Understanding how pension tax works in Ireland is essential to help you make better decisions for retirement and avoid common mistakes that could lead to higher taxes and a reduced pension pot.

The many different types of pensions can be subject to different taxes upon receiving payments. As well as this, there are also tax considerations related to pension contributions that you must bear in mind to ensure you retire with your desired income.

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Tax Treatment of Different Pension Types

Taxes are paid on different types of pensions and understanding those that you will have to pay on your withdrawals will help you better plan for the retirement that you deserve. Pension contributions also qualify for tax relief, which is also explored in more detail below.

Occupational Pensions with your employers have a relatively simple income tax setup, with everything being handled under the PAYE (Pay As You Earn) system. 

The tax due on your pension will be deducted automatically at the time of payment by the person or entity responsible for paying it. Company pensions are subject to USC (Universal Social Charge), but are not liable for PRSI charges.

PRSAs, as self-administered pension schemes, are liable for income tax, PRSI, and USC charges when funds are withdrawn or imputed distributions are made.

Withdrawals from a PRSA are taxable at your marginal rate after you take out your tax-free lump sum. Transfers from a PRSA to an Approved Retirement Fund (ARF) or into another PRSA are not treated as taxable withdrawals.

A retirement annuity contract (RAC), more commonly called a personal pension, must be approved by Revenue for tax purposes. Like other types of pensions, payments are taxed as normal income tax USC, and sometimes PRSI.

The state pension is liable for income tax, however it is exempt from both PRSI and the USC. The required income tax is not deducted from your pension payments when they are made, but must be paid at a later date or deducted from other benefits.

For public sectors, contributions are typically deducted from your salary before tax, so that you receive immediate tax relief while working. Once you retire, public sector pension payments are also treated as income so they are subject to income tax, USC, and sometimes PRSI.

After taking a lump sum from a wide range of pension options, people have the option of reinvesting the remainder of the pension value into an Approved Retirement Fund (ARF). This is a highly flexible pension investment with the potential to provide additional income post-retirement.

Income and other gains made from an ARF investments are exempt from tax as long as they remain within the fund. Withdrawals from an ARF are treated as income, and are taxable under the PAYE system.

When you reach a certain age, or the fund hits a value of €2 million or more, it is subject to imputed distributions. These are mandatory payments subject to income tax, PRSI and USC.

Imputed distribution comes into effect at age 61, and requires a mandatory withdrawal of at least 4% per annum. 

When the pensioner reaches age 71, this rises to 5% a year. If the value of the fund rises to over €2 million at any point, the imputed distribution increases to 6%.

What pensions are exempt from tax in Ireland?

No standard pension income is fully tax-exempt, but some elements including your lump sum are tax exempt. 

However, there are a number of other payments which are exempt from taxation, including:

  • Wound and Disability pension gratuities granted under the Army Pensions Act
  • Military Gratuities and Demobilisation Pay for officers in the Defence Forces
  • Pensions and Allowances for veterans of the War of Independence, and their families
  • Magdalene Laundry Payments
  • Foreign Occupational and Social Security pensions which would not be taxable in their country of origin

Tax on Pension Lump Sums in Ireland

When you claim your pension it is almost always possible to take some portion of the overall fund as a tax-free lump sum. 

In the case of a Personal Retirement Savings Account (PRSA) or Retirement Annuity Contract (RAC) the maximum tax free lump sum which can be drawn on retirement is 25% of the total fund, up to a maximum threshold of €200,000.

The next €300,000 is taxed at 20%, and anything above this amount is taxed at your marginal rate and subject to USC.

Pension Tax Relief

Employees in Ireland are entitled to income tax relief on contributions made to a pension scheme each year, whether it is an occupation scheme set up with their employer, or a self-administered pension.

Income tax relief is provided at a person’s marginal tax rate. For a standard rate payer this will be 20%, or if you are paying tax at the top rate, relief will be provided at 40%. 

That means if you contribute €500 to a pension scheme, you would be entitled to either €100 or €200 worth of tax relief, depending on your tax band.

Tax Relief Limits

There are strict limits to the amount of income for which you are able to claim tax relief in relation to pension contributions. These are centred around your total income and your current age bracket.

There is also an overall limit on the amount of earnings which may be taken into account for tax relief in any given year, which is currently set at €115,000. This overall limit applies to a single or multiple sources of income. 

There is also an age bracket limit on the amount of a person’s earnings for which they may claim tax relief. This percentage gets higher as you get older, which means that you can increase your contributions tax-efficiently as you approach retirement.

Under 30 15%
30 – 39 20%
40 – 49 25%
50 – 54 30%
55 – 59 35%
60 or Over 40%

For the majority of PAYE employees on a company pension, any pension contributions and the appropriate tax relief will be applied at source. If not, you can claim this tax relief from Revenue.

If you have a company pension and are also making additional voluntary contributions (AVCs) to a PRSA, then the amount of tax relief you are eligible for will be reduced by the employee’s contributions to the company plan.

If you contribute to a PRSA, the amount of eligible tax relief is set according to the standard age-based and earnings limits. No relief on PRSI or USC is available for contributions made to PRSAs.

Employer contributions to a PRSA plan do not count towards the employee’s age-related contribution limit.

An RAC is eligible for tax relief on relevant earnings based on the age rated limits, and the upper limit threshold. No relief on PRSI or USC is available for RAC contributions.

Depending on the setup of the pension scheme, and how much time you have spent in Ireland, you may be able to get income tax relief on your pension contributions.

Pension schemes operated by UK and EU providers for Irish businesses and employees are classified as ‘overseas pension schemes’. This means they can qualify for all the associated tax reliefs for occupational pensions, provided they meet the standards.

Tax on Income

There are also taxes on income for those in different situations such as Irish citizens who are living abroad and those with a foreign pension in Ireland.

Tax on Irish Pensions When Living Abroad

If you live abroad but receive an income from an Irish pension, it is generally taxable in Ireland. Double-tax agreements between Ireland and the country you live in may stop or reduce the likelihood of being taxed twice.

Tax on Foreign Pension in Ireland

If you have a pension from another country, but are resident in Ireland, how tax is paid on that pension will vary based on whether Ireland has a double taxation agreement with the country.

The circumstances may still be different depending on the nature of that agreement, and whether a person is in private or public employment.

How to Avoid Pension-Related Tax

Avoiding pension related tax is generally not possible, however you can avoid paying emergency tax on your pension and there are some strategies that can maker inheritance as tax efficient as possible.

Avoid Emergency Tax on your Pension

To avoid having Emergency Tax deducted from this pension, you can provide your pension provider with your Personal Public Service Number (PPSN). Your pension provider will then request a Revenue Payroll Notification (RPN).

Avoiding Inheritance Tax

Passing on your pension assets can trigger inheritance tax, depending on the structure. ARFs may be taxed at the marginal rate, while lump sums may face Capital Acquisition Tax (CAT).

Your spouse can receive the ARF into their own ARF without income tax or Capital Acquisitions Tax (CAT). They will pay income tax on any withdrawals from the ARF.

However, children under 21 do not pay tax on pension inheritance. They may however have to pay CAT, depending on the amount inherited. For children over 21, tax is charged at a 30% flat rate on pension inheritances.

Early planning and speaking to a financial advisor will help you make the best decisions with regards to inheritance tax and your pension.

Pension Tax FAQs

Many people miss out on tax relief or pay unnecessary tax due to simple errors. Common pension tax mistakes include not maximising your contributions, misunderstanding lump-sum limits or ignoring the Standard Fund Threshold (SFT).

Careful planning can minimise exposure but any amount withdrawn over the SFT is taxed at 40%.

Adult children usually pay 30% income tax. Other beneficiaries may face income tax at their marginal rate and possibly CAT.

Yes, if you earn taxable income in Ireland and contribute to a qualifying pension, you are eligible for tax relief within the age-based limits.

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