How Does Tax Relief on Pension Contributions Work in Ireland?

In Ireland, employees can claim tax relief on pension contributions made by themselves or by their employer on their behalf. This reduces their overall tax liability. 

The exact relief depends on factors like the employee’s age, total earnings, and the type of pension scheme they contribute to.

Moreover, employers also get tax relief for their contributions toward employee pensions.

Let’s explore how tax relief against pension contributions works in Ireland and how to make these claims. 

Which Employees Can Claim Tax Relief on Pension Contributions in Ireland?

Employees must meet the following criteria to be eligible for tax relief on their pension contributions in 2023:

• You must be contributing to an approved pension scheme, which includes:

  • Occupational pension schemes (Standard contributions + Additional Voluntary Contributions)

  • Personal pensions like Personal Retirement Savings Accounts (PRSA) and Retirement Annuity Contracts (RACs)

  • Qualifying overseas pension plans

• Your income or earnings must be taxable under Schedule E or Schedule D (Case I or II).

What are the Limits for Tax Relief on Employee Pension Contributions?

The amount of tax relief you can claim is capped based on factors like:

• Your age 

• The size of your pension fund

• Your total income (which limits the amount of contributions you can make)

Additionally, tax relief on pension contributions is calculated at the highest income tax rate you pay, known as the marginal rate.

Example:
Suppose you pay tax at a 40% rate. If you make a lump sum pension contribution of €15,000 to claim relief for the previous tax year, you’ll get a tax rebate of €6000.

There is no relief from Universal Social Charge (USC) or Pay Related Social Insurance (PRSI) for employee pension contributions.

Let’s now look at the different limits on tax relief against pension contributions:

Disclaimer: This information is for general purposes only and should NOT be considered investment advice. Consult with a qualified financial advisor for personalised guidance before making investment decisions.

A. Standard Fund Threshold (SFT)

The Taxes Consolidation Act 1997 limits the total value of the tax-relieved pension savings individuals can draw in their lifetime. 

This limit, aka the Standard Fund Threshold, is €2 million in 2023. 

In other words, you can only claim income tax relief for a pension pot of up to €2 million.

The limit applies to pension benefits built through any of the following tax-relieved pension products:

• Defined benefit occupational pension schemes

• Defined contribution occupational pension schemes

• Retirement annuity contracts (RACs)

• Personal retirement saving accounts (PRSAs)

• Additional voluntary contributions (AVCs)

What happens when your pension fund exceeds the SFT?

If your pension fund capital exceeds the SFT (€2 million in 2023), you will be taxed 40% (chargeable excess tax) on any amount you withdraw beyond this limit. 

To avoid paying this excess charge, you could stop contributing to your pension fund once it reaches the SFT.

B. Annual Limits

The amount of pension contributions you can get relief on in a year is subject to two types of limits:

• Age-related percentage limit: A maximum percentage of your gross income, depending on your age.

• Total earnings limit: A limit to the total earnings (gross income) that’s taken into account to calculate your tax-relieved contributions.

Note: These limits also apply to self-employed people. For them, earnings refer to their net annual earnings (earnings minus allowable expenses).

We’ll learn about these two limits in detail:

1. The Age-related Percentage Limit

Here’s the maximum percentage of your annual earnings (for different age brackets) that you can get tax relief on for your pension contributions:

• Under 30 - 15%

• 30 to 39 - 20%

• 40 to 49 - 25%

• 50 to 54 - 30%

• 55 to 59 - 35%

• 60 and over - 40%

Let's use an example to understand this clearly:

Consider you’re 52 years old and earn €100,000 in 2023. You can contribute up to 30% of your earnings (i.e. €30,000) to your pension and still be eligible for tax relief. ​​

In other words, the first €30,000 of your contributions wouldn’t count towards taxable income, lowering your income tax rate.

Professionals under 50 who usually retire earlier than the norm, like athletes, are eligible for a higher tax relief limit (30% of net earnings).

2. The Total Earnings Limit

The ‘earnings limit’ is the maximum amount you can earn in a year and still be eligible for tax relief on your pension contributions.

In 2023, the annual earnings ceiling for tax-relieved pension contributions is €115,000.

This limit applies whether you’re contributing to a single pension product or multiple schemes.

Note: The figures mentioned above are maximum limits. You can contribute less if you want.

How’s Your Maximum Tax-Relieved Contribution Worked Out?

If you’re contributing to a single pension product, your maximum tax-relieved contributions would be your relevant age-based percentage of the lower of:

• Your yearly gross income (for employees) or net relevant earnings (for self-employed), and

• The total earning limit of €115,000.

Here’s an example:

Suppose you’re 53 years old, earning a total of €300,000 in 2023, and contributing 20% (€60,000) to an occupational pension scheme. 

(Remember, you can contribute up to 30% for your age bracket).

Your tax-relieved pension contributions would be limited to €34,500 (the lower of your actual contributions made and 30% of the earning limit of €115,000 — €34,500).

What if you have multiple sources of income?

In that case, the tax relief only applies to the source of income through which you’ve made the pension contributions.

C. Tax Relief Limit on Lump Sum Payments

Irish tax laws allow you to take a part of your pension as a tax-free lump sum amount, subject to certain Revenue limits.

Employees aged 50 or above can typically withdraw 25% of their pension as a tax-free lump sum subject to a lifetime limit of €200,000 in 2023. 

This applies to all pension schemes that transfer to an Approved Retirement Fund, including PRSA and occupational pension schemes.

Any ‘excess lump sum’ amount above this 25% limit is taxable as follows:

• Lump sum amount from €200,001–€500,000 is taxed at 20%

• Lump sum amount of over €500,000 is taxed at your marginal rate

If you’re a member of an occupational pension plan with 20 or more years of service, you may be eligible for a tax free lump sum up to a maximum of 1.5 times your final salary if the amount exceeds the 25% limit above. 

Tax Relief on Employers’ Pension Contributions

Employer pension contributions are payments made into an employee’s pension scheme by their employer.

Employer contributions to the following schemes on behalf of employees are not treated as a Benefit-in-Kind (BiK) to employees:

• Occupational Pension Scheme (OPS)

• Personal Retirement Savings Account (PRSA) 

• Pan-European Personal Pension Product (PEPP)

What’s Benefit-in-Kind?

A BiK is a taxable non-cash benefit an employer may offer to their employees. 

This means employees ARE NOT taxed under the Pay As You Earn (PAYE) system or the Pay Related Social Insurance (PRSI) system for employer pension contributions. 

Consequently, these contributions are NOT SUBJECT to the total earning and age-based limitations we discussed earlier.

How Much Tax Relief Do Employers Get For Employee Pension Contributions?

Employers get full tax deductibility against their profits for pension contributions on behalf of their employees. 

This applies to contributions made towards approved pension schemes, and there’s no upper limit on pension tax relief for employer contributions.

As a result, tax relief on pension contributions incentivise employers to offer solid pension plans to their employees.

But look:

Setting up and managing employee retirement benefit plans typically involves massive paperwork and significant brokerage and administrative costs.

Want a simple and cost-effective way to set up workplace pensions?

A trusted platform like Kota lets you enrol your employees in a compliant workplace pension plan with just a few clicks.

Kota lets you:

• Instantly enrol, manage, and scale pensions on a digital app.

• Offer award-winning pension schemes via providers like Irish Life. 

• Give your employees complete control over their contributions so they can make changes as needed.

• Understand how your pension packages compete locally with the latest geo-based data.

• Integrate pensions with your existing HR and payroll systems.

How To Claim Tax Relief On Pension Contributions In Ireland?

Claiming tax relief for pension contributions in Ireland involves different procedures based on your employment status.

You can make a claim through your employer's payroll system or Revenue’s online service.

1. If You’re a PAYE (Pay-As-You-Earn) Employee

Your employer typically deducts your pension contributions from your salary and refunds the due tax relief. 

This means that you receive tax relief immediately at your marginal (highest) rate, and no further action is required from you to claim this relief.

What if your employer doesn't deduct pension contributions?

Use the myAccount online service at https://www.ros.ie/myaccount-web/sign_in.html to include your pension contributions when filing an income tax return.

2. If You're Self Employed

You can apply for tax relief on pension contributions through the Revenue Online Service (ROS) before the deadline for the specific year. 

You must pay tax under the self-assessment system and specify your pension contributions in your online self-assessment tax return (or by completing Form 11).

3 FAQs About Tax Relief Against Pension Contributions in Ireland

Still have questions about tax relief against pension contributions in Ireland? 

Let’s look at some FAQs.

1. What’s the Difference Between Tax Credit and Tax Relief?

• Tax credits in Ireland reduce the amount of tax payable. They are deducted directly from your tax due.

• Tax reliefs decrease the taxable income and are deducted from your income before tax calculation.

2. Can You Claim Your Pension Early in Ireland?

Yes, most people can cash in their pension as soon as they turn 50 and still be able to claim a 25% tax-free lump sum amount.

But there’s a catch:

If you’re a member of an occupational pension scheme, you must no longer be working with the employer who set up the pension scheme.

Members of  PRSA or defined contribution schemes can claim pension early if they’re permanently unable to work due to sickness and have valid medical evidence. However, you’ll get less money than if you worked till your normal retirement age.

3. Can You Claim a Backdated Tax Relief on Your 2022 Income Tax?

Yes, you can claim backdated relief for the 2022 tax year by making lump sum Additional Voluntary Contributions on or before 27th October 2023.

4. What Are Some Tax Exempt Pensions in Ireland?

The following pension incomes are exempt from taxes in Ireland:

• Wound and disability pensions

• Military gratuities and demobilisation pay

• Pensions and other allowances to War of Independence veterans and their families

• Magdalene Laundry payments

• Foreign occupational and social security pensions (exempt only if the recipient lived in the country that granted the pension)

Optimise Your Tax Savings in Ireland With Pension Contributions

Tax relief is a great incentive for both employees and employers to contribute towards pensions.

For employees, it reduces the income tax they pay, which is especially beneficial for higher-rate taxpayers. Employers, on the other hand, get relief on their corporation tax.

When planning for retirement, you must stay updated on the tax relief limits on pension contributions. Use our detailed guide to maximise your tax relief benefits.