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TAXING YOUR PENSION – BUDGET 2011

The main changes announced include:

  • Employee pension contributions will no longer qualify for PRSI relief and the health levy
  • For 2011, marginal relief will be at 41%
  • With effect from January 1, employers’ PRSI will apply to 50% of employee pension contributions, including Additional Voluntary Contributions (AVCs)
  • The annual earnings cap for pension relief will fall from €150,000 to €115,000. The €115,000 earnings cap will also apply to contributions made in 2011 in respect of the 2010 tax year
  • Tax relief will be reduced to 34% in 2012, 27% in 2013 and 20% in 2014
  • Effective December 7, 2010, the maximum allowable pension fund for tax purposes is limited to €2.3m. Higher thresholds apply between €2.3m and the previous threshold of €5,418,085
  • Effective January 1, the maximum allowable tax-free lump sum drawdown from a pension fund on retirement will be €200,000 – anything over this amount will be taxed at the standard income tax rate of 20% up to €575,000 and at the taxpayer’s marginal rate above this amount

Along with these, The Sunday Times has unearthed an unwelcome little booby trap for self-assessed taxpayers, who may now be liable to pay some retrospective taxes.

Lenihan announced a restriction on all pension contributions to be paid in 2011, even those for which relief will be claimed against claims made in 2010.

“The tax penalty trap will snare those who based their preliminary tax assessment for this year, which had to be paid by November 16, on the expectation of being able to make substantial pension contributions before finalising their tax bills for this year sometime in 2011,” the newspaper notes. “Tax experts called the move unfair retrospective taxation, warning that self-assessed taxpayers will have unwittingly underpaid preliminary tax, exposing themselves to interest penalties of 12% a year.”

This also means self-employed taxpayers who want to maximise their pension contributions for 2010, must stump up by December 31. In the present climate and after having made a pension payment and satisfying the taxman in November, many people are unlikely to have the wherewithal to do so.

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