Are You Due a PRSI Refund?

There was a fair bit of publicity recently surrounding a news story that the State has refunded €10 million to taxpayers who were overcharged in 2010. We've had several calls about this.

Just to be clear - this relates to the Health Levy. If your overall income in 2010 was less than €26,000 you were exempt from the Health Levy. If you earned more than €500 in one week in a PAYE employment, the Health Levy would have been deducted for that week.

So anyone who earned more than €500 in a week during 2010 AND earned a total of less than €26,000 for the year should reclaim their Health Levy.

More reasons to incorporate your business

If you're a sole trader, or thinking about starting up a business, new legislation should make it easier for you to incorporate the business as a limited company. For example, you'll be able to have just one director, just one document in the company constitution and you'll be able to have an AGM by correspondence. See this article.

At present, there are benefits to being a company director as distinct from a sole trader, when it comes to making pension provision. Here's a brief summary: -

Sole Traders

• Pension contributions limited to a fixed percentage of Net Relevant Earnings, dependant on age.



• Earnings cap of €115,000.



• No PRSI or USC relief.



• Earliest retirement age (except in ill-health) is 60.

Company Directors

• Companies can write off significant pension contributions against Corporation Tax, up to generous Maximum Funding limits.



• Funding not restricted by the earnings cap.



• Company contributions offer effective relief against tax, PRSI and the USC.



• Early retirement permitted from age 50, once director severs ties with company and disposes of shares.

Image: jscreationzs / FreeDigitalPhotos.net

Personal Fund Thresholds - Revenue deadline looming...

In accordance with Section 787P(2), Taxes Consolidation Act 1997, anyone with pension benefits with a capital value of over €2.3 million at 7/12/2010 has until 7/6/2011 to apply for a Personal Fund Threshold (PFT) Certificate. Anyone who misses this deadline faces substantial additional taxation when they retire. Bearing in mind that an application for a PFT Certificate involves gathering details of all pension arrangements, often from a variety of sources, anyone who needs a PFT Certificate should be taking action now.

Worryingly, in this Irish Times piece, Dominic Coyle tells us that by April 8th, only 144 enquiries had been received by Revenue on this topic, out of an estimated 6,000 affected people.

Who does this affect?

While the figure of €2.3 million might seem enormous, don't forget that this is the capital value of a pension fund. So you don't have to be a multi-millionaire to fall into this category. Here's a few examples: -

• Anyone in a Defined Benefit pension scheme with an expectation of a pension of €115,000 per year or more, before lump sum entitlements.

• Any Public Servants with an expectation of a pension of €100,000 per year or more.

• Anyone in either of the above categories with a lower pension entitlement but with additional pension funds from other sources, e.g. AVCs, RACs, pensions from previous employments etc.

• Anyone with Defined Contribution pension funds totalling more than €2.3 million at 7/12/2010.

What happens if the June deadline is missed?

After 7/6/2011, anyone who retires with pension benefits with a capital value of greater than €2.3 million, who does not have a PFT Certificate, will be taxed on the excess over €2.3 million at 41%. This is an additional tax, over and above the normal taxes that will apply to drawdown of pension funds. So an individual who retires with a pension fund of €3 million and no PFT Certificate will pay €287,000 in tax before drawing their pension benefits in the normal way.

How can we help?

We can gather the required information from the various pension schemes, calculate the capital value of pension benefits in Defined Benefit and Public Sector schemes, calculate the Personal Fund Threshold and prepare the application for submission.

Don't forget to tell the taxman

If you're a PAYE employee and have a private pension policy that's paid through your bank account by Direct Debit (and NOT through your salary) you presumably have applied for and received your tax relief by way of extra Tax Credits. (You have got around to applying for your tax relief, haven't you? If not, do it NOW!)

Two things to remember: -

(1) You can also apply for a refund of Employee PRSI on the contribution at the end of each tax year, provided that you've already been granted the tax relief. Use this form.

(2) If you increase, reduce or stop your contribution, don't forget to let Revenue know. Revenue usually grant extra tax credits on pension contributions on the assumption that the contribution will remain the same until further notice. So if, for example, you stop your contributions altogether, you must notify Revenue or else you'll continue to get tax relief on a contribution you're no longer making and will have to give it back eventually. On the other hand, if you increase your contributions, you won't get your extra tax relief until you let Revenue know.

This applies to PAYE employees with Personal Pensions, PRSAs or AVC PRSAs who are paying their contributions gross and NOT via a salary deduction arrangement.

Deadline approaches for pension contributions

If you're filing your 2008 tax return and paying your tax online using Revenue's online service www.ros.ie you have until November 16th to do so. You can reduce your tax bill by making a pension contribution before you make your tax return and backdating the tax relief on the pension contribution against your 2008 tax liability.

For high earners, this is the final opportunity to claim tax relief on pension contributions up to the 2008 income ceiling of €275,239. The income ceiling has been reduced for the 2009 tax year to €150,000.

Poor response to second-home tax

I blogged earlier this month here about the €200 tax on second homes. Today is the final day for payment of this tax. According to RTE, only €15 million has been collected to date. That's 75,000 houses out of a potential 200,000.

Anyone eligible who doesn't pay this faces penalties.

Tax Relief on Life Assurance

I'm surprised that life assurance companies don't spend more money advertising this, but if you want something done, you might as well do it yourself! There is a form of life assurance policy that can qualify in full for tax relief at your highest rate, which can therefore knock up to 41% off the cost. In some instances you can also claim back Employee PRSI relief on the premium.

Such policies are available to the self-employed and those in non-pensionable employment (i.e. in employment but not in an Occupational Pension Scheme.) One fact that is not widely known is that if you contribute to a PRSA, you are deemed by Revenue to be in non-pensionable employment, even if your employer contributes to your PRSA. So you would still be eligible to hold a tax-efficient life assurance policy.

Some points to note about life assurance policies on which you can claim tax relief: -

(1) They only provide cover on death and have no value except on death.

(2) They cannot be assigned so you can't use them as security for a mortgage or other loan.

(3) You cannot have a joint policy, although if you and your partner are both self-employed or in non-pensionable employment you can each have such a policy.

If you're eligible and are seeking to protect your dependents at a reasonable cost, this is definitely worth enquiring about.

Make your pension contribution early

There has been some confusion over the Supplementary Budget's 1% levy on life assurance policy premiums, which takes effect on 1/6/2009. It's not 100% clear whether or not this applies to pension contributions as well as life assurance premiums. We are awaiting clarification on this.

Got a note from Hibernian Aviva today - "Hibernian Aviva Life & Pensions Ltd is working with the Irish Insurance Federation and other life assurance companies to clarify the impact of the proposed levy and we are seeking to mitigate its effect on customers.

We want to assure you that we will be doing everything we can to lobby the Department of Finance to re-think the imposition of this proposed levy and to convey to them the potential damage that it will have on the Life & Pensions industry."

I fully support their efforts, as adding a levy like this to a pension product is simply a reduction in the tax relief by another name.

However, if this is going to be the case, there's a strong argument in favour of making pension contributions prior to 1/6/2009 and thus avoiding the 1% levy. This would be especially relevant to the self-employed who would normally pay their annual pension contributions in October or November.

What will this Budget achieve?

I'm struggling to find too many positives about yesterday's Budget.

I do accept the need for tax increases and spending cuts in the current climate.

But the overall strategy of this budget baffles me. He reduces incentive to save money, by increasing DIRT tax, CGT and Exit Tax on investments. This at a time when interest rates are very low anyway and most other investments are going through a very volatile period.

So if he doesn't want us to save, maybe he wants us to go out and spend instead, thus putting much-needed money back into the economy, right?

Wrong - he increases levies and reduces reliefs so that people will have less money to spend.

So what does he really hope to achieve?

Fear of Budget good for business

Although the r-word hasn't exactly been good for business, there have been two noticeable trends of recent days and weeks: -

(1) Self-employed people deciding to invest money in Personal Pension arrangements this week, in case the April 7th Budget changes rules on tax relief.

(2) Older people deciding to draw their pension benefits this week, in case the April 7th Budget imposes tax on lump sums with immediate effect.

It seems reasonable to assume that there will be some changes to pension legislation in next week's Budget, though only Brian Lenihan and a select few know what form they will take. But if the fear factor causes a bit of a rush, who am I to complain?

Pension tax cuts in the Budget?

Everyone has their predictions about what will happen in next month's Mini-Budget, which is likely to be more juggernaut than Mini. Some possibilities are discussed in today's Irish Independent here.

The Minister needs to tread very carefully if considering reductions in tax relief available to those seeking to fund their pensions. Confidence in pension funds is at a low point at the moment, given the recent downward trend in fund values. This confidence will inevitably return when values start rising again. But if the Minister picks this point in time to announce cuts in tax reliefs, it could cause many people to simply scrap their pension plans altogether. This, of course, would be a bad thing for people's long-term futures and would render wasted all the millions spent on pensions awareness campaigns of recent times.

That said, tax savings are inevitably required. Here's one for the Government to consider - introduce a low rate of Capital Gains Tax and/or tax on dividend or rental income on pensions. Currently, neither tax exists within pension funds. At a rough estimate, funds under management in Ireland total over €55 billion and that's after all the recent falls. Even if there is a recovery of 5%, that would add €2.75 billion. A tax of 10% on gains alone would add €275 million to the Exchequer coffers, while still leaving pensions an attractive form of investment.

I'll only take 1% commission on tax savings for this idea.