Tax relief on individual pension contributions is currently allowed at the taxpayer's marginal income tax rate, that is, at the standard or higher rate of income tax as appropriate in each case. Tax relief at 33% would result in a reduction in the tax relief on pension contributions available to higher rate taxpayers and an additional incentive to pension savings for standard rate taxpayers.
The Government agreed, in the revised Programme for Government, that a new pension savings incentive will be set at a rate equivalent to 33% tax relief rather than the existing marginal rate relief. This commitment is now included in the National Pensions Framework. The Framework also makes clear that PRSI and Health Levy relief on pension contributions will be in addition to the 33% rate of tax relief and the mechanism for delivering this relief will be developed during the implementation phase of the Framework.
A breakdown of the cost of tax relief on employee contributions to occupational pension schemes is not available by income tax rate, as tax returns by employers to the Revenue Commissioners of employee contributions to such schemes are aggregated at employer level. An historical breakdown is available by tax rate of the tax relief claimed on contributions to personal pension plans — Retirement Annuity Contracts (RACs) and Personal Retirement Savings Accounts (PRSAs) — by the self-employed and others, to the extent that the contributions have been included in the personal tax returns of those taxpayers. The latest data available in this regard are figures in respect of the tax year 2007.
There is, therefore, no statistical basis for providing definitive figures on the costs or benefits involved in moving to a 33% rate of relief. However, by making certain assumptions about the available information, it is estimated that the overall full year yield to the Exchequer from allowing tax relief at a flat rate of 33% in respect of individual contributions to occupational pension schemes, RACs and PRSAs would be about €115 million. It is assumed that tax relief at the flat rate of 33% would also be available to claimants who are currently confined to tax relief at the standard rate of 20%. The estimated yield of €115 million is broken down between estimated savings to the Exchequer of approximately €185 million from reducing the tax relief on pension contributions for those paying tax at the higher income tax rate and an estimated cost of approximately €70 million from increasing the tax relief for those paying tax at the standard rate. The estimated Exchequer saving assumes no change in the current relief arrangements for PRSI and health levy on pension contributions and takes no account of the economic or behavioural impacts which would occur as a result of a change in tax treatment as envisaged in the question.