Is the State pension exempt from tax?

Q: I was always under the impression that the social welfare pension was free from income tax until I read an article recently that all income was liable.

I contacted Revenue in October 2011 and I received a tax bill for over €4,000. This covered the years 2007/11. I have paid this in full. However, I thought I heard a Government spokesman saying no back payments were being pursued?

My company pension is €17,721 per annum and social welfare pensions for myself and my wife come to €23,717. Did the Government not say it was only those with total income of €50,000 that were liable?

I don’t mind paying tax if it is due but there seems to be a lot of confusion out there. Maybe you can shed some light?

- Mr JK, Dublin

A

A lot of people seem to have been under the impression that social welfare pensions were free from tax and I’m not sure where that came from.

The situation is and, to my understanding, has always been very clear. Any income above the relevant exemption thresholds is liable to income tax, regardless of where it comes from.

What is true is that those people who receive only the State pension will not be liable for tax – but that’s only because the State pension is pitched at a level below the tax exemption.

A person on a full State pension will receive €11,875.60 a year, well below the €18,000 threshold for income tax for a retired person.

A married couple will receive up to twice that, equally well below the €36,000 threshold for them.

I have no idea where you got the figure of €50,000 for income tax exemption, but the thresholds are as set out above.

With joint income of €41,438, you and your wife will be liable for income tax.

If it makes it any easier for people in the current confusion – for which the Revenue has now had to apologise and rightly so – they can continue to believe that their State pension is tax-free and that it is any additional income or their occupational pension that is putting them over the threshold and that it is from this sum that the tax is being taken. The outcome, of course, is still the same.

The one piece of respite people receive on State pensions is that, as with all other Department of Social Protection payments, they are not liable to the universal social charge. However, the charge will apply to all other income.

You make passing reference to a Government spokesman whom you thought said no back payments were being pursued. Two things arise.

First, it is not in the power of the Government to determine whether back tax is pursued; that is the province of the Revenue.

It may well be that a pragmatic decision is taken that the pursuit of back tax in most cases in the current debacle will cost more than any money likely to accrue to the Revenue but, in her apology last week, Revenue chairwoman Josephine Feehily would say only that additional penalties would not be imposed unless a deliberate attempt to hide income from the Revenue was discovered.

Secondly, regardless of any decision to pursue payment of tax arrears owing from pensioners on their State payments or not, it is most unlikely that Revenue is going to turn away people who approach them voluntarily to regularise their arrangements as you did last October – well ahead of the latest fiasco.

This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into.

Please send your queries to Dominic Coyle, QA,

The Irish Times, 24-28 Tara Street, Dublin 2. E-mail: dcoyle@ irishtimes.com