings" is the figure used to determine the maximum tax-relievable pension contribution. I'm wondering how is "net relevant earnings" calculated in a dual-income situation?

Some example figures:

• Gross PAYE employment income: €20,000
• PAYE pension deducted in payslip: €1,000
• Gross self-employed income: €30,000
• Self-employed income after expenses: €15,000

Is the "net relevant earnings" for a self-employed person their net income after expenses (€15,000 in this example) and for a PAYE worker, it's the gross salary?

So, for pension relief purposes, is the maximum contribution calculated on:

1. Just the net self-employed income? (25% of €15,000 = €3,750)
2. A combined figure of both incomes? (25% of €20,000 + €15,000 = €8,750 - €1000 = €7750)

So my main question is:

• What is the maximum pension contribution I can make to reduce my overall tax liability? and can that be in 1 pension, e.g. PRSA for the self-employed income or does it need a second AVC for the PAYE?

I'm trying to figure out which figure to base my calculations on and what the practical steps are to ensure I'm making the most of my tax relief. Any guidance would be really helpful!

Thank you!

 

[Steven Barrett]

If you are in pensionable employment from your PAYE job, you have to max out your contributions to that income first. If there is still scope to make contributions through your self employed income, you can make a separate contribution to a separate policy.

Net relevant earnings comprise the trading and services income of self-employed persons. They are effectively the taxable trading profits. They are net of losses, tax deductible interests. and capital allowances, which are deducted in the calculation of taxable profits.

 

[S class]

Is your PAYE employment a company occupational pension scheme, or is it a PRSA that your employer also contributes to ?

Is the 1k contributed directly from your wages an employee or employer contribution, or a combination of both ?

 

[Rose321]

If you are in pensionable employment from your PAYE job, you have to max out your contributions to that income first.

thank you @stevenbarrett the PAYE job is teaching (subbing) so I would need to make an AVC contribution before setting up PRSA?

 

[Rose321]

s your PAYE employment a company occupational pension scheme, or is it a PRSA that your employer also contributes to ?

Is the 1k contributed directly from your wages an employee or employer contribution, or a combination of both ?

Thank you @S class The PAYE is teaching (subbing) & the 1k is directly from my wages to Dept of Education, no employer contribution in the 1k.

 

[Dave Vanian]

If you are in pensionable employment from your PAYE job, you have to max out your contributions to that income first.

I think this rule doesn't apply where the combined income from both jobs is less than €115,000. Assuming that @Rose321 has income of less than €115,000 from both sources, she could choose to make a pension contribution against her self-employed income regardless of whether or not she has maxed out her tax relief on the PAYE income.

 

[Rose321]

I think this rule doesn't apply where the combined income from both jobs is less than €115,000.

Ok thank you, yes less than €115,000 - so with the example numbers above is the max PRSA based on:

Gross self-employed income: €30,000 x 25% or Self-employed income after expenses: €15,000 x 25%?

 

[S class]

Use 25% of your gross income for USC, minus 1k, as the total for your PAYE employment.
+
You can also make a pension contribution of 25% of your 15k self employment income.

Assuming that you are in a public sector pension scheme for the teaching employment. You can either pay the AVCs for this employment directly to the AVC provider for this scheme. Or you can set up your own AVC PRSA and make contributions to this.

You will need to set up a separate PRSA for your contributions from your self employment.

 

[Steven Barrett]

I think this rule doesn't apply where the combined income from both jobs is less than €115,000.

It applies regardless of earnings. Obviously, if earnings are under €115,000, there is scope to make contributions as an AVC and as a personal contribution to a personal pension or a PRSA.

 

[AAAContributor]

If you are in pensionable employment from your PAYE job, you have to max out your contributions to that income first. If there is still scope to make contributions through your self employed income, you can make a separate contribution to a separate policy.

I think this rule doesn't apply where the combined income from both jobs is less than €115,000.

Assuming that @Rose321 has income of less than €115,000 from both sources, she could choose to make a pension contribution against her self-employed income regardless of whether or not she has maxed out her tax relief on the PAYE income.

It applies regardless of earnings.

This is an interesting situation where there are dual incomes.

Where an individual has two sources of earnings, one being pensionable where they are a member of a contributory company pension scheme and the other non-pensionable or from self-employed earnings, in such cases the pensionable salary uses up the Earnings Limit first.

This can reduce the scope for individuals to receive income tax relief against their non-pensionable / self-employed earnings and in some cases result in no scope at all.

The interaction of dual incomes and the Earnings Limit impacts the tax relief available on a contribution to a PRSA or Personal Pension.

The question is: does it actually FORCE the individual to contribute AVCs (i.e. they are mandated to pay into the AVC Scheme or PRSA AVC) over paying into a PRSA or Personal Pension?

If I have salary income of €100k (and am a member of a Scheme) and have self employed income of €30k (and if we use an age-related limit of 20%), I can only make a contribution to a PRSA/Personal Pension of 20% of €15k (i.e. €3k) and get tax relief. I can't get tax relief on a contribution of 20% of €30k. The Earnings Limit of €115k and my salary income impacts my scope for a tax-relievable contribution to the PRSA/PP.

If I have a salary of €120k and the same self employed income, there is no scope for me to make a contribution to a PRSA/PP and get tax relief.

We can see that the scope for pension contributions in relation to self employed earnings can get squeezed to zero, depending on pensionable salary.

However, if in the first situation I make a contribution to the PRSA of €3k (and make no AVCs or other pension contributions) and seek to claim tax relief in my Form 11, will this claim for tax relief be denied by Revenue?

Can they actually deny the claim and say that I am forced/mandated to have put that €3k into AVCs?

This seems quite severe!

Have I not followed the rules by noting the interaction of my salary and the Earnings Limit and accordingly calculated the contribution I can make on my self-employed earnings?

 

[Dave Vanian]

It applies regardless of earnings. Obviously, if earnings are under €115,000, there is scope to make contributions as an AVC and as a personal contribution to a personal pension or a PRSA.

No. If someone has earnings of €80,000 pensionable PAYE and self-employed income of €30,000, they can choose to put a contribution into a Personal Pension or PRSA against their self-employed income even if they're not maxed out on the contributions to the pension scheme re PAYE salary.

 

[S class]

No. If someone has earnings of €80,000 pensionable PAYE and self-employed income of €30,000, they can choose to put a contribution into a Personal Pension or PRSA against their self-employed income even if they're not maxed out on the contributions to the pension scheme re PAYE salary.

This seems like the correct situation.

It would be interesting to input all the situations mentioned by AAAContributor into form 11 to see how each situation is calculated.

The majority of people who submitt their own form 11 would be clueless about this possible tax rule. They would choose how to distribute there pension contributions and just accept the form 11 calculation.

 

[Dave Vanian]

My understanding is that the Dual Income provisions exist to stop someone exceeding the €115,000 salary cap. So if someone has PAYE income of €120,000 and is in a pension scheme in respect of this employment and also self-employed income on top, then in that case they simply cannot make any pension contributions against their self-employed income and must max out contributions in respect of the PAYE job, up to the €115,000 salary limit.

 

[GSheehy]

Revenue Pensions Manual is very comprehensive and provides examples. It incorporates the previous (Tax Briefing 74) Revenue e-brief for GMS Doctors.


Gerard

www.prsa.ie