Revenue Tax Briefing

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Revenue Tax Briefing Issue 43, April 2001

New Savings Scheme

Special Savings Incentive Accounts

A new savings scheme has been introduced to encourage regular savings by individuals. The main features of the scheme are as follows:

  • For every amount saved in the scheme, the Exchequer will contribute to the individual saver’s account a tax credit equal to 25% of that amount. This is equivalent to giving tax relief on savings at the standard rate of income tax.
  • The scheme will start on 1 May 2001 and accounts must be commenced on or before 30 April 2002 (i.e. the first subscription must be made to the account on or before that date) The tax credits will be paid in respect of subscriptions made to the account in the month of commencement and the subsequent 59 months.
  • Special Savings Incentive Accounts will be managed, on behalf of an individual saver, by a range of bodies such as banks, building societies, the Post Office Savings Bank, credit unions, life companies, fund managers and stockbrokers. A Special Savings Incentive Account can comprise investments in deposits, credit union shares quoted shares, government securities, collective funds or life assurance products as determined by the account manager.
  • Tax credits will be forwarded by Revenue directly to the account manager and added to the savings in the account. The Government will not be operating or guaranteeing the account or the return on investment - this will be a matter between an individual and his or her account manager. It will be a matter for each individual to assess the level of risk he/she wishes to take.
  • To obtain maximum benefit from the savings scheme the savings must be held for the full term which ends 30 days after the fifth anniversary of the end of the month in which the account commences. [This is to allow time for the tax credit due in respect of the final subscription to the account to be forwarded to the account manager by the Revenue].
  • Where an account is held for the full term or, if earlier the account holder dies, tax will deducted by the account manager at the rate of 23% but only from the income or gains arising from investment of the subscriptions and tax credits. In other words tax is applied to the difference between the total value of the account at full term less the aggregate of all subscriptions and tax credits lodged to the account.
    This tax will be deducted by the account manager when an account has been held for a full term whether or not the funds are withdrawn from the savings account at that time.
  • Where before an account has run its full term there is a withdrawal from an account, the full amount withdrawn will suffer tax at 23%.
    The tax is applied:
    • where the withdrawal is in cash, to the amount of the withdrawal,
    • where the withdrawal is of assets, to an amount equal to the market value of such assets.
  • An individual aged 18 years of age or over can commence an account. An account holder must be resident in the State for tax purposes and either resident or ordinarily resident throughout the period the account is held. Each individual is allowed only one account and on commencing the account will be required to provide documentary evidence of his or her PPS No. (personal public service number) to the account manager concerned and to complete a declaration
  • SSIAs are individual accounts - joint accounts are not permitted. A husband and wife can each independently open an account. While the general requirement is that each account must be funded out of the account holder’s own resources, this requirement does not apply in the case of married couples. For example, if only one spouse has income, that income can fund both spouses’ SSIA.
  • The maximum amount that an individual can lodge to an account in any one month will be ₤200, and the tax credit to the account will be ₤50 for each ₤200 lodged. A minimum amount of ₤10 per month must be saved by an individual for the first year of the account. After the first year an individual may save any amount in a month from ₤0 to ₤200 over the remaining four year period.
  • It is possible for an individual to transfer a special saving incentive account from one account manager to another.
  • Lodgements to the account must be made from funds available to an individual and his/her spouse. However funds cannot be borrowed or the repayment of sums borrowed cannot be deferred for the purposes of funding lodgements to the account.
  • The assets held in an account cannot be used as security for a loan.

Set out below are some examples of how the scheme will operate. It should be noted that the figures used in the examples for investment returns are for illustration purposes only ; it will be a matter between the individual and the account manager what actual investment return is involved.

Example 1

Joe opens an account with his preferred account manager and decides to save ₤50 a month for the five year period. Joe will save ₤3,000 over the five year period and the Exchequer will contribute a further ₤750. If the return on investment is assumed to be 4% per annum the return on this ₤3,750 saved over a period would be of the order of ₤390 which would be taxed at 23% leaving a net gain of ₤300. Thus Joe would have ₤4,050 at the end of the five year period for ₤3,000 saved, a gain of ₤1,050 after tax.

Example 2

Anne decides to open an account and save the maximum of ₤200 per month. She will save ₤12,000 over the five year period and the Exchequer will contribute ₤3,000.

Again assuming a 4% return the gain on this ₤15,000 would be of the order of ₤1,564 which would be taxed at 23% leaving a net gain of ₤1,204. Thus Anne would have ₤16,204 at the end of the five year period, a gain of ₤4,204 after tax.

Example 3

George saves ₤100 per month throughout the 5 years, but in year 3 he seeks to withdraw some funds to meet a financial emergency. His account is “topped-up” by a tax credit of ₤25 each month, and at the end of the period he has a balance on the account of ₤8,100, which is made up of:

  • cash savings of ₤6,000 (₤100 x 12 x 5);
  • a tax credit top-up of ₤1,500 (₤6,000 x 25%);
  • income/gains of, say, ₤1,100;
  • less: the year 3 cash gross down of ₤500 (net ₤385);

In year 3 the savings manager will deduct 23% tax from the gross withdrawal of ₤500, pay ₤115 to Revenue and the balance ₤385 to George.

At the end of year 5 the savings manager will deduct 23% tax (i.e. ₤253) from the ₤1,100 income/gains and pay it to Revenue. The balance remaining in the account (₤7,847) can be drawn down at that stage without any further tax charge.