A confidential Revenue paper said a massive loophole in pensions law meant some people could wipe out all of their tax liability by transferring huge sums into a retirement saving fund.
The paper said the link between salary and pension had been completely “broken” and the system left open for large scale abuse by the wealthy.
The internal report, prepared by a Revenue official, said “a number of tax loopholes” had inadvertently been introduced because of the 2022 Finance Act.
It said there had always been room for individuals to increase personal wealth through clever use of pension schemes, but this had been supercharged by the loophole.
The paper said it allowed for “funding at an unlimited level” for family members or spouses artificially employed on low salaries and short contracts.
It said: “In effect, some self-employed professionals could wipe out their own tax liability on their professional income by a sufficiently large tax deductible PRSA [pension] contribution for their employed spouse.”
The Revenue report said the original plan had been to bring equality to different pension schemes and to encourage PRSA pension schemes that were easy to administer.
“In summary, PRSAs were seen as good for the consumer, better regulated; good for Revenue – fewer schemes to approve and resources could be freed up and moved to compliance; good for the Pensions Authority – more resources moved to regulatory activities.”
However, the changes led to the abolition of benefit in kind charges on pension contributions and left them “without limit” and no link to salary or service.
The paper added: “[The legislation] severed this link and by doing so created a number of tax avoidance loopholes.”
It raised the prospect of how it could be abused through employment of family members, spouses, “if even for a short period.”
“For example, a family member put on the payroll on €10,000 per annum for a limited period (which may well lead to little or no taxation liability) could have a pension funded by a BIK free tax deductible PRSA contribution of say, €1m or even €2m,” the research said.
The research also said payments into pension pots could then be used over a period of several years to reduce tax liabilities.
It said: “A company could write [off] the entire pension contribution of €2 million against profits in the year the payment is made and carry forward the business losses for set off against profits in subsequent years.”
It said there was no requirement for any link between the pension contribution and the salary being paid to a person.
In some cases, that meant directors with other income sources, could pay themselves the minimum wage and funnel up to €2 million into a pension.
“Revenue is missing out on all the tax that would have been paid on the salaries paid over the years of service needed to accumulate these maximum pension funds,” the paper added.
It also explained how the link between length of service and accumulation of a retirement pot had been completely broken as well.
The paper said a spouse or family member could work for a short period of time – perhaps even a month – and accumulate a sizeable pension.
It said: “In fact, an employer could employ a spouse for a month [or] year and fund for a maximum pension fund of €2 million and the spouse could leave the business after a month [or] year or whatever time period suited them.”
The report was prepared in the summer of 2023 and before a review of tax records showed some businesses were transferring over €500,000 per year into funds for the owner, their spouse, their children, or even their parents.
The Revenue Commissioners had withheld the report from release and only made it public following an appeal to the Information Commissioner under FOI laws.
Asked about the paper, a spokeswoman said that they had actively monitored the changes, and their analysis of trends and data identified a number of cases that gave rise to concerns.
They said these were shared with the Department of Finance and amendments in the Finance Act 2024 had addressed the problem.
