Establishing a pension fund is an incredibly smart and forward-thinking move to ensure you have the financial means and support necessary after you’ve retired from work.
Whether adding 1% or 10% of annual earnings to their pension funds, many people don’t realise that the contribution payments they make every year are eligible for tax relief.
If your pension payments are made through your employer or the PAYE system, your tax relief is likely already accounted for. However, sometimes the rate of taxation applied is incorrect or additional relief is available, so it’s important to evaluate your tax credits or ask a tax professional to help review your tax liability.
How It Works
When you make a contribution to a pension fund, whether privately or through your employer, your contribution is deducted from your gross income before it is taxed. So you effectively save at your higher rate of tax and are able to deposit that full amount into your pension fund.
For example, if your gross monthly income is €5,000 taxed at a rate of 40%, you receive €3,000 pay that month. However, if you contribute 2% to your pension, that €100 contribution is taken from your gross income before it is taxed, and the full €100 is added to your pension amount—meaning you don’t pay €40 of it (40%) as tax.
€40 each month may not seem like a lot, but over time it can add up to significant savings, particularly when you’re planning for retirement. Given that the current state pension is just over €200 per week and an undeniable pension crisis emerging given the age profile of workers, a private pension will be essential to maintain a reasonable income in old age.
Another often overlooked advantage is that both PAYE workers and the Self Employed can make pension lump sum contributions up to the 31st of October in the year following the contribution year.
For example, a taxpayer can make a lump sum pension contribution in October 2022 of €10,000 in relation to the previous year, 2021. The taxpayer can then immediately get a tax rebate of €4,000 assuming they pay tax at a marginal (higher) rate of tax of 40%.
This is a very useful tool if you obtain a lump sum on retirement from an employment or redundancy from an employment.
How Much Can I Claim?
The amount of tax back you can receive on pension contributions increases as you get older, and all pension tax relief is subject to an earnings maximum, which is currently set at €115,000. This means that regardless of age, only contributions deducted from the first €115,000 of your annual salary are eligible for tax relief.
Your age dictates what percentage of your earnings are eligible for tax relief when contributed to a pension fund:
>30 years 15%
30–39 20%
40–49 25%
50–54 30%
55–59 35%
60+ 40%
For example, if an individual aged 55 earns €200,000 in 2022, they are eligible to claim tax relief on 35% of their pension contributions subject to the maximum earnings limit of €115,000, or €40,250.
If this person contributes 25% of their annual salary, €50,000, they receive tax relief on the first €40,250 at their marginal rate and pay tax as normal on the remaining €9,750.
Additional factors may apply to individuals with multiple income streams, those who contribute to multiple pension funds and people with unique professions that have a younger standard retirement age, such as athletes.
Think you may be due tax back on pension contributions?
If you have any questions about claiming tax back on pension contributions or would like to discover if you are eligible for tax back on your pension, contact a member of our expert team at 059 8634 794.
Alternatively, you can fill out our 60-second application form for a complete tax review – 3 in every 4 people get tax back with Irish Tax Rebates and remember if you aren’t due a rebate there is no fee.
