Q I moved home during Covid. I was working from home at the time and didn’t really take the commute into consideration when I moved. Prior to Covid, I had been based in the office for more than ten years. There’s a big push now to get staff back into the office but the commute would be unworkable for me. My boss has said I can continue to work for him – but only if I change my work status from employee to self-employed freelancer. I’m considering taking up his offer but I’m worried about the pension end of things. Under the rules of the work pension scheme, I can’t continue to be a member of the scheme if I’m not an employee. How would I continue pension savings when self-employed? Joanna, Co Mayo
A Contracting can have some great financial and lifestyle benefits but it’s not for everyone. The benefit to your employer is clear – more flexibility in scaling up and down the workforce as demand requires without being subject to employment law; a potentially cheaper way of hiring given there is no requirement to offer company benefits; and no need to pay employer’s PRSI.
However, the benefits to the employee are not as evident. By switching to a self-employed, self-assessed status, you are essentially leaving PAYE service and in the context of your pension, you would therefore become a deferred member of your work pension scheme. (A deferred member is a past member of a pension scheme who has not yet reached retirement).
So if your employer was contributing to the pension scheme by way of a company contribution, this will cease – and you should bear this in mind when negotiating terms.
Within your new self-employed status, you may set up a PRSA contract and this contract may also accept a transfer value of your deferred work pension.
There are wider considerations at play when looking to change your employment status, such as the potential of reduced benefits, taxation and job security or insecurity as the case may be.
So my suggestion is to seek specialist employment advice to specifically discuss your own personal circumstances.
Q I’m about to retire. I’ve a pretty good pension through work and I’m also entitled to the full State pension. I’ve been an employee all my life so I’ve never had reason to file an income tax return. Will I need to file an income tax return once I start to get paid my pension? Will any tax due on the income from my private pension be deducted automatically – or will I have to make arrangements to pay the tax to Revenue? What about the tax-free lump sum I’m due to get when I retire – do I need to declare this to Revenue too and if so, how? Sam, Co Kildare
A In general, all income arising from pensions in Ireland is subject to taxation, so your private occupational pension income is taxable. Occupational pensions are subject to tax under the PAYE (Pay-As-You-Earn) system so the process is the same as was applied when you were being paid your salary.
In order to tax your social welfare pension, your annual tax credits are reduced by the tax liability on your social welfare pension. For higher incomes, the standard rate cut off point (the point at which you begin to pay the higher rate of income tax) will also be reduced. You then effectively pay tax on both pensions – but it is collected from the occupational pension. The technical term for this is coding in of credits. You would have to pay tax on your social welfare pension if your social welfare pension was not coded in, and this involves making a tax return filing through the self-assessment system annually by October 31 of each year.
With regard to your tax-efficient lump sum, a maximum of €200,000 can currently be taken as a tax-free pension lump sum. This is a total lifetime limit even if lump sums are taken at different times and from different pension arrangements. Lump sums between €200,001 and €500,000 are taxed by the pension administrator at 20pc – with any balance over this amount taxed at your marginal rate and subject to the Universal Social Charge. Where there is a standard chargeable amount due (that is, where your lump sum is between €200,001 and €500,000), you will be required to complete a self-assessment tax return but the remittance of any tax liability is handled by your pension administrator who is required to pay the tax within three months from the end of the month in which the lump sum was paid.