Is tax due on my pension?

Breda Scully  of Future — an independent pension advisory firm in Galway city.

Breda Scully of Future — an independent pension advisory firm in Galway city.

Last week, Revenue posted letters to 150,000 people about their tax compliance, including those who are claiming widow’s and widower’s pensions. Over the weekend, there was much comment and criticism in the media about the way Revenue has handled the situation. Accepting Revenue has taken a scattergun approach to the potential non-payment of income tax by pensioners, it is important that people understand how a tax liability might arise and that they have the information to hand to ensure they are compliant in 2012.

Individuals who have paid tax through the PAYE system during their working lives can easily assume that any income they receive in retirement will have the correct tax deducted prior to payment. Whilst it is good practice for all citizens to complete a tax return each year, we know that this is not the case, as millions of tax relief is unclaimed each year. Indeed Revenue has stated that some pensioners may be due a tax rebate if an overpayment of tax was paid.

It might be useful to recap on the basic principles involved as some people may be confused as to how this may apply to them.

What is a DSP pension?

This is the Department of Social Protection pension which includes: State pension, Transition pension (paid to people aged between 65 and 66 ) Widow’s/Widower’s/ Surviving Civil Partner’s and Invalidity pensions.

Why is tax not deducted before payment?

If you are receiving a DSP pension and have no other sources of income, you will not be liable for income tax. If you have an additional source of income, or a pension from private employment, you may be liable to tax if your total income exceeds €18,000 if single and €36,000 if married. There is no mechanism for taxing social welfare pensions at source (before it is paid to you ). Your non-social welfare income determines how tax due is paid.

How do I

pay the tax?

The means by which a PAYE taxpayer pays income tax on their DSP pension is that Revenue reduces the taxpayer’s annual PAYE tax credits and rate band entitlements and this will result in additional tax being taken by their pension provider on their private pension. If, however, you exceed the income limits by virtue of other taxable income, eg rental or dividend income, then you need to complete a tax return each year and submit it to revenue. Self-employed individuals should include their pension details on the Form 11 which they submit annually.

Either I or my spouse has income from a part-time job:

Then you need to complete a tax return annually. Your tax free allowances may be based on the income you receive from your own or your spouse’s paid employment and Revenue will not assume that on reaching age 66 you are also in receipt of a DSP pension and adjust your tax credits accordingly.

I have an Approved Retirement Fund and take five per cent income annually?

If your private pension is invested in an ARF, the minimum distribution annually is five per cent of the value of your ARF fund based on a December valuation. It is important that you check the P60 which is issued by the ARF provider each year, to ensure you have paid the correct amount of tax. Once you are eligible for the Transitional (age 65 ) or DSP pension at 66, it is important to complete a tax return especially if you have drawn money from your ARF prior to age 65 as your tax credits may now change.

Will the change in the USC exemption limit mentioned in the Budget affect someone’s position?

Firstly, DSP pensions are not liable to USC and so are not taken into account in determining whether the USC exemption applies or not. Regarding the revised exemption limit, if a person’s non-DSP income is likely to be less than the €10,036 limit that applies for 2012, the USC exemption should apply.

What should I do now?

Revenue estimate that one in four of pensioners surveyed may have underpaid their taxes. Therefore to ensure your tax liability is correctly calculated it is important to complete a tax return. This can be done online at or you can pick up a paper tax return from your local tax office. You could also ring Revenue helpline at 1890 777 425 for those living in the west.

Everyone with income in excess of the minimum amounts (€18/€36k ) should complete a tax return to ensure their tax is fully paid. It would be unwise to assume because you are in receipt of a pension that you have no further income tax liabilities. Most income is subject to income tax so you need to look at your total income for 2011. The staff in your local Revenue office may be able to assist with your tax return or you could contact an accountant who may offer an income tax return service.

Breda Scully MIIPM QFA FLIA is a director of Future, which is an independent pension advisory firm in Galway City.


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