The value of pension tax relief is overstated

R

RichInSpirit

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Hi Brendan, I looked at the pension tax breaks lately. For me in my 40's the maximum pension that attracts tax relief is 25% of gross salary.
If you work out the total pension benefit after paye tax, usc and PRSI the difference the effective tax that you pay is 10% of gross salary all the way from the start of the higher rate all the way to €115000.
The figures change again at 50 and 60.
 
Of course 10% is not to be sneezed at but the tax break is not as large as you think looking at the headline figures.
 
Hi Richie

I moved this from the other thread as it deserves a separate discussion. I suspect that the other thread will go off in a lot of tangents. I had to pick a thread title, which I think is ok, but edit it if it doesn't capture your point adequately.

Could you maybe show us the analysis of how you came up with that figure?

Brendan
 
From the Consultation Paper

According to the report on Tax Expenditures for the Tax Strategy Group, the cost of tax relief
on private pensions is estimated to have been €2.4 billion in 2014 . These costs (i.e. tax
forgone) include tax reliefs associated with employee and employer contributions, exemption
of employers’ contributions to occupational schemes from employee BIK taxation, the tax
exemptions for contributions to RACs and PRSAs, and tentative figures for exemption of
investment income and gains of approved superannuation funds and of tax free portions of
retirement lump sums.

That seemed very high to me which would tie in with your point about the impact on the individual. I wonder does the Tax Strategy Group factor in the fact that the pensions are taxed on drawdown?
 
The 10% is simply the tax relief times the maximum band, so 40% * 25%

It's not really meaningful. For somebody on 100k, they are reducing their tax by 10k. It's only 10% of income, but it's a 33% reduction in their total income tax.
 
Hi Brendan.

Here are 2 examples of the point I was trying to convey earlier.

I think they are accurate but feel free to pick holes in them

Example 1.
Gross Pay €50000
Standard Rate Cutoff €34550
Single person Tax Credits €3300.00
Standard Rate PAYE Tax @ 20% = €3610.00
Standard Rate USC @ Various Rates = €928.215
Standard Rate PRSI @ 4% = €1382.00
Higher Rate Taxable Income = €15450
Higher Rate PAYE Tax @ 40% = €6180
Higher Rate USC @ 4.75% = €733.875
Higher Rate PRSI @ 4% = €618.00
Net Pay = €36547.91
Effective Tax Rate = 26.9%
Maximum Available Pension for 40 to 50 year old = 25% of Gross = €12500
Tax Saving @ maximum pension contribution @ 40% = €5000
Net Pay Including Max Pension Contribution Benefit = €41547.91
Effective Tax Rate Including Pension Contribution = 16.9%

Example 2.
Gross Pay €100000
Standard Rate Cutoff €34550
Single person Tax Credits €3300.00
Standard Rate PAYE Tax @ 20% = €3610.00
Standard Rate USC @ Various Rates = €928.215
Standard Rate PRSI @ 4% = €1382.00
Higher Rate Taxable Income = €65450
Higher Rate PAYE Tax @ 40% = €26180
Higher Rate USC @ 4.75% & 8% = €4082.445
Higher Rate PRSI @ 4% = €2618.00
Net Pay = €61199.34
Effective Tax Rate = 38.8%
Maximum Available Pension for 40 to 50 year old = 25% of Gross = €25000
Tax Saving @ maximum pension contribution @ 40% = €10000
Net Pay Including Max Pension Contribution Benefit = €71199.34
Effective Tax Rate Including Pension Contribution = 28.8%
 
Gordon Gekko said:
Please explain the 10%...
Click to expand...

Hi Gordon, see above. It's just a different way of looking at the same thing. I believe in the importance of providing for a pension for the future.
But the "loss" of tax to the country by pension contributions might be being overplayed by some unnecessarily.
 
RichInSpirit said:
Gross Pay €50000
...
Effective Tax Rate = 26.9%
Maximum Available Pension for 40 to 50 year old = 25% of Gross = €12500
Tax Saving @ maximum pension contribution @ 40% = €5000
Click to expand...

I am not sure that this means anything?

I thought you had done something more complex.

I defer 40% tax today by making a pension contribution.
It will grow tax-free
When I draw down the pension, it will be subject to PAYE and USC at my marginal rate.

So I am not getting a full 40% tax saving.

Brendan
 
Brendan Burgess said:
I am not sure that this means anything?

I thought you had done something more complex.

I defer 40% tax today by making a pension contribution.
It will grow tax-free
When I draw down the pension, it will be subject to PAYE and USC at my marginal rate.

So I am not getting a full 40% tax saving.

Brendan
Click to expand...
If we went off the 100000 salary it may make things easier to understand,

if the taxpayer chose not to use the tax break he/she would only have 15000 thousand euro to invest for there retirement ,

The question is it possible they 15000 could out preform the 25000 euro in a pension fund taking into account the would be taxes due on the 15000 investment also
Note 25%of the 25000 principle and growth can be taken tax free (6250 euro of they 25000 invested will not attract any tax or USC)


I think Richin Spirit used age 42 year old as an example so we will take the investment will mature when he/she is 67 lets say invested for 25 years ,
 
Last edited:
Sorry Brendan for simple rather than complex. I suppose the point that I was trying to get across was that although there's 40% relief it's not 40% of gross salary. And that the government still takes a big whack of tax from you including PAYE PRSI and USC.
I was surprised that the tax savings weren't more.
 
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