774 Certain approved schemes: exemptions and reliefs

Summary

This section sets out the various tax reliefs and exemptions to be granted in relation to schemes which are fully approved for tax purposes under section 772. Such fully approved schemes are classified as “exempt approved schemes”, that is, an approved scheme set up under irrevocable trusts (so that the disposal of the assets of the scheme is governed by the approved terms of the scheme) or an approved scheme which is an overseas pension scheme. An exempt approved scheme has the following tax advantages –

• the income from the scheme’s investments and deposits is exempt from income tax and, if the scheme’s income includes casual underwriting commissions, these are also exempt;
• an ordinary annual contribution to the scheme by an employer and by an employee is allowable as an expense in computing chargeable income in each case;
• relief for pension contributions made by a “relevant contributor”, which means a company which contributes to occupational pension schemes set up for employees of another company in certain defined circumstances, including in corporate group structures, a merger, an amalgamation, a reconstruction, a merger, a division and a joint venture.
• any contribution by an employer, which is not an ordinary annual contribution, may, at the discretion of the Revenue Commissioners, be spread over a period of years and treated as an expense incurred in those years.
• contributions on retirement by employees which are in respect of dependants’ benefits or are the repayment of contributions previously refunded or benefits received may, at the discretion of the Revenue Commissioners, be spread over a period of years and treated as an expense incurred in those years.
• other contributions by an employee which are not ordinary annual contributions and which are paid after the end of a tax year but on or before the return filing date for the tax year may be set against the remuneration for that tax year.
• employee contributions that cannot be allowed either in the preceding year or in the year of payment may be carried forward to following years and allowed, subject to age-based limits, for those years.

Under section 790A, an earnings cap of €115,000 applies to the total of an individual’s contribution to all pension products but it does not apply to contributions to an approved scheme made before 4 December 2003.

Details

Application

(1) The section applies to approved schemes established under irrevocable trusts, to any approved scheme which is an overseas pension scheme and to any other approved scheme where the Revenue Commissioners so direct. All of these types of schemes are designated “exempt approved schemes”. [The “irrevocable trust” condition can be satisfied by the execution of a deed, by a resolution of a board of directors or by a resolution of partners, by a separate declaration of trust, or by the inclusion of a trust condition in the policy conditions in insured schemes.]

(2) The exemptions and reliefs given by the section only apply to the period during which a scheme is an exempt approved scheme.

Income of scheme

(3) to (5) Income from an exempt approved scheme’s investments (including dealings in financial futures and traded options) or deposits and from certain underwriting commissions are exempt from income tax. The exemption for underwriting commissions applies only to those that are applied for the purposes of the scheme and would, but for the exemption, be chargeable to tax under Case IV of Schedule D, that is, casual transactions. Accordingly, it does not apply to the profits of an organised trade of underwriting which would be chargeable under Case I of Schedule D. While the investments and deposits of overseas pensions schemes may be located elsewhere, this exemption applies if, for any reason, such funds are held in the State either permanently or temporarily.

Employer’s contributions

(6) Any sum paid by an employer or relevant contributor as a contribution to an exempt approved scheme is allowable as an expense in computing the profits of the employer’s or relevant contributor’s trade or profession or as an expense of management in the case of assurance companies and investment companies. In respect of payments made in chargeable periods commencing after 21 April 1997, relief is only available in respect of sums actually paid and not for provisions for or accruals in respect of such payments. Relief also only applies to that part of an employer’s or relevant contributor’s contribution which relates to employees of a business the profits of which are charged to income tax or corporation tax. Where the employer’s or relevant contributor’s contribution is not an ordinary annual contribution, the amount may be spread over such period of years, as the Revenue Commissioners consider appropriate. (Section 775 contains provisions supplementary to subsection (6)).

Employee’s contribution

(7)(a) An ordinary annual contribution by an employee to an exempt approved scheme is allowed to be deducted from his/her earnings assessable under Schedule E as an expense incurred in the year of payment. Note also the earnings limit for relief purposes in section 790A.

(7)(b) & (ba) & (7A) An employee’s contributions which are not ordinary annual contributions, and which are —

• contributions deducted from a lump sum payable on retirement to provide for dependants’ benefits, or
• contributions made on retirement to pay back a previous refund of contributions or to pay back benefits previously provided to the member of a pension scheme [such as a marriage gratuity], where the contributor had previously left the employment related to the pension scheme, or
• contributions made on retirement to acquire additional benefits under a scheme where an option is available under the scheme which involves the purchase of additional years service in respect of actual employment before joining the scheme, and the employee has, before 6 February 2003, responded in writing to an offer from the scheme to take up the option,

may be taken into account and allowed for the year in which they are paid or apportioned over such period of years as the Revenue Commissioners may consider proper. The lump sum may be spread over past years or future years, as appropriate. Any excess tax paid as a consequence of spreading the lump sum over past years may be repaid by the Revenue Commissioners notwithstanding the general time limit for making a claim for a repayment of tax set out in section 865, where the employee makes a claim for the relief within 4 years from the end of the year of assessment in which the contribution is paid and such a claim is a valid claim within the meaning of section 865(1)(b). (The meaning of a valid claim is dealt with in section 865).

(7)(c) The maximum aggregate deduction to be allowed in any year in respect of the ordinary annual contribution and the portion of any other contribution allocated to that year shall not exceed an age-related percentage of the employee’s remuneration in respect of the office or employment for the year in which the contributions are paid.

The age-related percentages are as follows:

(7)(d) & (e) Contributions that cannot be allowed due to an insufficiency of earnings will be carried forward to later years.

(8) Non-ordinary annual contributions paid for a tax year between the end of the tax year and the return filing date for that year will, subject to the annual limits, be allowed to be set against the income for the tax year where a claim is made by that date.

For the year of assessment 2010, the earnings limit is, by virtue of section 790A(5), deemed to be €115,000 for the purpose of determining the extent to which contributions paid by an individual in the year of assessment 2011, are to be treated as paid in the year of assessment 2010.

Relevant Date: Finance Act 2019