SAVING TAX ON AN OLD AGE PENSION

IF you have no other income but the State Pension, you will have no tax liability as the basis tax exemptions are in excess of the pension.

However, many people continue to be in employment after 66 years of age or are in receipt of rental income or have a private pension, a farm or other business. Also, in many instances their spouse has other income and they are taxed under joint assessment.

From March 30, 2018, the weekly rate is €248.30 with an increase for a qualified adult, typically a spouse, who is also over 66 years, of €218 a week. Thus, the total pension can be €462.30 per week or €24,093.60 per annum. Note, however, that the increase for the dependent is subject to a means test on the dependent.

For people in receipt of the State Pension and the increase for the dependent and who has other income this causes tax issues. Revenue has always taxed the main claimant of the pension on the entire amount. This means that only one PAYE credit, currently €1,650 per annum, was available against what is currently a maximum of €24,093.60 per annum.

A lot of people have corresponded with Revenue and claimed that, as a couple, they should get two PAYE credits of €1,650 each, as two people were getting the pension with the dependent getting a separate €218 per week.

Revenue has always resisted this but in two cases before the Tax Appeals Commissioners (TAC) last year, Revenue lost. The TAC decided that under Section 14 of the Social Welfare and Pensions Act 2007 that the increase for the adult dependent had to be paid directly to the qualified adult.

The decision means that an adult dependent is entitled to a separate PAYE credit and the standard rate band for Income Tax of the couple in the current year is increased by the amount of the pension payable to the dependent.

Revenue has appealed these two decisions to the High Court but given the wording of the legislation, it is hard to see a success here for Revenue in the court.

A person affected by the decisions is entitled to declare on their tax return their increase for the spouse as a separate income of the spouse and get a tax saving with the second PAYE credit of €1,650 at 20 per cent or €330 plus an increase in the 20 per cent rate band.

This will be significant if the combined incomes have resulted in some of their income being liable to tax at the top rate of 40 per cent. Note that the PAYE credit is allowed against the State Pension for income tax purposes, even though the Department of Social Welfare does not operate PAYE when paying out the State Pension.