Paying pension additional voluntary contributions (AVCs) and tax reliefs
The following is an answer from Crowe tax director Michael O’Scathaill to a Sunday Times reader’s question in the Money Q&A on Sunday 13 September 2020.
I am in receipt of the Covid temporary wage subsidy scheme (TWSS) payment, with a top-up. I continued to pay a pension additional voluntary contribution (AVC) on the top-up until my tax refund ran out. As I will be due to pay tax on all monies received at the end of the year, would it be advisable to continue paying the AVC, despite currently getting no tax relief? Would the AVC payments be eligible for tax relief at the end of the year?
M Keenan
The subsidy element paid under the TWSS constitutes taxable income for employees and is subject to PAYE and USC. However, unlike normal wages and salaries, this is not taxed through payroll and the Revenue Commissioners will instead perform a reconciliation at year-end to collect any taxes due. The discretionary top-up element paid by employers is taxed through payroll as usual.
As a result of only a fraction of salary being taxed through payroll, many employees received an income tax refund during the early stages of TWSS and I presume this is the refund you are highlighting. However, depending on your earnings in the year as a whole, the
refund may effectively be clawed back by the Revenue Commissioners at year-end.
Regardless of the manner in which the subsidy and top-up payments are taxed, they both ultimately form part of your gross salary for 2020. In addition to determining your ultimate tax liability for the year, gross salary also forms the basis for determining the maximum level of pension contributions that qualify for tax relief.
The Revenue Commissioners, in performing their reconciliation, will factor in any pension contributions made during the year as well as the various sources of income. Therefore, by continuing to make AVC contributions, you may potentially reduce any income tax due on the subsidy element of the TWSS. It is, however, important to review your overall income and pension contributions for the year to determine the tax benefit.
For tax-relief purposes, an individual may contribute a percentage of their gross salary to pension; this percentage depends on the individual’s age during 2020, ranging from 15% for those under 30, to 40% for those over 60.
There is, however, also an earnings cap so that when relevant earnings exceed €115,000 per annum, the relevant percentage is only applied to the first €115,000.
An employee pension contribution can avail of relief from PAYE but not from USC or PRSI. Relief is granted at the individual’s marginal rate of tax by deducting the qualifying contribution from their gross salary. You may therefore wish to review your likely income for the year as a whole, to ensure that you will have sufficient gross salary to receive tax relief on your entire contributions, and ideally at the 40% rate of tax.
Finally, AVCs can also impact on your pension funding and benefits on retirement. You should discuss the matter with your pension adviser before making any further AVCs.
If you have any questions regarding pension, retirement planning or personal tax planning contact a member of our tax and private clients team.
I am in receipt of the Covid temporary wage subsidy scheme (TWSS) payment, with a top-up. I continued to pay a pension additional voluntary contribution (AVC) on the top-up until my tax refund ran out. As I will be due to pay tax on all monies received at the end of the year, would it be advisable to continue paying the AVC, despite currently getting no tax relief? Would the AVC payments be eligible for tax relief at the end of the year?
M Keenan
The subsidy element paid under the TWSS constitutes taxable income for employees and is subject to PAYE and USC. However, unlike normal wages and salaries, this is not taxed through payroll and the Revenue Commissioners will instead perform a reconciliation at year-end to collect any taxes due. The discretionary top-up element paid by employers is taxed through payroll as usual.
As a result of only a fraction of salary being taxed through payroll, many employees received an income tax refund during the early stages of TWSS and I presume this is the refund you are highlighting. However, depending on your earnings in the year as a whole, the
refund may effectively be clawed back by the Revenue Commissioners at year-end.
Regardless of the manner in which the subsidy and top-up payments are taxed, they both ultimately form part of your gross salary for 2020. In addition to determining your ultimate tax liability for the year, gross salary also forms the basis for determining the maximum level of pension contributions that qualify for tax relief.
The Revenue Commissioners, in performing their reconciliation, will factor in any pension contributions made during the year as well as the various sources of income. Therefore, by continuing to make AVC contributions, you may potentially reduce any income tax due on the subsidy element of the TWSS. It is, however, important to review your overall income and pension contributions for the year to determine the tax benefit.
For tax-relief purposes, an individual may contribute a percentage of their gross salary to pension; this percentage depends on the individual’s age during 2020, ranging from 15% for those under 30, to 40% for those over 60.
There is, however, also an earnings cap so that when relevant earnings exceed €115,000 per annum, the relevant percentage is only applied to the first €115,000.
An employee pension contribution can avail of relief from PAYE but not from USC or PRSI. Relief is granted at the individual’s marginal rate of tax by deducting the qualifying contribution from their gross salary. You may therefore wish to review your likely income for the year as a whole, to ensure that you will have sufficient gross salary to receive tax relief on your entire contributions, and ideally at the 40% rate of tax.
Finally, AVCs can also impact on your pension funding and benefits on retirement. You should discuss the matter with your pension adviser before making any further AVCs.
If you have any questions regarding pension, retirement planning or personal tax planning contact a member of our tax and private clients team.
