Q&A Dominic Coyle

How will the State get the extra 4% on savings?

Tue, Oct 22, 2013, 01:00

How will the Government get the extra 4 per cent on savings from non-PAYE employees? Will banks deduct it? Or will it be deducted from personal pensions?

Ms M.M., email

PRSI was not mentioned in the Budget last week but, as you note, that does not mean that it is not going to be a significant issue for people in the year ahead. The Government announced plans back in Budget 2013 (in December, 2012) to extend PRSI to “unearned income”. However, the measure was deferred and only comes into force on January 1st, 2014, which means that it is only now that people are waking up to the practicalities of it.

I think many people thought the Minister might clarify the details in the Budget but that was never going to happen: the whole point of announcing the measure last year was to avoid any negative headlines on the issue this time around. So how is it going to work?

The first thing is to get a fix on unearned income. This includes rental income, investment income, dividends and bank interest – ie income outside your basic employment.

The Department of Social Protection oversees the collection of PRSI and it assures me there is no question of banks or credit unions being required to collect PRSI in the same way they now deduct Deposit Interest Retention Tax (Dirt). In part, that is because the institution has no way of knowing who is liable to pay PRSI and who is not.

Secondly, collection of PRSI will not be by way of deduction from a pension or other salary or welfare payments. While this is an issue for local property tax, that is not to say that all future tax collection will replicate the LPT model. In relation to pensions, it should also be noted that no-one over the age of 66 is liable to PRSI unless they remain in employment and even then only under Class J. Thus, if you are in receipt of a State pension, you should not have any obligation to pay PRSI on your savings.

Essentially, the Department advises, people who are regarded as “chargeable persons” for income tax purposes under the Taxes Consolidation Act 1997 will be liable. And in plain language? For the purposes of “unearned income”, a chargeable person within the PAYE system is someone who has more than €3,174 in unearned income. Below that level, amounts are considered “insignificant” and the Department tells me such people will not be liable to PRSI.

Strictly speaking, the rule excludes someone “who has an element of other insignificant income that is fully taxed through the Revenue Commissioners PAYE system” from liability. The reference to “fully taxed through the Revenue Commissioners’ PAYE system” reflects the point that people are strictly speaking supposed to make a tax return if they have income outside PAYE, including bank interest. In reality, very few do so and it makes no difference to their tax bill anyway. The bottom line is that, for most people – especially at current rates of interest – PRSI on bank savings is not likely to be an issue.

Anyone who has unearned income above that €3,174 threshold – either in bank interest alone or combined with other unearned income such as share dividends and rental income – is obliged to make a return and pay the PRSI (and tax) owed through the Revenue’s self-assessment system. If you are outside the PAYE system because you are self-employed, you’ll already be filing under self-assessment if you earn more than €5,000; if outside it because you are not in paid employment, the same insignificant sum rule will effectively apply.

Severance pay qualify for Top Slicing Relief?
I was laid off this year and received a lump sum which would entitle me to Top Slicing Relief. I am due to reclaim this next year as it relates to the previous three years. Is my entitlement abolished with the budget?

Ms A.O., email

The Budget announcement ensured I undertook a crash course in Top Slicing Relief, an area that, till now, has rarely cropped up in this space. The good news is that you will not be affected. There is a rather complicated process for assessing how much of ex gratia ( ie above statutory amounts) lump sums are liable to tax.

There are three different ways of calculating your entitlement and, essentially, you opt for whichever is most financially beneficial to your own particular situation within certain parameters.

When you have arrived at the amount that is taxable, Top Slicing Relief meant that you would not be taxed on the outstanding sum at a rate higher than the average rate of tax paid by you over the previous three tax years. From the start of next year, that will be abolished.

However, as I said, you will not be affected. The process for claiming Top Slicing Relief is that you claim the relief after the end of the tax year in which the lump sum was received. Thus, for you, you cannot claim relief on the the lump sum received when you were laid off this year until 2014.

Several people contacted us within hours of the Budget on this and I checked with Revenue, which confirmed that the relief was being abolished for for payments made on or after January 1st next. Since your payment was made this year, you are entitled to claim.

This column is a reader service and is not intended to replace professional advice. Please send your questions to Q&A, c/o Dominic Coyle, The Irish Times, 24-28 Tara St, D2, or to dcoyle@irishtimes.com