AAAContributor
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Thanks for highlighting that.
Single Scheme and PRSA AVC: Clarification on Lump Sum Limits
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Thanks for highlighting that.
Just to be 100% sure I’ve got this right. I’m in my 40s. My current HSE gross salary is €100k and my business gross income is €10k. So €110k gross. Does this mean I can put €2.5k from the business gross income into a “PRSA AVC” that is also being paid into from my HSE salary or just a standalone “PRSA” that is not being paid into from my HSE salary?
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Assuming you want to maximise your scope for tax relief on pension contributions, in calculating the contribution you can make to the PRSA AVC and receive tax relief thereon, follow these steps:
1. Ascertain employment income: €100,000. €110k is irrelevant.
2. Ascertain tax relief % for age: 25%
3. Calculate scope for tax relief on employment income: €25,000 (€100,000 x 25%).
4. Take account of what contributions you have already made to the Single Scheme: let's say €5,400 approx on a €100k salary. Ignore ASC.
5. Scope for contribution to PRSA AVC = €19,600 (€25,000 - €5,400).
You can see here in reckoning up what you can contribute to a PRSA AVC, we are working off income from employment only.
Now, how you actually fund that €19,600 payment to the PRSA AVC provider from a cashflow perspective, is your business.
If you had, say, €5k sitting in your sole trader bank account and only had €14,600 in your current account, the €19,600 in theory can come from anywhere.
At this point in the game you have contributed €5,400 in employee contributions (where you will have received tax relief through payroll) to the Single Scheme and have paid €19,600 to a PRSA AVC.
Total pension contributions at this point are: €25,000.
At this point, no further contributions are made to your PRSA AVC.
I guess you could pay more into your PRSA AVC (which is I think what you getting at - work off a total income of €110k), but you would have to carry forward tax relief to the following year as tax relief on a PRSA AVC contribution will only be granted based on your income from employment. See here.
Revenue have your employment figure so will only allow tax relief on a contribution of €19,600 as you'll already have received tax relief on the €5,400 Single Scheme contributions.
If you say to yourself that you have income from both sources of €110k and will pay €19,600 + €2,500 into your PRSA AVC and claim tax relief on €22,100, you will only be entitled to receive tax relief on €19,600 for the tax year in question and will have to set €2,500 as a contribution against the employment income in the following year.
What you want to do at this point is:
6. Open a standalone PRSA and contribute €2,500 to that pension product, and claim the tax relief on that.
At this point you have contributed:
- €5,400 employee contributions
- €19,600 PRSA AVC
- €2,500 PRSA
Total €27,500 = (25% x €110k)
So, as I say, if you are looking to maximise your tax relief and have the means to contribute €27,500, you follow the above approach.
What @Dave Vanian is highlighting/implying is that if your total income is less than the earnings limit of €115k, if all you have is the means to contribute, let's say €2.5k for the sake of example, to a pension (exclusive of the €5,400 you have already contributed in employee contributions to the Single Scheme), you can put the €2.5k into a PRSA AVC and get tax relief (as you have scope to put in up to €19,600), OR you could put the €2.5k into a standalone PRSA and likewise get tax relief on that. If all you had was the means to contribute €5k, you could put it all in the PRSA AVC, or put €2.5k into a PRSA (which you are limited to i.e. 25% x €10k) and the balance into the PRSA AVC.
Restrictions around tax relievable pension contributions and the particular pension product (AVC Scheme, PRSA AVC, PRSA, Personal Pension) only apply where Total Income exceeds the Earnings Limit of €115k. I had implied in my previous post that it could apply for total incomes below €115k. As I mentioned previously, the examples in Revenue Pensions Manual Chapter 26, illustrate how the restriction works.
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CharlieMac
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I checked with Irish Life about potentially transferring a PRSA AVC back in to one of their (Cornmarket/Union) AVC Schemes. From my understanding doing this would make it more flexible to pay for additional single scheme benefits (buy back years) by way of transferring value I had built up in the AVC fund.
Irish Life said my PRSA provider would have to satisfy them that my PRSA AVC was linked to my HSE employment and I was only paying in to it while employed by the HSE and using income from that employment. In practice I don't know if Irish Life bother to check or would be able to prove what income source(s) you used to make AVCs in to a PRSA AVC.
If Revenue request the PRSA and AVC PRSA payment certificates, they will spot the overpayment into the AVC PRSA. They would then take back the tax relief on the overpayment.
Also you might lose out on tax free lump sum at retirement.
The AVC PRSA will be limited to whatever excess tax free lump sum that's available after you receive your occupational scheme lump sum.
25% is available tax free from the PRSA on top of your occupational scheme maximum.
Also you might lose out on tax free lump sum at retirement.
The AVC PRSA will be limited to whatever excess tax free lump sum that's available after you receive your occupational scheme lump sum.
25% is available tax free from the PRSA on top of your occupational scheme maximum.
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Speaking of AVC PRSAs, the following is an interesting Tax Appeal Commission (TAC) Determination I noticed this week:
As far as I can tell, the gist is this:
- A taxpayer (the "Appellant") sets up a PRSA AVC account to make a lump sum contribution,
- The tax relief is afforded to the taxpayer by Revenue,
- The broker charged a flat fee of €400 to the client to set up the PRSA AVC account,
- The taxpayer contacts Revenue (the "Respondent") the following year looking to get tax relief on the setup fee of €400 that they paid to the broker,
- Revenue said "no dice",
- Taxpayer appeals Revenue's decision to the TAC,
- TAC determines that Revenue was correct in refusing the claim for relief from income tax on the €400 fee.
The taxpayer was aggrieved that income tax relief could have been obtained had they been making periodic payments to the AVC provider from payroll (where any fee was deducted by the AVC provider from that contribution).
I presume the Appellant's argument was, that if the broker was remunerated through a sub-100% allocation rate, instead of charging an invoiced flat fee to the client, that tax relief could have been obtained on €400 effectively paid to the broker via this method.
For instance, I presume the taxpayer's argument was that if the broker applied a 98% allocation rate, 100% is taken via salary, with 98% being allocated to pension policy and 2% to the account of the broker. The taxpayer would be getting relief on 100% of the monies rather than 98%.
Revenue acknowledged that tax relief is available on 100% of the amount if contributed from salary (and not on amounts less than this, i.e. 98% in my example) but that direct payments to a broker cannot avail of relief.
If the individual had, for example, the scope to contribute €8k to the PRSA AVC account for tax relief purposes, and let's say the broker charges €400 (via either of 2 methods: Scenario 1 flat fee, Scenario 2 95% allocation rate), and that the individual is a higher rate taxpayer:
Scenario 1
- €8k gets credited to the PRSA AVC account as a lump sum from their net funds,
- Revenue grants relief of €3.2k (40%),
- Broker is paid €400 (from the individual's net funds),
- €8k is in the pension now.
Scenario 2
The individual was claiming:
- They could have paid €8k to the PRSA AVC account via payroll deductions,
- Any implicit broker fees deducted from the contribution would be eligible for tax relief.
However, in both cases, the taxpayer still gets the tax relief they are entitled to: €3.2k.
As for fees, in the first scenario, €8k is in the pension pot, but €400 was paid direct to the broker. In the second, €7.6k is in the pension pot, with no direct payment to the broker.
As far as I can tell, the gist is this:
- A taxpayer (the "Appellant") sets up a PRSA AVC account to make a lump sum contribution,
- The tax relief is afforded to the taxpayer by Revenue,
- The broker charged a flat fee of €400 to the client to set up the PRSA AVC account,
- The taxpayer contacts Revenue (the "Respondent") the following year looking to get tax relief on the setup fee of €400 that they paid to the broker,
- Revenue said "no dice",
- Taxpayer appeals Revenue's decision to the TAC,
- TAC determines that Revenue was correct in refusing the claim for relief from income tax on the €400 fee.
The taxpayer was aggrieved that income tax relief could have been obtained had they been making periodic payments to the AVC provider from payroll (where any fee was deducted by the AVC provider from that contribution).
I presume the Appellant's argument was, that if the broker was remunerated through a sub-100% allocation rate, instead of charging an invoiced flat fee to the client, that tax relief could have been obtained on €400 effectively paid to the broker via this method.
For instance, I presume the taxpayer's argument was that if the broker applied a 98% allocation rate, 100% is taken via salary, with 98% being allocated to pension policy and 2% to the account of the broker. The taxpayer would be getting relief on 100% of the monies rather than 98%.
Revenue acknowledged that tax relief is available on 100% of the amount if contributed from salary (and not on amounts less than this, i.e. 98% in my example) but that direct payments to a broker cannot avail of relief.
If the individual had, for example, the scope to contribute €8k to the PRSA AVC account for tax relief purposes, and let's say the broker charges €400 (via either of 2 methods: Scenario 1 flat fee, Scenario 2 95% allocation rate), and that the individual is a higher rate taxpayer:
Scenario 1
- €8k gets credited to the PRSA AVC account as a lump sum from their net funds,
- Revenue grants relief of €3.2k (40%),
- Broker is paid €400 (from the individual's net funds),
- €8k is in the pension now.
Scenario 2
The individual was claiming:
- They could have paid €8k to the PRSA AVC account via payroll deductions,
- Any implicit broker fees deducted from the contribution would be eligible for tax relief.
However, in both cases, the taxpayer still gets the tax relief they are entitled to: €3.2k.
As for fees, in the first scenario, €8k is in the pension pot, but €400 was paid direct to the broker. In the second, €7.6k is in the pension pot, with no direct payment to the broker.
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