The Minister for Finance, Michael Noonan and the Minister for Public Expenditure, Brendan Howlin have delivered Budget 2014. Philip Doyle of Ocean Finance takes a deep dive into the implications for pensions and personal taxation.
Budget 2014: Personal Finances Overview
- There has been no change to the tax relief on pension contributions, which is positive for pension investors.
- The Standard Fund Threshold will be reduced from €2.3 million to €2 million from 1 January 2014, but the €200,000 limit for a tax free retirement lump sum remains intact.
- The changes include the introduction of a pension levy of 0.15% with effect from 2014. This will result in a levy of 0.75% for 2014 before the levy of 0.6% ends in 2014 as originally planned.
- The rate of exit tax on life assurance policies and Deposit Interest Retention Tax (DIRT) have both increased to 41%.
A summary of the changes and current relevant taxation rates are outlined below.
Budget Summary (Personal Finances) 2014
Tax Relief on Pension Contributions
There has been no change to the tax relief on pension contributions for 2014. Tax relief on personal contributions to a pension arrangement will continue to be available at an individual’s marginal rate of tax.The earnings cap remains at €115,000 for 2014.
Standard Fund Threshold (SFT)
The SFT is being reduced from €2.3 million to €2 million with effect from 1 January 2014.
Individuals with pension rights in excess of the new lower SFT on 1 January 2014 will be able to protect the capital value of those rights by applying for a Personal Fund Threshold (PFT) up to a maximum of the existing SFT of €2.3 million. Details of the application process for a PFT will be reflected in the forthcoming Finance Bill. Individuals who already have a PFT will retain that PFT and do not need to take any action as a result of the change.
For Defined Contribution pension arrangements, the value of assets on 1 January 2014 is relevant for the purposes of applying for a PFT.
For Defined Benefit pension rights, the current capitalisation factor of 20:1 must be used in determining whether an individual’s accrued pension exceeds the SFT of €2 million at 1 January 2014.
In both cases, the value of any retirement benefits taken since 7 December 2005 must also be taken into account in considering the pension scheme value at 1 January 2014 for the purposes of applying for a PFT.Any capital value in excess of the SFT or PFT (if applicable) on retirement is taxed at 41% and is then subject to tax at the individual’s marginal rate, and any PRSI and USC applicable on drawdown.
As the new lower SFT is based on a valuation date of 1 January 2014 opportunities may exist between now and then to continue funding (subject to Revenue rules) up to the €2.3 million threshold. One issue that was not addressed on Budget Day is whether the SFT will be increased in line with inflation. We will have to wait for the publication of the Finance Bill for clarification on this point.
Retirement Lump Sum
No changes were announced in relation to the retirement lump sum. Under current Revenue rules the first €200,000 of any retirement lump sum is tax-free with any amount between €200,000 and €575,000 subject to Income Tax at the standard rate.
Any amount paid out in excess of €575,000 is taxed at the marginal rate and is also subject to PRSI and the Universal Social Charge. Any tax-free retirement lump sums taken on or after 7 December 2005 count towards the limits. In line with previous practice, we may see a reduction in the upper limit from €575,000 to €500,000 introduced in the Finance Bill in light of the change to the SFT.
Pension Fund Levy
The current levy of 0.6% p.a. on pension fund assets will increase to 0.75% for 2014. The levy will reduce to 0.15% for 2015.
State Pension (Contributory)
The personal rate of the State Pension (Contributory) remains at €230.30 per week.
2) EXIT TAX
At present the exit tax rate on life assurance policies effected on or after 1 January 2001 (known as gross roll-up policies) is 36% for individuals and applies to gains once a chargeable event occurs. This rate will increase to 41% for chargeable events after 1 January 2014.
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3) DEPOSIT INTEREST RETENTION TAX (DIRT)
The Government has raised DIRT on savings to 41%. The previous rates were 33% (where payments were made annually or more frequently) and 36% (where payments were made less frequently than annually).
4) INCOME TAX, UNIVERSAL SOCIAL CHARGE & PRSI
As expected, income tax rates, tax bands and tax credits all remain the same.
It was announced that top slicing relief will be abolished entirely from 1 January 2014. This follows on from top slicing relief being removed with effect from 1 January 2013 for individuals who received termination or severance payments where the non-statutory payment amounted to €200,000 or over.
Universal Social Charge (USC) and PRSI
There were no changes to the USC or PRSI rates and bands announced in Budget 2014.
5) CORPORATION TAX
There is no change to the Corporation Tax rate of 12.5% for trading income and 25% for non-trading income.
6) CAPITAL ACQUISITIONS TAX (CAT)
There has been no change to the CAT rate of 33% or to the existing CAT thresholds which are as follows:
Group A: €225,000
Applies where the beneficiary is a child (including adopted child, step-child and certain foster children) or minor child of a deceased child of the disponer. Parents also fall within this threshold where they take an inheritance of an absolute interest from a child.
Group B: €30,150
Applies where the beneficiary is a brother, sister, niece, nephew or lineal ancestor or lineal descendant of the disponer.
Group C: €15,075
Applies in all other cases.
7) CAPITAL GAINS TAX (CGT)
The rate of CGT remains at 33%.
Legislation including the Finance and Social Welfare Bills are expected to be published in the near future and we wait to see if they contain further changes not specifically announced in the Budget.