Tax advantages of a pension plan

Pensions are a very tax-efficient way of saving

When you contribute to a company pension scheme, the net cost or the 'real' cost to you isn't as high as you would initially think. The Government provides generous tax relief at your highest tax rate to encourage pension saving.

In other words if your income levels bring you into the higher income tax bracket then you get tax relief at that rate. Likewise, if your income level means that you are paying tax at the lower rate only, then this is the rate at which you get the tax relief.

How pension tax relief works

You decide how much you need to contribute to your pension to provide you with a comfortable retirement. Then your payroll area will arrange all the rest and give you the tax relief deductions at source.

So, if you decide, for example, to save €100 a month into your pension plan, your payroll department will arrange for that amount to be paid into your pension plan directly from your salary. They will also calculate and apply the tax relief that you are entitled to. Your take-home pay will only reduce by the difference.

Examples of income tax pension relief

For example, for every €100 you contribute, your take-home pay will only be reduced by €60 if you pay tax at 40% (as of January 2015) and by €80 if you pay tax at 20%.  €100 is invested into your pension plan.

This means that should you contribute €300 a month, your take-home pay will only go down by €180 if you pay tax at 40% and by €240 if you pay tax at 20%. But €300 will be invested into your pension plan.

If you pay tax at 40%*   If you pay tax at 20%
€100 Total Investment to your pension €100
- €40 Less tax saved - €20
€60 Net Cost to you €80

*Marginal tax rate as of April 2017.

Are there any limits on pension saving?

It would be nice if you could save unlimited amounts into your company pension plan and get tax relief, but because the tax breaks are so good, the Government puts limits on them. These limits are very generous and are based on your income and age and they are subject to a maximum earnings limit (see below).

The table below displays the percentage of your income that you can receive tax relief for when contributing to a pension plan. This includes any compulsory contributions to your main scheme and Additional Voluntary Contributions. Any contribution in excess of compulsory employee contribution paid by an employee will be treated as Additional Voluntary Contributions.

Age Maximum % of taxable earnings allowable for tax relief on your pension contributions
Under 30 15%
30-39 20%
40-49 25%
50-54 30%
55-59 35%
60 and over 40%

If you are a member of an occupational pension scheme, the maximum contribution levels for tax relief relate to the total employee contributions to any occupational pension schemes.

For Group PRSAs, these levels include the employer as well as any employee contributions.

There are also limits on the benefits that may be provided at retirement.

PRSAs: employer contributions

Any employer contributions made to a PRSA on your behalf are treated as a Benefit-in-Kind (BIK). While these contributions do qualify for income tax relief, they don't qualify for relief from PRSI or the Universal Social Charge.

Earnings limit and maximum pension fund size

The maximum earnings limit from 2017 is €115,000. The earnings limit is subject to review. There is no maximum payment that can be made, but you may only claim tax relief within Revenue limits.

There are also limits on the benefits that may be provided. Under current legislation, the Standard Fund Threshold allowable for tax relief purposes is €2.0 million. This maximum amount includes any pension benefits already taken together with pension benefits yet to be taken. Any fund in excess of this amount will be liable to a once-off income tax charge at the top rate of tax (currently 40%) when it is drawn down on retirement. This limit may be adjusted annually in line with an earnings index.

Please note that the Revenue Commissioners have also placed limits on the total amount that can be contributed by you and your employer to your occupational pension plan.

However, if you are concerned by these limits please consult your financial advisor for further details.

Taxation of pension benefits

While you may receive tax relief on your contributions as they are invested in your pension arrangement, your benefits may be taxed as you take them at retirement. Any pension you receive will be subject to income tax under the Pay As You Earn (PAYE) system and may also be subject to the Universal Social Charge. While you may be able to receive some lump sum benefits tax free, other lump sum benefits may be subject to tax.

However, if you are concerned by these limits please consult your financial advisor for further details.