Understanding Pension Contributions Tax Relief in Ireland
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 their contribution payments 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 pension tax relief is available, so it’s important to evaluate all your tax credits or ask a tax expert to help review your income tax liability.
What is Tax Relief on Pension Contributions?
Tax relief on pension contributions refers to the financial incentive applied against the income earned from employment to encourage individuals to save for their retirement. Individuals who contribute to approved pension schemes, including Additional Voluntary Contributions (AVCs), can receive Income Tax relief. The relief is granted at the individual’s marginal tax rate, which can either be 40% for top-rate taxpayers or 20% for standard-rate taxpayers.
What is an AVC?
An Additional Voluntary Contribution (AVC) is a tax-efficient way to supplement your retirement income. AVCs are extra contributions that individuals can make in addition to their regular pension contributions, typically through an employer-sponsored pension scheme.
Two common examples of AVCs are:
- Personal Retirement Savings Account (PRSA): An investment account used to save for retirement.
- Retirement Annuity Contract (RAC): A type of insurance contract approved by Revenue and more commonly known as a ‘personal pension’.
*Note: Both PRSA and RACs must be paid privately to claim tax back on these pension contributions from Irish Tax Rebates. This is because if your employer does it for you, you will already be receiving the tax relief at source from your occupational pension.
How do AVCs work in Ireland?
To avail of AVC tax relief, individuals must be part of a pension scheme, often through their employer. AVCs provide a means for individuals to have more control over their retirement planning and to address any potential gaps in their pension income.
How Does Pension Tax Relief Work?
When you contribute 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.
Both employer and private contributors are eligible for relief, and as mentioned previously, they will be charged at either the standard rate (20%) or the higher rate (up to 40%), depending on their total income and tax status. However, unlike employer-sponsored pension schemes, where the employer often deducts contributions from the salary and provides tax relief directly, individuals making private contributions need to claim the relief through their annual tax return.
How Much Tax Relief on Pension Contributions Can I Claim?
The amount of pension contribution tax relief you can claim depends on both your age and your total earnings. Your age dictates what percentage of your earnings are eligible for tax relief when contributed to a pension fund.
The Pension Tax Relief Age Limits:
>30 years 15%
30–39 20%
40–49 25%
50–54 30%
55–59 35%
60+ 40%
What is the Maximum Pension Tax Relief in Ireland?
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.
Pension Tax Relief Examples
If you’re wondering how to calculate pension tax relief, here are a couple of examples:
Example 1
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 to significant savings, particularly when 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.
Example 2
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. Is it worth putting a lump sum into a pension in Ireland? Yes, and here’s why:
A taxpayer can make a lump sum pension contribution up to October of a particular year and backdate the benefit to the previous year. If a taxpayer made a pension contribution of €10,000 to their pension in October, the taxpayer can then immediately get a tax rebate of €4,000 from the previous year, assuming they paid 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 employment or redundancy from employment.
Example 3
If an individual aged 55 earns €200,000, 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.
How Many Years Can I Claim Back Pension Tax Relief?
You are able to claim tax relief on pension contributions made in the current tax year and the six years preceding it. So, for the current year (2024), you can potentially claim back tax relief for pension contributions made in 2019,2020,2021,2022,2023 and 2024.
It’s important to note that tax regulations can vary, and individuals should always check with a tax expert, like us here at Irish Tax Rebates, to confirm any backdated pension tax relief or rules applicable which may affect your claim of pension tax relief for previous years.
How Much of a Pension Lump Sum is Tax Free in Ireland?
Upon reaching retirement, you have the option to withdraw a portion of your pension fund as a tax-free lump sum. The amount you can take is dependent on the type of pension plan and the total tax-free lump sums withdrawn from other pension plans.
The maximum tax-free lump sum payment from an occupational pension is 1.5 times your final salary and this amount is dependent on having a certain number of years of service. The maximum that can be taken as a tax-free lump sum from a Personal Retirement Savings Account (PRSA) or Retirement Annuity Contract (RAC) is 25% of the fund. There are limits on the amount of tax free lump sums that can be taken, as outlined below.
Lump sum pension payments are taxed as follows:
- Lump sum up to €200,000 receives an income tax rate of 0%.
- Lump sum between €200,001– €500,000 receives an income tax rate of 20%.
- Lump sum of over €500,000 is taxed at the taxpayer’s marginal rate.
Do Employer Pension Contributions Count Towards Annual Allowance?
Yes, pension tax relief on employer contributions counts towards the annual allowance. The annual allowance is the limit on the total amount of pension contributions, including both personal and employer contributions, that can benefit from tax relief in a given tax year.
Pension Tax Relief for Self-Employed Individuals
If you’re self-employed and are interested in claiming pension tax relief, our sister website, Tax Return Plus, can help you.
How to Claim Tax Relief on Pension Contributions in Ireland
Claim tax relief on pension contributions with Irish Tax Rebates!
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