26 April 2011

Taxation of Retirement Lump Sums – New form where income tax is deducted under Case IV at the standard rate.

Section 19 (4)(b) Finance Act 2011 inserted a new section 790AA into the Taxes Consolidation Act 1997 (TCA 1997) which provides, with effect from 1 January 2011, that the maximum lifetime retirement  tax-free lump sum is €200,000.

Where a lump sum is paid to an individual on or after that date, the tax-free amount appropriate to that lump sum is determined having regard to any earlier retirement lump sums paid on or after 7 December 2005.

Amounts in excess of this tax-free limit (the excess lump sum) are subject to tax in two stages.

• The portion between €200,000 and €575,000* is taxed under Case IV of Schedule D at the standard rate. No reliefs, allowances or deductions may be set or made against this portion.
• Any portion above €575,000 is taxed at the individual’s marginal rate of tax and is regarded as profits or gains arising from an office or employment. Accordingly, tax on this portion is computed in accordance with the Schedule E basis of assessment.

The administrator of a relevant pension arrangement who deducts tax under Case IV of Schedule D from an excess lump sum is required to make a return within 3 months of the end of the month in which the lump sum giving rise to the excess lump sum is paid and pay the resultant tax to the Collector General at the same time by electronic funds transfer (EFT).

A new Form 790AA, (PDF, 259 KB) (including general guidance notes) is now available on the Revenue website for this purpose and must be used where an administrator deducts tax under Case IV by virtue of section 790AA TCA 1997.

Neither the tax deducted under Case IV nor the related portion of the excess lump sum should be included in forms P30, P35, P60 etc.

Any portion of an excess  lump sum that is regarded as profits or gains arising from an office or employment and taxed under Schedule E should not be included in Form 790AA but should be included in forms P30, P35, P60 etc.

[* This equates to 25% of the standard fund threshold (SFT) for the year of assessment in which the lump sum is paid. The SFT for 2011 is €2.3M].