Tax facts every pensioner should know

Is there a single pensioner left in this country who is still unaware that they are obliged to pay income tax on any income in excess of €18,000 or €36,000 for a pensioner couple?

Is there a single pensioner left in this country who is still unaware that they are obliged to pay income tax on any income in excess of €18,000 or €36,000 for a pensioner couple?

I rather doubt it, given the size of the furore and media attention since the Revenue Commissioner’s mail shot of the 150,000 pensioners who they picked out for special attention between November and January of this year, having received the 560,000 files of state pensioner beneficiaries from the Department of Social Protection.

This was the first time that these two, big money agencies of the state – one that hands out tens of billions of euro and the other that collects hundreds of billions decided to share their data.

The mailshot was an effort to update tax credits and bands, identify underpayments and overpayments, based on the social welfare income benefits listed by the DPS.

Unfortunately, this perfectly legitimate action – everyone is liable to taxation if they earn over the designated tax free limits, regardless of age - but the extraordinary level of incorrect data and the complicated and even contradictory language in the letters (which professional tax advisors even said they had trouble understanding) turned the event into a fiasco.

A private accountancy practise that produced this kind of result “would have seen heads rolling or put up on spikes outside their offices, something that has happened before at Dublin Castle when the moat was still running and tax collectors were in the employ of the King,” one accountant told me.

That said, Lettergate has still done everyone a service, no matter how cack-handed the delivery: we are probably all more aware of both our own responsibilities regarding tax compliance and what we should do if there is some question over your liability.

For pensioners, there are a number of basic tax facts to which they should make themselves familiar:

* Any pensioner whose sole income is their state pension of just under €12,000 or €24,000 is exempt from income tax, the universal social charge (USC) and should not have received one of the Revenue letters.

* Pension income – whether from a private company or the state or from an Approved Retirement Fund (ARF) is not subject to the PRSI contribution.

* All income, that is, earned income whether from individual or multiple pensions, including those pensions (private or state) that a pensioner earned from working abroad in the past; rental income (except income from the Rent a Room Scheme); dividend income from shares and interest on deposits is subject to tax if it collectively exceeds the tax-free threshold of €18,000 for an individual or €36,000 for a married couple. If you slightly exceed these tax free amounts, marginal relief may apply.

* Capital Gains Tax of 30% may also be payable on any profit you make from the sale of any shares; share dividends, over and above your annual €1,270 CGT deduction are subject to income tax. Meanwhile, double tax agreements with other countries mean that you may receive a tax credit on withholding tax on dividends held on shares basedin other countries.

* Pensioners over age 65, whose income falls under the €18,000/€36,000 tax free thresholds, are not subject to automatic 30% deposit interest retention (DIRT) tax and can ask their bank to help them inform Revenue that the usual DIRT deduction at source does not apply in their case.

* Like the state pension, deposit income is also exempt from USC. Income that exceeds the income tax free thresholds is only subject to a total 4% USC for those over 70 with incomes of less than €100k not the 7% or 10% that applies to other earners.

* Some pensioners may have inadvertently tipped over their tax free threshold by receiving, say, from age 80, the extra state pension age allowance, and this would have resulted in getting the Revenue letter. In such a case, the tax liability will most likely be tiny, even though it is payable at 40% (their exempt income being considered income exempt from the standard 20% liability).

* Everyone, even pensioners, are entitled under Capital Acquisition Tax rules to receive or give a gift of up to €3,000 year without any obligation to report the gift to the Revenue.

* Finally, pensioners with foreign occupational or state pensions, that may or may not be already taxed at source are obliged to file an annual tax return. Pensioners who may have rental and dividend income, for example, that, even when added to their pension income does not exceed the tax-free thresholds, are obliged to file an annual tax return. The information on their return will allow the Revenue to determine their correct tax credits, tax bands and universal social charge, where applicable.

* A tax return can also be used to claim tax refunds (if you haven’t done so already during the year by communicating directly with the very helpful Revenue office) on medical or dental expenses, for example.

Sorting out your taxes may not be the most enjoyable job you have to do, but it is a necessary one, especially now that every available bit of tax income is necessary to keep the ship of state from sinking entirely.

If you still have questions about the Revenue letter you received, or about whether you are paying the correct tax, contact your Inspector of taxes or a good, independent tax advisor. Then rest easily that you have done your duty and have no reason for further worry.

Money Express with Jill Kerby in association with Aviva