Revenue Tax Briefing

Tax Relief for Pension Contributions: Application of Earnings Limit in the case of Doctors with General Medical Services (GMS)¹ and private practice income

Tax Briefing 74 (September 2009) set out the operation of the aggregate earnings limit in situations where an individual has both earnings from employment and income from self-employment and makes contributions to both an occupational pension scheme/statutory scheme and a personal pension plan/PRSA.

In light of requests for clarification, this article illustrates the operation of the aggregate earnings limit for doctors with GMS income and income from private practice where they make contributions to both the GMS Superannuation Plan/AVCs ² and to personal pension plans/PRSAs.

Revenue confirms that pensionable GMS income (i.e. net GMS remuneration ³) makes up the first part of the aggregate earnings limit of €150,000 and net relevant earnings in respect of private practice income will, effectively, be zero where the GMS pensionable income is €150,000 or more. However, in light of the apparent uncertainty concerning the correct application of the earnings limit, transitional arrangements will apply for 2009 (see final section of this Tax Briefing).

Background

Under section 773 of the Taxes Consolidation Act 1997 (TCA) the superannuation arrangements for doctors under the GMS Scheme is approved by Revenue, for the purposes of Chapter 1 of Part 30 of that Act, as if the GMS Plan were a retirement benefits scheme for employees. Tax relief for contributions made by doctors to the Plan is given, therefore, under the provisions of Chapter 1.

Section 773(3) effectively deems GMS income to be "remuneration from an office or employment" and specifically excludes that income from being taken into account in the calculation of net relevant earnings for the purposes of any claim to relief in respect of premiums paid towards a personal pension plan (RAC).

Tax Relief for Pension Contributions

As set out in Tax Briefing 74, tax relief for pension contributions is subject to two main controls. The first control is an age-related percentage limit (see end Note) of an individual's remuneration/net relevant earnings, whilst the second control places an overall upper limit (€150,000 from 2009 onwards) on the amount of remuneration/net relevant earnings that may be taken into account for the purposes of giving tax relief.

In addition, section 790A TCA provides that, for the purposes of giving tax relief to an individual on contributions made to a retirement benefits scheme and to a personal pension/PRSA etc. the aggregate of the individual's remuneration, within the meaning of Chapter 1, and net relevant earnings within the meaning of Chapter 2 (RACs) and Chapter 2A (PRSAs) shall not exceed the earnings limit. In essence, therefore, where an individual has both remuneration from employment and net relevant earnings in respect of self-employment, the aggregate of the remuneration and net relevant earnings that can be "pensioned" for tax relief purposes cannot exceed €150,000. Revenue confirms that, if the pensionable remuneration from an office or employment in a year equals or exceeds the €150,000 limit, there is no scope to get tax relief on contributions to a personal pension plan/PRSA for that year. In effect, the legislation requires pensionable remuneration to be considerd first in determining the overall amount of tax relievable contributions that can be made in any year as between occupational pensions (including AVCs) and personal pensions/PRSAs.

Given that section 773 TCA treats a doctor's GMS income as "remuneration from an office or employment", the operation of the aggregate earnings limit outlined above applies to doctors with GMS and private practice income in the same way i.e. the GMS income and GMS Superannuation Plan contributions must be considered first in determining the overall amount of tax relievable contributions that can be made by a doctor in any year as between occupational pensions (including AVCs) and personal pensions/PRSAs.

The following examples illustrate the operation of the aggregate earnings limit in such circumstances.

Example 1

John is a GP aged 56. He is in receipt of net GMS remuneration in 2009 of €100,000 of which capitation income is €80,000 and he has net relevant earnings of €100,000 in respect of his private practice income.

As a member of the GMS Superannuation Plan, John is contractually required to make a contribution of 5% of the capitation element of his GMS remuneration to the plan. In addition, during 2009 John has paid regular monthly AVCs of €500 per month in respect of his GMS remuneration and has paid premiums of €1,000 per month to a personal pension plan (RAC) in respect of his private practice earnings. John is about to complete his 2009 tax return and wishes to maximise his pension tax relief for the year. What are his options?

Overall, the potential maximum contributions in respect of which John can claim tax relief in 2009 is €52,500 i.e. the earnings limit of €150,000 multiplied by the relevant age related % limit of 35%.

John's pensionable remuneration must be considered first. In relation to his net GMS remuneration, John has already made contributions of €4,000 as a result of his 5% contribution to the GMS Plan and a further €6,000 in AVCs, giving total contributions of €10,000. Under pension tax rules, John may make tax relievable contributions of up to €35,000 in respect of his net GMS remuneration as between the main GMS Plan and AVCs. Subject to overall benefit restrictions, John may have scope, therefore, to make a special "last minute" AVC of up to €25,000 under the provisions of section 774(8) TCA before the 2009 return filing date and elect to claim the relief on the contribution in 2009 so as to maximise his relief.

Having pensioned €100,000 of his net GMS remuneration, John has "used up" that amount of the €150,000 earnings limit, thus restricting his capacity to make tax relievable contributions in respect of a personal pension plan/PRSA to 35% of €50,000 i.e. €17,500. He has already made regular RAC premiums totalling €12,000 in 2009. On that basis he has capacity, under section 787(7), to make a further tax relievable RAC or PRSA contribution of €5,500 before the return filing date and elect to claim the relief in respect of the contribution in 2009.

Overall, as between his GMS Plan/AVC contributions of €35,000 and his RAC contributions of €17,500 John has claimed his full entitlement to tax relief.

Example 2

Jean is a GP aged 43. She is in receipt of net GMS remuneration in 2009 of €160,000 of which capitation income is €130,000 and she has net relevant earnings of €100,000 in respect of her private practice income.

As a member of the GMS Superannuation Plan, Jean made a contribution of €6,500 (5% of the capitation income) to the plan in 2009. In addition, during 2009 Jean has paid regular monthly contributions of €500 to a PRSA in respect of her private practice income. Before completing her 2009 tax return, Jean wants to establish what her position is as regards claiming relief on the contributions already made and on maximising her relief in 2009.

Overall the potential maximum contributions in respect of which Jean can claim tax relief in 2009 is €37,500 i.e. the earnings limit of €150,000 multiplied by the relevant age related % limit of 25%.

As in Example 1, Jean's pensionable GMS income must be considered first. In this case, as her net GMS remuneration exceeds the earnings limit of €150,000, she has no scope to claim relief for her PRSA contributions in 2009.

Jean has already made a contribution of €6,500 to the GMS Plan. Assuming she has capacity to do so (having regard to overall benefit restrictions), Jean has scope to make a special "last minute" AVC of up to €31,000 under the provisions of section 774(8) TCA before the 2009 return filing date and elect to claim the relief on the contribution in 2009 so as to maximise her relief.

Jean's PRSA contributions cannot be relieved in 2009 and must be carried forward for relief in future years. This is the position irrespective of whether Jean decides to make an AVC or not.

Transitional Arrangements

In light of the apparent uncertainty concerning the correct application of the earnings limit, the following transitional arrangements will apply in relation to the operation of the limit for 2009 in respect of doctors with GMS and private practice income.

Where a personal pension /PRSA contract was entered into before 7 September 2010 (the date of issue of this Tax Briefing) and the contribution

• was actually paid in 2009, or
• was paid before 7 September 2010 in respect of 2009 (i.e. where the taxpayer elects, before the 2009 return filing date, to have the contribution treated as if it was paid in 2009)

Revenue will not seek to apply the approach outlined in this Tax Briefing article and doctors may claim relief for 2009 on the same basis as in previous years, subject to the relevant age related and earnings limits not being breached.

Contributions made on or after 7 September 2010 in respect of 2009 and contributions made during 2010 in respect of 2010 (whether made before or after 7 September) fall to be treated under the approach outlined in this Tax Briefing.

In light of the transitional arrangements for 2009, years prior to 2009 are not affected by this Tax Briefing.

Age	Limits
Up to 30 years	15% of remuneration/net relevant earnings
30 – 39	20%
40 – 49	25%
50 – 54	30%
55 – 59	35%
60 and over	40%