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Budget 2013

Budget 2013

_________________________________________________________________________


1. Pensions

The Government has reaffirmed its commitment to encouraging lower and middle income earners provide for their retirement through investment in private pensions.
Tax Relief on Pension Contributions
There has been no change to the tax relief on pension contributions for 2013. Tax relief on personal
contributions to a pension arrangement will continue to be available at an individual’s marginal rate of tax.
With effect from 1 January 2014 tax relief on pension contributions will only be given in relation to providing a retirement income of up to €60,000 per annum. The precise details as to how this will operate will be finalised during 2013.
Pension Levy
The 0.6% p.a. temporary Pension Levy will not be renewed after 2014, it will cease as planned.
Budget 2013

The Standard Fund Threshold remains at €2,300,000 for 2013.
It is noted that changes will be put in place in 2014 to the Standard Fund Threshold to give effect to the likely cap on pension income of €60,000 p.a. Consultation on the specific changes required to the existing regime will take place with the Pensions Industry and the Departments of Public Expenditure and Reform and Social Protection.


Pre-retirement access to AVC funds
The Finance Bill when enacted will make provision for individuals to take a once off withdrawal of up to 30% of the value of their AVCs. Withdrawals will be subject to income tax at the individual’s marginal rate (since marginal rate relief was provided when the AVCs were initially made). The AVC withdrawal option will be available for a 3 year period from the passing of the Finance Bill.


State Pension (Contributory)
The personal rate of the State Pension (Contributory) remains at €230.30 per week. Therefore the ARF/ taxable cash options on retirement remain dependent on having a minimum guaranteed lifetime income of €18,000 p.a. or using €119,800 to invest in an AMRF or to purchase an annuity (or a combination of both).
2. Exit Tax
At present the exit tax rate on life assurance policies effected on or after 1 January 2001 (which are also called gross roll-up policies) amounts to 33% and applies to any gains on the policy. This rate is to increase to 36% for payments, including deemed payments, made on or after 1 January 2013.
The exit tax rate for life assurance policies taken out by companies remains at 25%.
3. DIRT (Deposit Interest Retention Tax)
The rate of DIRT is also increasing by 3 percentage points.
This means that for accounts where interest is credited at least annually DIRT is increasing from 30% to 33%
and for accounts where interest is credited less frequently than annually the rate is increasing from 33% to 36%. These rates are effective from 1 January 2013.
4. Income Tax, PRSI & USC
Income Tax
As expected income tax rates, standard rate bands and tax credits all remain the same.
Top slicing relief will be removed with effect from 1 January 2013 for individuals who receive termination or
severance payments where the non-statutory payment amount is €200,000 or over. Currently the individual’s
average tax rate for the previous three years applies to such lump sums rather than the individual’s marginal
rate of tax however this will change from 1 January 2013.
PRSI
The Minister stated there was a need to broaden the income base for PRSI and the following changes are
being made:
The minimum annual PRSI contribution payable for the self employed (Class S) with annual income over
€5,000 will increase from €253 to €500.
The weekly PRSI-free allowance has been removed for employees.
Where modified PRSI rate payers have income from a trade or profession, such income and any unearned
income they have will be subject to PRSI with effect from 1 January 2013.
For all others, unearned income will be subject to PRSI with effect from 1 January 2014. Unearned income
includes rental income, investment income, dividends and interest from deposits and savings.Universal Social Charge (USC)
Reduced rates of USC currently apply for individuals who are aged 70 and over or who have a full medical
card. With effect from 1 January 2013 these reduced rates will no longer apply if the individual has an income
of €60,000 per annum or over, they will now pay USC at the standard rates. These changes apply for both self
employed and PAYE income.
5. Corporation Tax
There was no change to the rates of corporation tax.
6. Capital Acquisitions Tax (CAT)
With effect from midnight on 5 December 2012 the capital acquisitions tax rate will increase from 30% to 33%
and the tax free thresholds which are available in respect of gifts or inheritances will be reduced by 10% as
shown below:
Group Relationship to Disponer Group Threshold 2012

Group Threshold 2013

A Son/daughter 250,000 225,000
B
Brother, Sister, Child of a brother or
sister, lineal ancestor or descendant
33,500 30,150
C Other 16,750 15,075
7. Capital Gains Tax (CGT)
CGT is to increase from 30% to 33% for all disposals made from midnight on 5 December 2012.
8. Local Property Tax (LPT)
As expected, the Local Property Tax (LPT) is being introduced with effect from 1 July 2013. Some of the main
points of this tax are as follows:
• It will be the responsibility of the property owner to pay the tax and Revenue is responsible for collecting
the tax
• The tax will be payable on the basis of the market value of the property as assessed by the property
owner
• Revenue will publish a valuation guide to assist property owners
• The initial valuation will be valid up to and including 2016
• The rate is 0.18% of market value for properties valued up to €1 million
• For properties valued at over €1 million the rate will be 0.18% on the first €1 million and 0.25% on the
balance
• From 2015, local authorities will be able to vary the above rates
9. Other Points
Child benefit will be cut by €10 a month from 1 January 2013.
Maternity benefit will be taxable with effect from 1 July 2013 (but will not be liable for USC).
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.
This publication is intended only as a general guide and not as a detailed analysis. In the interests of brevity and clarity, detailed information may have
been omitted which may be directly relevant to an individual’s or an organisation’s circumstances. It should not be used as a substitute for appropriate
professional advice. The information is provided “as is” without warranties of any kind, express or implied, including accuracy, timeliness and completeness.
In no event shall New Ireland or its employees be liable for any direct, indirect, incidental, special, exemplary, punitive, consequential or other damages
whatsoever (including but not limited to, liability for loss of income and/or profits), arising out of or in connection with the information provided in this
publication.

 

Budget 2012

n summary, there were no changes to the following:

  • Tax Relief - for both Employer or Employee Contributions.
  • Employer Corporation Tax rate to remain at 12.5%.
  • Retirement Lump Sum - up to €200,000 remains tax-free and amounts from €200,000 to €575,000 will continue to be taxed at 20%.
  • Standard Fund Threshold - remains unchanged at €2.3 million.
  • The anticipated introduction of a Maximum Lifetime Pension of €60,000 p.a. did not happen.
  • AMRF Specified Income & AMRF Specified Amount remain unchanged (as no change in the State Pension)

Changes
The following changes to pensions were announced:

  • Employer PRSI on Pension Contributions
    The current relief of 50% of Employer PRSI for Employee contributions to occupational pension schemes and other pension arrangements is being abolished from 1st January 2012.

    Comment
    Employer PRSI relief on Employee pension contributions was reduced by 50% in 2011 (from 100%) and this further reduction means that from 2012 there will be no Employer's PRSI relief on Employee pension contributions.

    This removes one of the incentives for Employers to help encourage Employees to make AVCs. It is important to note however that Employers' pension contributions continue to be exempt from Employer PRSI.

  • ARFs & Imputed Distribution
    The annual imputed distribution which applies to the value of assets in an Approved Retirement Fund (ARF) at 31st December each year is being increased from 5% to 6% in respect of ARFs with asset values in excess of €2 million (or, where an individual owns more than one ARF, where the aggregate value of the assets in those ARFs exceeds €2 million). The increase will apply in respect of asset values in affected ARFs at 31st December 2012 and future years.

    The transfer of ARF assets on the death of an ARF owner to a child of the owner aged over 21 is subject to a final liability tax equal to the standard rate of income tax in force at the time of the making of such a distribution (currently 20%). It is proposed to apply a higher final liability tax rate of 30% to such transfers and the details of this will be published in the Finance Bill.
  • Vested-PRSAs & Imputed Distribution
    The annual imputed distribution provisions which apply to ARFs will also apply on the same basis to "vested" PRSAs, where the assets are retained in the PRSA rather than being transferred to an ARF. This will include an increased deemed distribution percentage of 6% for Vested-PRSAs with assets in excess of €2 million.

    Where an individual holds more than one PRSA the deemed distribution will apply to the aggregate of the assets in all of that individual's PRSAs once any one of them is vested. The increase will apply in respect of asset values in affected PRSAs at 31st December 2012 and future years. Further details will be published in the Finance Bill.

    Comment

    Deemed distributions on ARFs were increased in 2011 from 3% to 5% (although the AMRF Fund remains exempt from the deemed distribution and this was increased from €63,500 to €119,800 in 2011).

    For 2012 the deemed distribution has been increased again and extended
    to include Vested-PRSAs on the same basis.

    We await to see the proposed rules in the Finance Bill, but we anticipate that this will be difficult to implement. In particular, where an individual holds more than one PRSA, the deemed distribution will apply to the aggregate of the assets in all of that individual's PRSAs once any one of them is vested. If a PRSA owner has a number of PRSAs with different providers this will be very difficult to monitor.

    Also, the first €119,800 in an AMRF is effectively exempt from the imputed distribution so we await to see how a similar exemption, if any, will be carried through to Vested-PRSAs.

    ARF holders / Vested-PRSA holders who wish to maintain the underlying value of their funds need to consider reviewing the investment funds in which they are invested to produce an investment mix that is likely to withstand the 5% p.a. draw-down (or 6% p.a. if these are greater than €2 million).

    _________________________________________________________________________

    Life & Taxation

    Changes
    The following changes to Life Products & Taxation were announced:

  • Capital Acquisitions Tax (CAT)
    The Capital Acquisitions Tax rate has been increased from 25% to 30%. This applies to the disposal of assets after 6th December 2011.

The Group A Threshold (gifted or inherited to son/daughter) has been reduced from €332,084 to €250,000. This applies to any gift or inheritance taken after
6th December 2011.

  • Capital Gains Tax (CGT)
    The Capital Gains Tax rate has been increased from 25% to 30%. This applies to the disposal of assets after 6th December 2011.
  • Savings: Deposit Interest Retention Tax and Exit Taxes on Life Assurance Policies and Investment Funds
    The DIRT (Deposit Interest Retention Tax) rate has been increased by 3% to 30% where paid annually or more frequently and 33% where paid less frequently than annually. The increased rates will apply to payments, including deemed payments, made on or after 1st January 2012.

    The Life Assurance Exit Tax has also been increased by 3% to 33%. The increased rates will apply to maturities, surrenders, assignments and deemed payments falling on or after 1st January 2012.

    Comment
    It was widely expected that the Government would increase taxes on unearned income, as it had ruled out any increase to income tax. With regard to Capital Acquisitions Tax, the increase in the CAT rate from 25% to 30% together with the reduction in the Group A Threshold may mean that more people will be faced with an inheritance tax liability on the transfer of assets from the parents to their children. Therefore, parents may need to consider taking out a Whole of Life Protection Policy under Section 72 to cover this liability.
  • Universal Social Charge (USC)
    The Universal Social Charge exemption limit is to be increased from €4,004 to €10,036 for the 2012 tax year. The basis of tax deduction will change from a "Week 1" to a "Cumulative" basis for the 2012 tax year.

    Comment
    The increase in the USC exemption limit is a significant increase and a very positive change made for the lower paid. Also, the change from the "Week 1" basis to a "Cumulative" basis will reduce the risk of the over or underpayment of the USC.

 

Pension related changes in Budget 2011
At the outset, it should be noted that the vast majority of individuals with pensions schemes, will not be affected by the tax changes announced by the Minister for Finance in his Budget Statement relating to the reductions in the Standard Fund Threshold, the maximum tax-free lump sum and the annual earnings limit.
Reduction in the Standard Fund Threshold
The maximum allowable pension fund on retirement for tax purposes known as the Standard Fund Threshold (SFT) is to be set at €2.3 million as on and from 7 December 2010. This compares with an SFT of just over €5.4 million that applied before the Budget.
Individuals with pension rights whose capital value exceeds this lower SFT on Budget Day will be able to protect that higher capital value by claiming a Personal Fund Threshold (PFT).
A PFT may apply if, on 7 December 2010, the capital value of an individual’s pension rights drawn down on or after 7 December 2005 (i.e. crystallised pension rights), if any, when added to any uncrystallised pension rights the individual may have, as valued on 7 December 2010 (i.e. pension rights which the individual is building up but has not yet become entitled to) is greater than €2.3 million. However, in no case may a PFT exceed the level of the previous SFT of €5,418,085.
The following simple examples illustrate the above point.
􀂾
The value of Paul’s uncrystallised pension rights on 7 December 2010 is €2m. He had not become entitled to any pension rights since 7 December 2005. As the value of Paul’s uncrystallised rights is below the SFT of €2.3m, he cannot claim a PFT and the maximum allowable pension fund for tax purpose that Paul can build up is €2.3m.
􀂾
The value of John’s uncrystallised pension rights on 7 December 2010 is €3m. He had not become entitled to any pension rights since 7 December 2005. As the value of John’s uncrystallised pension rights exceeds the SFT of €2.3m, John may claim a PFT of €3m which will be his maximum allowable pension fund for tax purposes.
􀂾
Mary has uncrystallised pension rights of €2m on 7 December 2010. She became entitled to pension benefits under another scheme on 1 January 2008, with a capital value of €1.5m. As the combined value of Mary’s crystallised and uncrystallised pension rights of €3.5m exceeds the SFT of €2.3m, she may claim a PFT of €3.5m which will be her maximum allowable pension fund for tax purposes.
􀂾
Jean has uncrystallised pension rights on 7 December of €4m. Jean had become entitled to pension benefits under another scheme on 1 July 2006 with a capital value of €2m. The combined value of Jean’s crystallised and uncrystallised pension rights is, therefore, €6m. This exceeds the SFT of
€2.3m but as it is also greater than the old SFT of €5,418,085. Jean’s PFT is restricted to €5,418,085 which will be her maximum allowable pension fund for tax purposes.
Note in the final two examples above, when the uncrytallised pension rights eventually come into payment, the capital value of the pensions rights that Mary and Jean had become entitled to on I January 2008 and 1 July 2006, respectively, will have already “used up” part of their PFTs.
A PFT will have to be claimed by way of a notification and certification procedure. Basically, individuals will have a period of 6 months from Budget Day to send details of their pension schemes and the calculation of their PFT to the Revenue Commissioners. The Revenue Commissioners will then certify the PFT. A PFT application form will be available on this website shortly.
Individuals who already have a PFT under the SFT regime as it applied before Budget Day will retain that PFT and there is no requirement to make a new notification to Revenue.
It should also be noted that where an individual has already become entitled to all of his or her pension rights before Budget Day (i.e. has already retired) and has no uncrystallised pension rights on that day (i.e. is not building up other pension entitlements to which he or she has not yet become entitled) the new lower SFT has no application.
The legislation (Schedule 23B to the Taxes Consolidation Act 1997) sets out the basis on which the capital value of crystallised and uncrystallised pension rights are to be determined at any date.
When the capital value of pension benefits drawn down by an individual exceed his or her SFT or PFT as appropriate a tax charge of 41% is applied to the excess and is paid over to the Revenue Commissioners by the pension scheme administrator. This charge is in addition to any tax charge that may be applied to the pension, annuity etc when it is paid out.
Taxation of Retirement lump sums
Retirement lump sums above €200,000 will be taxed with effect from 1 January 2011.
The new taxation regime for retirement lump sums replaces the existing regime which placed a lifetime limit on the amount of tax-free pension lump sums that could be taken by an individual from 7 December 2005. This limit was set at 25% of the old Standard Fund Threshold and amounted to about €1.35 million.
Under the new approach, the maximum lifetime retirement tax-free lump sum will be €200,000 as and from 1 January 2011. Amounts in excess of this tax-free limit will be subject to tax in two stages. The portion between €200,000 and €575,000 will be taxed at the standard rate of income tax in force at the time of payment, currently 20%, while any portion above that will be taxed at the recipient’s marginal rate of tax.
The figure of €575,000 represents 25% of the new lower Standard Fund Threshold of €2.3 million. The standard rate charge is “ring-fenced” so that no reliefs, allowances or deductions may be set or made against that portion of a lump sum subject to that charge.
Although tax free lump sums taken after 7 December 2005 (when the original limit was introduced) and before 1 January 2011are unaffected by the new rules, they will count towards “using up” the new tax free amount. In other words, if an individual has already taken tax- free retirement lump sums of €200,000 or more since 7 December 2005, any further retirement lump sums paid to the individual on or after 1 January 2011 will be taxable. These earlier lumps sums will also count towards determining how much of a lump sum paid on or after 1 January 2011 is to be charged at the standard or marginal rate as appropriate.
It is also important to note that the €200,000 tax–free amount is a lifetime limit and so it will apply to a single lump sum or where an individual is in receipt of lump sums from more than one pension product, to the aggregate of those lump sums. The restriction also applies to all pension arrangements, including occupational pension schemes, Retirement Annuity Contracts, PRSAs, public sector and statutory schemes.
There are certain exclusions from the pension lump sum tax charge. It will not apply, for example, to lump sum death-in-service benefits paid to a widow or widower, civil partner (within the meaning of the Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010), children, dependants, or personal representatives of a deceased person.
The following examples illustrate how this new scheme will work in practice.
Example 1
A is paid a retirement lump sum on 10 January 2011 of €180,000. This is the first such lump sum he has received. A’s retirement lump sum is exempt from tax as it is less than the tax-free limit of €200,000. He has, however, used up €180,000 of his lifetime tax-free limit.
Example 2
A is paid a further retirement lump sum of €150,000 on 30 June 2011. As the tax-free limit applies to the aggregate of all lump sums received on or after 7 December 2005, A must aggregate both lump sums to determine how much of the second lump sum is subject to tax. The aggregate of the lump sums received since 7 December 2005 is €330,000. This exceeds his lifetime tax-free limit of €200,000, by €130,000. The “excess lump sum” of €130,000 is, therefore, subject to tax at the standard rate of tax for 2011 i.e. 20%
Example 3
A is paid a further retirement lump sum of €450,000 on 30 September 2011.
As illustrated in Example 2, his lifetime tax-free limit of €200,000 has been fully used up and he has also used up €130,000 of the amount that is charged at the standard rate (i.e. €375,000; the difference between the tax free limit of €200,000 and €575,000 (25% of the SFT)). The latest lump sum is subject to tax as follows:

€245,000 @ the standard rate for 2011 (€375,000 – €130,000 = €245,000).

the remaining €205,000 @ his marginal rate for 2011.
Example 4
B is paid a retirement lump sum of €800,000 on 31 January 2011. This is the first such lump sum he has received. He is charged to tax as follows:

the first €200,000 is exempt,

the next €375,000 is taxed at the standard rate for 2011

the balance i.e. €225,000, is taxed at his marginal rate for 2011.
If B receives any future retirement lump sum, it will be subject to tax at his marginal rate in the year it is paid.
Example 5
C is paid a retirement lump sum on 10 January 2011 of €100,000. She had previously received a lump sum on 30 June 2009 of €300,000. As C’s earlier lump sum already exceeds the tax-free limit all of the latest lump sum is taxable. The €100,000 lump sum taken on 10 January is taxable at the standard rate of 20%. The earlier lump sum is unaffected.
Example 6
D is paid a retirement lump sum on 1 July 2011 of €400,000. He had previously received a retirement lump sum of €500,000 on 1 January 2006. The earlier lump sum has “used up” all of D’s tax-free limit of €200,000 so that all of the lump sum taken on 1 July is taxable. Even though the earlier lump sum is not taxable, it affects the rate of tax applying to the later lump sum. The earlier lump sum has “used up”
􀂾
the €200,000 tax free limit, and
􀂾
€300,000 of the €375,000 that is taxable at the standard rate
Therefore:
􀂾
€75,000 of the later lump sum is taxed at the standard rate
􀂾
the remaining €325,000 of the later lump sum is taxed at D’s marginal rate.
Annual earnings limit
The earnings limit which, in conjunction with age related percentage limits, governs the maximum amount of tax relievable contributions an individual can make in any one year to pension products has been reduced from €150,000 in 2010 to €115,000 for
2011. This means that the maximum tax relievable pension contribution that can be made in 2011 is €46,000 i.e. €115,000 @ 40% (assuming the individual is aged 60 or over).
In addition, the earnings limit for 2010 is deemed to be €115,000 in respect of contributions that are paid in 2011 but which the individual elects to have treated as if paid in 2010.
For example, assume A who is 61 had net relevant earnings in 2010 of €150,000 (equal to the earnings limit for that year). Under the rules the maximum tax relievable pension contributions A can make in 2010 is €60,000 i.e. €150,000 @ 40%. Assume A only made contributions of €40,000 in 2010 to a personal pension. In 2011 A makes a further contribution of €20,000 and under the rules wishes to elect to have that treated as paid in 2010 so as to maximise his tax relief in that year. Under the new provisions the earnings limit for 2010 is deemed to be €115,000 for the purposes of this election. The maximum tax relievable pension contribution A could make in 2010 if the limit had been €115,000 would have been €46,000 (i.e. €115,000@ 40%). Therefore, only €6,000 of the €20,000 contribution made in 2011 can be pushed back into 2010. Had A’s actual contribution made in 2010 been €46,000 or more, he would have no capacity to elect to have a contribution made in 2011 treated as being paid in 2010.
Approved Retirement Funds
The annual imputed distribution which applies to the value of assets in an Approved Retirement Fund (ARF) at 31 December each year is being increased from 3% to 5% in respect of asset values at 31 December 2010 and future years.
Extension of flexible options on retirement
The National Pensions Framework published in March 2010 contained a commitment that flexible options on retirement in relation to pension funds (e.g. access to Approved Retirement Funds (ARFs) etc.) be extended to all Defined Contribution (DC) pension arrangements. As mentioned in the Minister for Finance’s Budget speech, this commitment is being fulfilled in 2011.
Prior to the Finance Act 1999, any person taking a pension under a DC scheme was required to purchase an annuity with the pension fund moneys remaining after the drawdown of the appropriate tax-free lump sum. The Finance Act 1999 introduced significant changes which gave a considerable degree of control, flexibility and personal choice to certain categories of individual, which included the options to purchase an annuity or to invest in an Approved Retirement Fund (ARF) or Approved Minimum Retirement Fund (AMRF), as appropriate.
The option to have all or part of an individual’s accumulated pension fund placed in an ARF must be exercised not later than the date on which the annuity or pension would otherwise become payable and is conditional on the individual having a guaranteed pension income for life of at least €12,700 in payment at that time. Where this guaranteed income test is not met, a maximum of €63,500 of the net pension fund
(after taking the tax free lump sum), or the whole of the remaining fund, if less, must be either invested in an AMRF or used to purchase an annuity.
Where the AMRF route is taken the capital invested in the AMRF cannot be used by the individual until he or she reaches 75 (or dies) whereupon the AMRF automatically becomes an ARF. Up to now, the fact that the owner of an AMRF was able to meet the guaranteed income requirement after retirement was of no consequence – if the test was not met at the point of retirement the AMRF route had to be taken and the capital was “locked in” until age 75.
In the context of extending the flexible options, the Minister indicated the following changes to the legislation and transitional arrangements:
􀂾
The AMRF option is being retained but the “set-aside” requirement will now be the lesser of 10 times the maximum rate of State Pension (Contributory) – about €120,000 – or the remainder of the pension fund after taking the tax-free lump sum, as compared with €63,500 at present.

The specified or guaranteed income limit of €12,700 per annum is being increased to 1.5 times the maximum rate of the State Pension (Contributory) bringing the “specified income” limit to close on €18,000 per annum.

The guaranteed income requirement, if not satisfied at the time of retirement may be satisfied at any time after retirement, at which point the Approved Minimum Retirement Fund (AMRF) becomes an ARF.

As a transitional measure, the current guaranteed income requirement of €12,700 per annum will continue to apply for a 3 year period in the case of individuals who have already retired. If they satisfy the existing requirement within 3 years (of the 2011 Finance Bill becoming law) their AMRF becomes an ARF. After this 3 year period, the new higher guaranteed income test referred to above will have to be satisfied.
The deferral of annuity purchase arrangements for members of occupational DC schemes which is operated administratively by the Revenue Commissioners is being extended pending these changes being signed into law.
Full details of the above will be reflected in the Finance Bill

     

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