Dáil Éireann Debate, Thursday - 4 October 2012
22. Deputy Aengus Ó Snodaigh asked the Minister for Finance if there is an estimate of the tax forgone to the State from the activity whereby propriety directors can make tax free contributions to pensions; if he has considered placing a limit on the amount that can be contributed to pensions tax free by these persons for example in the region of 20% on an individual salary. [42268/12]
Amharc ar fhreagraContributions to occupational pension schemes by employees are tax-relieved at the marginal rates of income tax applying to such individuals, subject to restrictions on the annual amount of tax-relieved contributions based on annual earnings (a maximum of €115,000 per annum applies) and age-related percentage limits of those annual earnings. To the extent that “proprietary directors” make pension contributions as employees of their business these restrictions would apply. However, employer contributions to occupational pension schemes are not included within the age-related percentage limits and the overall earnings cap for tax-relieved pension contributions referred to above. This is on the basis that employers cannot fund for pension benefits in excess of the statutory maximum of a pension of 2/3rds of final salary. I assume it is to these employer contributions that the Deputy is making reference in his question.
A review of certain tax schemes undertaken in 2005 included a review of Tax Relief for Pensions Provision which was carried out jointly by my Department and the Revenue Commissioners. The results of this review were published in February 2006 as part of Volume III of the Budget 2006 Review of Tax Schemes. Among the main conclusions of the review were that, notwithstanding the maximum funding rule of a pension of 2/3rds final salary:
“Current tax reliefs appear to be very generous in relation to individuals whose employers are in a position to make substantial tax deductible contributions to their schemes effectively without limit, particularly in circumstances where they can influence the level of employer contributions and their remuneration level”
Proprietary directors would be among the individuals being referred to in this context.
In an effort to address the issues raised in the various conclusions of the review, including the specific conclusion referred to above, various options for change were put forward which resulted in a number of significant amendments being made to the tax regime for both pensions and Approved Retirement Funds in the 2006 Budget and Finance Act.
The changes involved:
- Closing off excessive tax relieved funding for pensions through the imposition of a maximum allowable pension fund on retirement for tax purposes of €5m, with punitive tax on amounts drawn down in pension benefits in excess of that sum. (This maximum allowable pension fund for tax purposes -the Standard Fund Threshold - has since been reduced to €2.3 million).
- Imposing a cumulative limit of 25% of the Standard Fund Threshold on the maximum tax-free lump sum that can be taken on retirement. (This cumulative lifetime limit for tax-free retirement lump sums has since been reduced to €200,000).
- Restricting the capacity of individuals to use Approved Retirement Funds (ARFs) as purely long-term tax-exempt vehicles by introducing the concept of an annual imputed or notional distribution from ARFs which is taxable at the ARF owner’s marginal tax rate. (The imputed distribution was introduced on a phased basis rising to a rate of 3% of ARF assets. The imputed distribution percentage was increased from 3% to 5% in Budget and Finance Act 2011 and to 6% in this year’s Budget and Finance Act for ARFs with assets of €2 million or more.)
The fact that employer contributions to occupational pension schemes are not included within the employee age-related percentage limits and the overall earnings cap on pension contributions, was identified as an anomaly in the review and was considered among the options for change. However, the review identified difficulties with such a course of action and rather than change the treatment of employer contributions, it was considered that the imposition of the limit on the maximum allowable tax relieved pension fund (the Standard Fund Threshold) would be as effective, without giving rise to the difficulties identified in the review.
I am advised by the Revenue Commissioners that employer contributions to occupational pension schemes are returned annually to the Revenue Commissioners on an aggregate basis as part of the P35 tax return by employers. Small self-administered pension schemes (SSASs) are a particular type of occupational pension scheme which are normally single member schemes – that member generally being a proprietary director. However, Revenue systems are not capable of distinguishing between multi-member and single member schemes for the purpose of establishing the employer contributions made specifically in relation to proprietary directors as part of the P35 returns.
I am also advised by the Commissioners that a condition of approval of small self administered schemes is the supply of regular information about the scheme, including the submission of annual audited accounts of the scheme which would include contributions made. However, this material is not as yet held in a manner that would allow the information requested by the Deputy to be extracted without a significant investment of resources by them.
