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Sunday 24 June 2018

Public servants will be the big losers if ESRI's pension tax proposals are implemented

Stock photo: PA
Stock photo: PA
Charlie Weston

Charlie Weston

It seems that the State-supported Economic and Social Research Institute (ESRI) is determined to undermine the current system of providing workers with tax relief for investing some of their wages in a pension.

In its latest broadside, the think tank has concluded that high-income households are the big gainers from the tax treatment of pension contributions. It says cutting the tax reliefs for putting money into a pension should be considered.

The ESRI stance is despite the fact that there is woefully inadequate pension coverage in this country, and that middle-income earners would be the big losers if the tax relief was reduced. Other big losers from the latest attack on tax reliefs from the ESRI would be those in the public sector.

Most of the contributions paid into a pension by employers and staff get tax relief at the person's highest rate of tax.

This means those paying tax at 40pc get relief at that rate, but those on lower income paying tax at 20pc get lower levels of tax relief.

And remember that a single person hits the 40pc tax rate on income as low as €34,550. The threshold is €43,550 for married one-earner couples.

The ESRI says the system could be changed by restricting tax relief on pension contributions to 20pc for everyone.

Alternatively, there could be a 30pc tax relief rate for everyone, the think tank says. The research found that such changes would save the state up to €1bn a year.

However, if the ESRI proposals are implemented they will cost public sector workers, in particular, a fortune.

This is because the proposals can only work equitably if employer contributions are made subject to a benefit-in-kind (BIK) tax charge for the employee.

This means making employer pension contributions a BIK charge for the employee for income tax, PRSI and USC.

In the case of private sector defined contribution schemes, the BIK charge would apply to the employer contributions.

For the public service, this will mean subjecting all public service employees to an annual BIK charge of the estimated value of the employer cost of providing their pensions.

As the average employer contribution to pensions in the public sector is 29pc, according to the Department of Public Expenditure and Reform, the ESRI's proposals would hit public servants very hard.

What this means is that most of the €1bn touted savings from changes to the tax relief on pension contributions would come from the Government's own employees.

It is hard to see this happening.

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