Dáil Éireann Debate, Tuesday - 6 October 2009
293 Deputy Róisín Shortall asked the Minister for Finance the steps he will take to deal with the actions of persons who, as alleged in paragraph 5.5.6 of part 10 of the Commission on Taxation report 2009, avoid the pensions contribution cap introduced in budget 2009 by arranging for their employer to make contributions in excess of these relevant limits; and if he will make a statement on the matter. [33685/09]
View answerTax relief on employee contributions to occupational pension schemes is subject to age-related percentage limits and to an overall annual earnings cap. The earnings cap, originally set at an amount of €254,000, was indexed with effect from 2007, and for the 2008 tax year, stood at just over €275,000.
Changes were announced in Budget 2009 and included in Finance (No. 2) Act 2008 to improve the equity of the existing tax arrangements in the pensions area by significantly reducing the annual earnings cap for 2009 to €150,000.
The annual earnings cap and age-related percentage limits for pension contribution purposes referred to above do not apply to employer contributions to occupational pension schemes but only to employee contributions.
The Commission on Taxation Report makes the point that changes could be made to the terms of employment contracts, due to the reduction in the annual earnings cap, to provide for a switch from employee contributions to employer contributions. In this regard, I am advised by the Revenue Commissioners that any attempts to circumvent the limits imposed on personal contributions to pension schemes in this way would fall foul of the rules governing salary sacrifice arrangements.
The Revenue's Commissioners' position on salary sacrifice generally, is that if an employee forgoes any remuneration by way of any arrangement, either by changing the existing terms or contract of employment or creating new terms or contract of employment, or indeed if there are no recorded terms and conditions in relation to the employment, the employee will remain taxable on their 'gross' income. Remuneration sacrificed is to be considered as an application of the income earned by an employee rather than an expense incurred by that individual's employer.
Therefore, any arrangement under which an employee waives an entitlement to remuneration or accepts a reduction in remuneration in return for a corresponding payment by the employer into a pension scheme is an application of the employee's income and is not acceptable to the Revenue Commissioners. While under such an arrangement the payment is ostensibly being made by the employer, it is in practice being made by the employee. This has always been Revenue's view and is reflected in paragraph 3.8 of Chapter 3 of the Revenue Pensions Manual. Section 118B of the Taxes Consolidation Act 1997 which came into effect on 31 January 2008, deals with the issue of salary sacrifice and confirms the Revenue Commissioners’ view that such arrangements have always given rise to a tax charge. The section ensures that, with certain exceptions, the remuneration sacrificed is taxable in full and the employer must operate PAYE and PRSI on it.
