Deducing deductions

Q&A: A DEDUCTION of 10 per cent is made from the dividend for UK tax. I then have to pay full Irish tax. With the abolition of the 10 per cent tax rate, will their deduction rise to 20 per cent? Is there anything I can do?

Mr L.B., Dublin

A Dividends from UK-listed companies are subject to a 10 per cent deduction at source and, as you note, there is no credit allowed for this against Irish income tax. As such, the dividends are subsequently liable in full to Irish income tax.

I can see your concern, given the recent abolition of the 10 per cent income tax rate in the UK. The last thing you would need is a higher deduction that is not claimable against any Irish tax liability.

You can put your mind at rest. The UK Inland Revenue assures me that the 10 per cent "dividend ordinary rate" continues to satisfy in full the tax obligations of foreign residents to the UK exchequer on dividends from companies listed in London.

This 10 per cent tax credit deduction is a different creature than the disappearing 10 per cent income tax rate, I am told.

Q I am a retired teacher and when my SSIA matured last year I invested €7,500 in a pension scheme and qualified for the Government top-up of €2,500. The money was invested in Quinn Life Celtic Freeway Pension. The value of the fund is now €6,844.

I accept that due to the stock market decline the value of the investment has fallen. My query, however, relates to encashment of my policy. Quinn Life tells me that I can only withdraw 25 per cent of it tax free and that the other 75 per cent is subject to tax at my marginal rate.

At 41 per cent, this equates to more than €2,000. Surely this cannot be correct? Even if the fund had held its value of €10,000, the tax would be in excess of €3,000 - €500 more than the Government top-up.

How can one be liable for tax on a fund that has lost money? I would appreciate your comments as I learnt about this scheme through your column.

Ms D.F., e-mail

AThe scheme to which you refer was a special incentive put in place by the then minister for finance, Brian Cowen, to encourage people to invest some of their Special Savings Incentive Account (SSIA) in a pension. As you note, the deal was that the Government would pay €1 for every €3 transferred from the matured SSIA to a pension up to a maximum Government contribution of €2,500.

However, the important thing to note here is that this is a pension investment product rather than a straightforward fund investment.

In the case of the latter, under what is called gross roll-up, when you decide to exit the fund, you would pay an "exit tax" equating to the basic rate of income tax plus three percentage points on any gain made on the investment.

However, pensions are taxed in a totally different way. The first thing to note is that pensions are longer-term investments. By their nature, they are subject to the volatility of the market but this tends to even itself out over time.

The second point is that, generally, pension savings cannot be liquidated or encashed until retirement. At that stage, 25 per cent can be taken tax free. The balance, as Quinn has told you, is subject to tax at one's marginal rate.

The idea with Personal Retirement Savings Accounts or other pension products, apart from annuities, is that the money is drawn down only as you need it.

If you are currently paying tax at 41 per cent, you might well decide that you do not need to access these funds now and might be better advised to wait.

Equally, it should be noted that encashing the full policy at this stage means you are doing so at a time when the market has been in a slide for 16 months. To do so means you are effectively locking in your losses and ruling out any prospect of a recovery in the performance of your pension fund.

Q My wife and I are old-age pensioners and thus not liable to PRSI. We have a variety of sources of income and would like clarification as to which of the following income sources are liable to the 2 per cent health levy: Irish State old-age pension; UK dividends; Irish dividends; small state pension from an EU country; profit rental on an Irish investment property; deposit interest from an Irish bank; and profits from a small business.

Mr D.McC., Dublin

A People over the age of 65 no longer have any liability to Pay-Related Social Insurance (PRSI). However, they are still liable to the 2 per cent health levy until they turn 70 - unless they are in receipt of a widowed person's allowance at an earlier stage or have a medical card.

From the position stated in your letter, my guess is that you are liable to the health levy on all those sources of income.

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Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2 or by e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering questions. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.