Revenue Note for Guidance

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Revenue Note for Guidance

Schedule 3

[Section 201]

Reliefs in Respect of Income Tax Charged on Payments on Retirement, etc

Overview

This Schedule provides certain reliefs from the charge to tax imposed under section 123 which are supplementary to the exemptions and reliefs provided for by section 201.

PART 1

Interpretation and preliminary

par 1 The term “the relevant capital sum in relation to an office or employment” means an amount equal to the value, at the date of termination of the employment, of any lump sum (not chargeable to income tax) actually received on the termination of the office or employment plus the value of lump sums (not chargeable to income tax) which are receivable and lump sums (not chargeable to income tax) which, if an option or right to commute a pension or a part of a pension in favour of a lump sum were exercisable, may be received at some future date.

Irrespective of whether or not an option or right to commute a pension in favour of a lump sum is actually exercised, the amount equal to the value, at the date of termination of the employment, of any lump sum which could be received in the future by the exercise of the option or right is to be taken into account for the purposes of determining the relevant capital sum in relation to the office or employment.

If it is permissible under the rules of a pension scheme for an individual to surrender irrevocably an option or right to commute a pension or part of a pension in favour of a lump sum and the individual has done so at the date of termination of the employment, the amount equal to the value of the lump sum at that date is not taken into account in calculating the relevant capital sum in relation to the office or employment.

The amount of “the standard capital superannuation benefit” is determined by first calculating one-fifteenth of the average annual taxable emoluments from the office or employment for the last 3 years of service before the relevant date, then multiplying that amount by the number of complete years of service and then deducting from the resultant amount the relevant capital sum in relation to the office or employment.

par 2 References in the Schedule to a “payment in respect of which income tax is chargeable under section 123 “are references to the net amount of the payment after deduction of the basic exemption given under section 201 or the appropriate proportion of it.

par 3 References to “the amount of income tax to which a person is or would be chargeable” are references to tax chargeable either by assessment or deduction. This provision is necessary for the purposes of top-slicing relief provided for in paragraph 10.

par 4 Relief can only be given under this Schedule where a claim is made under section 201.

par 5 Relief under this Schedule is not available in respect of any annual payments out of which the taxpayer is entitled to deduct tax.

PART 2

Relief by reduction of sums chargeable

par 6 Instead of deducting the basic exemption from the payment chargeable to tax under section 123 as is provided for by section 201(5), the amount of the “standard capital superannuation benefit” (referred to as “SCSB”) for the office or employment concerned may be deducted in determining the amount so chargeable.

par 7(a) Where more than one payment is made in respect of the same office or employment or in respect of different offices or employments held under the same or associated employers, all such payments are aggregated and, where made in respect of different employments, the SCSB in respect of the various employments are likewise aggregated. This ensures that only one basic exemption is obtained in such circumstances.

par 7(b) The calculation of the SCSB might give different amounts at the dates of different events. A double allowance of any part of the SCSB is prevented and the amount to be taken into account is the highest of the amounts.

par 8 A claimant for relief under section 201 may, if it is more beneficial to him/her than a claim for the SCSB and if he/she has not in the previous 10 years of assessment made a claim under section 201, have the basic exemption provided for in section 201 increased by the lesser of —

  • €10,000, and
  • the excess (if any) of €10,000 over the relevant capital sum in relation to the employment (that is, the value of tax-free lump sums the claimant receives, will receive, and may receive in the future should he/she exercise an option to commute a pension in favour of a lump sum).

In other words the increased exemption is, in effect, reduced euro for euro by reference to the value of such tax-free lump sums.

par 9 Where there has been some foreign service but not sufficient to give complete exemption under section 201, the proportion which the length of the foreign service bears to the length of total service of the net amount which would otherwise be chargeable is to be exempt.

Par 9A Paragraph 9 ceased to have effect from the passing of the Finance Act 2013 effective from 27 March 2013.

PART 3

Relief by reduction of tax

par 10 This paragraph provides what is referred to as “top slicing relief”. The “top-slicing relief” is designed to limit the tax on chargeable sums to the highest slice (or top slice) of the claimant’s income which would, but for the relief, attract tax at the claimant’s highest rate of tax. The effect of top slicing relief is to charge tax on the chargeable sum at a special rate. This special rate is the average rate of tax on the claimant’s taxable income for the 3 tax years preceding the tax year for which the lump sum is treated as income. Effect is given to the relief by application of the formula —

(P×T)

A ×

I

A =

the claimant’s income tax liability (including the tax liability on the chargeable amount) for the tax year in which the payment is treated as income less the tax liability of the claimant excluding the tax liability on the chargeable amount).

P =

the chargeable amount of the lump sum.

T =

the aggregate of the tax paid by the claimant for the 3 tax years before the tax year for which the lump sum is treated as received.

I =

the aggregate of the claimant’s taxable income for those 3 years.

The tax which would otherwise by payable on the chargeable sum is then reduced by he amount determined by the formula.

par 11 Where in a single tax year a taxpayer gets 2 or more lump sum payments in respect of the same office or employment which have to be top-sliced, the payments are treated for the purposes of top-slicing as a single payment equal to their aggregate.

par 12 Where in a single tax year a taxpayer gets 2 or more lump sum payments in respect of different offices or employments which have to be top-sliced, the payments are treated as if made for the same office or employment and, accordingly, for the purpose of top-slicing are aggregated and treated as a single payment.

par 13(a) Top Slicing relief ceased to apply to any payment of €200,000 or more, to which section 123 applies, made on or after 1 January 2013. This limit is determined without reference to any exemption or deduction provided for in section 201.

Par 13(b) For the purposes of determining whether the limit of €200,000 has been reached, paragraphs 11 and 12 apply in aggregating any payments made.

Par 13(b) Notwithstanding section 201, paragraph 10, granting Top Slicing Relief, ceased to apply to any payments which were made on or after 1 January 2014, and which were chargeable to tax under section 123.

Relevant Date: Finance Act 2021