790AA Taxation of lump sums in excess of the tax free amount

Summary

This section provides for the imposition of a limit on lump sum payments that can be made tax-free on or after 7 December 2005 under various pension arrangements. It replaces an earlier version of the same section.

As and from 1 January 2011, the lifetime tax-free limit on all retirement lump sums paid to an individual on or after 7 December 2005 is €200,000. This limit applies to a single lump sum or, where more than one lump sum is paid to an individual over time, to the aggregate value of those lump sums.

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 €500,000 is taxed under Case IV at the standard rate of tax* while any portion above that is treated as emoluments and taxed under Schedule E at the individual’s marginal rate of tax.

*For lump sums paid between 7 December 2010 and 31 December 2013, the upper limit of the portion taxed under Case IV was €575,000.

Details

(1) Subsection (1) sets out the definitions and other assumptions underpinning the section. For the most part these are self-explanatory but the following points should be noted.

(1)(a) For the purposes of the section the term “administrator” is given a broad definition given the range of relevant pension arrangements (as defined) that it is intended to cover. It is defined to include, in particular, administrators of private sector occupational pension schemes, retirement annuity contracts – normally Life Assurance Companies – and PRSA administrators.

“relevant pension arrangement” is defined to include:

• All Revenue approved occupational pension schemes. This includes AVC arrangements.
• All Revenue approved retirement annuity contracts and trust schemes for professionals such as Solicitors, Accountants and Dentists. It is possible for a representative body to establish under trust a group scheme to provide section 784 insurance contract type benefits – the body must comprise or represent the majority of individuals so engaged in the State.
• All PRSA contracts.
• Qualifying overseas pension plans.
• All public service pension schemes as defined in the Public Service Superannuation (Miscellaneous Provisions) Act 2004.
• All statutory schemes – that is schemes established by or under any enactment. This includes all statutory schemes that fall outside of the definition of public service pension scheme as mentioned above.

The “standard chargeable amount” is determined by the formula-

where SFT is the standard fund threshold for the year of assessment in which the lump sum is paid and TFA is the tax free amount. For 2014 the standard chargeable amount is €300,000, i.e. the difference between 25% of the standard fund threshold of €2 million (€500,000) and the tax-free amount (€200,000).

The “specified date” is 1 January 2011.

The “tax free amount” is €200,000.

(1)(b)(i) A lump sum means a lump sum that is paid to an individual under the rules of a relevant pension arrangement as defined. The lump sum can be made by way of commutation of part of a pension or part of an annuity or otherwise (e.g. in the public sector by way of the payment of a specified amount in addition to a pension).

(1)(b)(ii) Commutation of part of a pension or annuity includes a situation under the ARF options whereby the lump sum is calculated by way of commutation of part of the pension or part of the annuity that would otherwise be payable if the ARF option had not been taken.

(1)(c) References in the section to a lump sum that is paid to an individual include references to a lump sum that is obtained by, or given or made available to, an individual. By extension words used to describe lump sums previously paid etc. will be construed accordingly

(1)(d)(i) Where two lump sums are paid on the same day, the one that is paid earlier is treated as having been paid before the later one for the purposes of subsection (1)(e). Each lump sum, therefore, has to be tested against the tax-free amount in its own right in accordance with the requirements of subparagraphs (i) and (ii) of paragraph (e), to determine if there is an excess lump sum.

(1)(d)(ii) A lump sum will not be treated as being paid at the same time as one or more other lump sums and if such is the case then the individual to whom the lump sums are paid must decide which of the lump sums is to be treated as being paid first etc. for the purposes of the section.

(1)(e) The rules for determining when an excess lump sum, if any, arises in relation to a lump sum payment (current lump sum) made on or after the specified date (i.e. 1 January 2011) and which is treated as income under subsection (2) and taxed under subsection (3), are as follows:

• (1)(e)(i) Where the lump sum payment is the first lump sum to be paid to the individual on or after 7 December 2005 (the date the taxation of retirement lump sums was originally introduced), the excess lump sum is the amount by which the lump sum exceeds the lump sum limit of €200,000.
  For example, if a retirement lump sum of €600,000 was paid in January 2014 (being the first such lump sum) then the excess lump sum is €400,000, i.e. €600,000 – €200,000 (the tax-free amount).
• (1)(e)(ii)(I) Where one or more lump sums have been paid on or after 7 December 2005 but before the current lump sum, then where the sum of the earlier lump sum payments is less that the lump sum limit, the excess lump sum is the earlier lump sums and the current lump sum added together minus the lump sum limit.
  For example, a lump sum is paid in January 2011 of € 50,000, a second one paid in June 2012 of €100,000 and the current one paid in February 2014 of €180,000. The excess lump sum is therefore –
  • The sum of the earlier lump sums (€50,000 + €100,000) = €150,000
  • Plus the current lump sum = (€150,000 + €180,000) = €330,000
  • Minus the lump sum limit = (€330,000 – €200,000) = €130,000.
  (1)(e)(ii)(II) Where the sum of the earlier lump sums is equal to or greater than the lump sum limit then the excess lump sum is the amount of the current lump sum.
  For example, a lump sum was paid in February 2008 of €150,000, a second in July 2009 of €170,000 and a third (the current lump sum) in January 2011 of €200,000. As the sum of the earlier lump sums – €320,000 (€150,000 + €170,000) exceeds the tax-free amount of €200,000 the entire current lump sum is an excess lump sum.

(2) Where a lump sum is paid to an individual on or after 1 January 2011, the excess lump sum is regarded as the income of the individual for the year in which it is paid and is subject to tax in accordance with subsection (3).

(3) The first portion of the excess lump sum (i.e. the portion between €200,000 and €500,000) is charged to tax under Case IV of Schedule D at the standard rate of income tax in force (currently 20%) when the lump sum is paid. The portion, if any, of the excess lump sum above the standard chargeable amount (i.e. above €500,000) is regarded as profits or gains arising from an office or employment and is charged to tax under Schedule E at the marginal rate of tax.

(3)(a) Paragraph (a) of subsection (3) sets out the rules for taxing a retirement lump sum which is received on or after 1 January 2011 where-

• no other lump sum has been paid to the individual since 7 December 2005, or
• where one or more lump sums has been paid since 7 December 2005 which, in aggregate, are less than, or equal to, the tax-free amount.

The part of the excess lump sum that doesn’t exceed the standard chargeable amount is taxed under Case IV of Schedule D at the standard rate.

The part of the excess lump sum that exceeds the standard chargeable amount is regarded as profits or gains arising from an office or employment and is taxed in accordance under Schedule E (relevant emoluments).

For example, a lump sum is paid in June 2012 of €200,000 and the current lump sum is paid in January 2014 of €600,000.

In accordance with subsection (1)(e)(i)(II), the excess lump sum is €600,000.

The earlier lump sum, €200,000 plus the current lump sum = (€200,000 + €600,000) = €800,000 minus the tax-free amount = (€800,000 – €200,000) = €600,000.

As the excess lump sum exceeds the standard chargeable amount of €300,000 (€500,000 – €200,000 = €300,000), the excess lump sum is taxed as to €300,000 under Case IV at the standard rate and the remaining €300,000 is taxed as emoluments under Schedule E.

(3)(b) Paragraph (b) of subsection (3) sets out the rules for taxing a retirement lump sum which is received on or after 1 January 2011 where one or more lump sums has been paid since 7 December 2005 which, in aggregate, exceed the tax-free amount.

(i) Where “the first mentioned amount” (i.e. the amount by which a lump sum or lump sums paid prior to the current lump sum exceed the tax free amount) is less than the standard chargeable amount, then –

• The part of the excess lump sum that doesn’t exceed the difference between the standard chargeable amount and the first mentioned amount is taxed under Case IV of Schedule D at the standard rate.
• The part of the excess lump sum that exceeds the difference between the standard chargeable amount and the first mentioned amount is regarded as “relevant emoluments” and is charged to tax under Schedule E.
  For example, a lump sum is paid in June 2012 of €100,000, a second lump sum is paid on 5 January 2013 of €300,000 and a further lump sum (the current lump sum) is paid on 25 January 2014 of €600,000.
  The excess lump sum in this case is €600,000, as the sum of the earlier lump sums exceeds the tax free amount.
  The “first mentioned amount” is €200,000 (i.e. €100,000 + €300,000 = €400,000 – €200,000 = €200,000).
  The first mentioned amount is €100,000 lower than the standard chargeable amount of €300,000.
  €100,000 of the excess lump sum of €600,000 is charged to income tax under Case IV of Schedule D at the standard rate.
  The remaining €500,000 is “relevant emoluments” of the individual and is taxed under Schedule E.

(ii) In all other situations, the excess lump is regarded as “relevant emoluments” of the recipient.

For example, A lump sum is paid on 5 January 2014 of €800,000, and a further lump sum (the current lump sum) is paid on 25 January 2014 of €700,000.
The excess lump sum in this case is €700,000 (the whole of the current lump sum), as the earlier lump sum exceeds the tax-free amount.

As the “first mentioned amount”, €600,000 (€800,000 minus €200,000), exceeds the standard chargeable amount, the entire excess lump sum of €700,000 is “relevant emoluments” and taxed under Schedule E.

(4) The pension administrator and the individual to whom the lump sum is payable are jointly and severally liable for the payment of the tax on the portion of the lump sum charged under Case IV of Schedule D. This means that payment by one will discharge the liability of the other to the extent of the payment made.

(5) The administrator and the individual to whom the lump sum is paid are liable for the charge referred to in subsection (4) irrespective of whether either or any of them is or are resident or ordinarily resident in the State.

(6)(a) Where all or part of the tax charged under Case IV of Schedule D on an excess lump sum is paid by the administrator and is not recovered from, or reimbursed by, the individual, then the amount of the tax paid by the administrator is treated as forming part of the excess lump sum and is taxed accordingly.

(6)(b)(i) In the case of public sector administrators, any tax paid will be a debt owing to the administrator from the individual pensioner or his or her estate.

(6)(b)(ii) The public sector administrator may appropriate so much of the lump sum arising under the particular pension scheme as may be necessary for the reimbursement of the tax paid. The individual must allow such an appropriation.

(7)(a) The scheme administrator must deduct tax from an excess lump sum in accordance with section 790AA and remit the tax to the Collector-General.

(7)(b)(i) In relation to the portion of the lump sum that is regarded as income of an individual and chargeable under Case IV (the portion between the tax-free amount of €200,000 and €500,000) –

• It does not form part of the individual’s total income,
• It is to be computed without regard to any deductions allowed in computing income for the purposes of the Tax Acts,
• No reliefs, deductions or tax credits may be set against the amount so charged or against the tax payable on that amount,
• The income tax exemption limits and marginal relief will not apply as regards income tax so charged.

In effect the charge under Case IV applies to the whole of that part of the excess lump sum that does not exceed the standard chargeable amount and nothing may be deducted or set off to reduce the tax due. It effectively ring fences the charge to tax.

(7)(b)(ii) The portion of a retirement lump sum in excess of the standard chargeable amount is regarded as profits or gains arising from an office or employment and is taxed under Schedule E as emoluments to which PAYE applies. The administrator must deduct tax at the higher rate of tax on the full amount treated as emoluments unless the administrator has received a revenue payroll notification from Revenue in respect of the individual.

(8) A pension administrator who deducts tax from that part of an excess lump sum that is charged under Case IV of Schedule D must make a return in respect of that part of the excess lump sum to the Collector-General within 3 months of the end of the month in which the lump sum is paid to the individual in question. The return must contain the following information –

1. The name and address of the administrator,
2. The individual’s full name and address and PPS number,
3. Details of the pension arrangement under which the lump sum giving rise to the excess lump sum was paid,
4. Details of the amount and the basis of calculation of the excess lump sum, and
5. Details of the amount of tax that the administrator has to account for in relation to the lump sum.

Form 790AA should be used for this purpose.

(9) The tax which an administrator deducts under Case IV of Schedule D in accordance with this section (referred to as ‘relevant tax’) and which must be included on a return in accordance with subsection (8) must be paid by the administrator to the Collector-General, (without the issue of a notice of assessment) and is due at the same time as the return form is due. Provision is made, however, for assessing the person who is liable for the relevant tax where it is not fully paid by the due date.

(10) Where the amount of tax has not been included in a return or where an officer of the Revenue Commissioners is dissatisfied with the return then he or she may make an assessment on the individual for the relevant tax in question and the due date for the purpose of interest on the unpaid tax is the date by which the return was due.

(11) Where an amount is incorrectly included in a return as an excess lump sum, an officer of the Revenue Commissioners may make assessments, adjustments or set offs to secure, as far as possible, that the liability to tax including any interest on unpaid tax would be the same as if the amount had not been included.

(12) Any relevant tax assessed will be due within one month of the issue of a notice of assessment (unless the tax is due earlier under subsection (9)) subject to an appeal against the assessment or an application by the scheme administrator under subsection (14). However, no appeal or application will affect the date when any amount is due under subsection (9).

(13) The standard late payment provisions apply in relation to any part of an excess lump sum that is charged to tax under Case IV if Schedule D. Where interest is payable on any tax charged the provisions of section 1080(2)(b) will not apply.

(13A) A person aggrieved by an assessment made under this section may appeal by notice in writing to the Appeal Commissioners. The appeal must be made within 30 days after the date of the notice of assessment. The appeal is heard and determined in the manner provided for in Part 40A.

A person may not appeal if he or she has not filed a self assessed return and paid the amount of appropriate tax due in accordance with their own self assessment (where the person was required to file a return).

(14)(a) An administrator who reasonably believed that a lump sum did not give rise to an excess lump sum (and therefore no income tax liability) or that the amount of the liability was less than it should have been may apply in writing to the Revenue Commissioner to be discharged from any liability arising from the error.

(14)(b) Where, having received an application referred to in paragraph (a), the Revenue Commissioners are of the opinion that it would not be just and reasonable for the administrator to be made liable for the tax they may discharge the administrator and issue notification of that discharge in writing.

(14)(c) Where the administrator is so discharged, the liability falls on the individual in question.

(15) Every return required under this section is to be in a form specified or authorised by the Revenue Commissioners and must include a declaration that the form is correct and complete.

(16) The provisions of section 787G(2) apply to any income tax being deducted from an excess lump sum payable by a PRSA administrator. Section 787G(2) applies to any tax that a PRSA administrator is required to deduct from assets made available to the beneficial owner of the PRSA. It provides that the beneficial owner must allow such deduction of tax and where the assets of the PRSA are insufficient to discharge the tax the excess will be an amount due to the PRSA administrator from the beneficial owner or his or her personal representatives where the beneficial owner is deceased.

(17) An individual who receives a lump sum from a qualifying overseas pension plan must pay tax on the excess lump sum under Case IV of Schedule D at the rate, or rates of income tax that would apply if the lump sum was received from a pension plan other than a qualifying overseas pension plan.

(18)(a) & (b) The provisions of the section do not apply to –

• A death in service lump sum payable by an occupational or statutory pension scheme to the widow/widower, surviving civil partner, children, children of the civil partner or personal representatives of a deceased individual, or
• the balance of a lump sum paid at normal preserved pension age to an individual under the Incentivised Scheme of Early Retirement in accordance with the Department of Finance Circular 12/09 entitled Incentivised Scheme of Early Retirement.

(19) Section 781 shall have effect notwithstanding the provisions of this section. Section 781 provides, inter alia, that where a scheme rule provides for full commutation of a pension under what is know as a “death’s door” concession (a concession for individuals who are in exceptional circumstances of ill health) the commuted pension is taxed at a rate of 10% to the extent that it exceeds any lump sum payable. This subsection simply ensures that the lump sum paid in these circumstances, will not be subject to tax on any “excess lump sum” amount.

Relevant Date: Finance Act 2021