Getting interest on savings without DIRT

Q&A I am 67 and in receipt of a pension of €17,000. My wife is 61, and she earns €8,000 working in a local shop part-time. Between the pension lump sum I received at retirement and an inheritance from my mother, we are fortunate to have savings. We earn about €5,000 jointly annually from An Post savings bonds and certificates, and a further €5,500 interest on jointly held bank accounts (before DIRT is deducted).

We also have a rental property which makes €6,000 per annum, before deductions for repairs and interest of about €3,500. The DIRT stopped on the bank interest works out at about €1,700 per annum. My wife and I are jointly assessed.

A friend of mine has suggested that I should be getting the bank interest without DIRT being stopped because of my age. He filled out a form for the bank and it worked for him. He is around the same age as myself and is single, but I don’t think he would have the same level of savings as my wife and I.

I would appreciate if you could outline what the income exemption related to age is, based on the circumstances outlined above whether my wife and/or I would qualify for the exemption, and what forms need to be supplied to Revenue and/or the banks to ensure DIRT is not stopped on any interest we earn with the banks.

Mr T.I., Kildare

Your friend is right, but only in part, as you suspected. It is true that people over 65 can apply to have their interest paid without deduction of Deposit Interest retention Tax (DIRT) – but they will only succeed if their income is below the income exemption limit. With the rate of DIRT now 33 per cent, the exemption could certainly make a difference.

In the current year (as in 2012), the income exemption limit for a couple over the age of 65 is €36,000. The single rate is half that. On your rough reckoner, your family income is about €38,000, which would make you liable for DIRT.

But, as you note, your DIRT will account for 85 per cent of the difference between the exemption limit and your income. While you will have DIRT deducted from your accounts at source, it is possible you may find yourself in a position to claim a partial refund – under marginal relief.

Marginal relief is open to people over the age of 65 whose income is above the exemption threshold but less than double the threshold.

Essentially, you deduct the threshold from your income and assess tax at the “marginal” rate of 40 per cent. If this is more beneficial to you financially than claiming credits and paying tax through the standard rate bands (20 per cent up to income of €41,800 – plus an allowance of up to €23,800 for lower-earning spouse – and 41 per cent above this).

In your case, it appears that you would pay €755 income tax under the normal regime as against €800 under marginal relief. However, you also have the €1,700 DIRT, so it is worth seeing at the end of each year from the age of 65 if you can reclaim some of it. You will need to complete a Form 54.

For pensioners whose income is below the threshold and who want to get their interest free of DIRT, they should fill out a DE1 Declaration Form. They will need to complete a separate form for each account with each financial institution on which they want the DIRT exemption to apply.

Revenue and Welfare at odds on allowance

You dealt with a question last week on the taxation of the increase in the contributory old age pension for a qualified adult. You stated that the Revenue “not unreasonably” relies on section 112 of the Social Welfare Consolidation Act 2005 to deny an additional standard rate tax band and PAYE tax credit.

In my view the Revenue position is not only unreasonable and unfair; it also conflicts with the statutory position. This is because Revenue ignore section 14 of the Social Welfare Pensions Act 2007 together with section 112 Taxes Consolidation Act 1997. It is easy for Revenue to maintain a position, however unreasonable, when dealing with a group of taxpayers of limited resources. The only recourse of a taxpayer faced with an unlawful demand by Revenue is to appeal to the Appeal Commissioners and, perhaps ultimately to the courts – a daunting and expensive prospect for any taxpayer.

Mr J.O’H., Longford

You’re correct that the provision to pay the qualified allowance directly to the individual to whom it applies is a statutory provision.

But what you have here is a clash of statutory provisions.

The Revenue’s position is that the payment would not be made (never mind who receives it) if the applicant was not entitled to the original welfare payment – the pension.

You cannot claim a qualified adult allowance if the individual is entitled to claim welfare on their own behalf – i.e. the claim is made for an adult dependent, someone who is dependent mainly or entirely on the applicant financially.

Without that qualification, there is no qualified adult allowance payable. Therefore, for Revenue, the payment is made to the applicant, not the qualified adult. This is why I stated their position was “not unreasonable”.

You also take me to task for referring to then minister Cullen’s move to make the allowance payable directly to the qualified adult as political, pointing out correctly that the position is enshrined in statute. You note in your letter that under section 112 of the Taxes Consolidation Act 1997, income tax “shall be charged ... on every person ... to whom any annuity, pension or stipend chargeable ... is payable”.

This is a perfectly sensible income tax regime until Mr Cullen’s “political” move – a move that took no account of the practicalities and legislative framework regarding the collection of tax.

Revenue maintains that, as the payment is made by virtue of the pension application, the applicant is chargeable; my original correspondent, and you, make the claim that as the money is paid directly to the qualified adult, they should be the chargeable party.

I would be surprised if the clash of provisions has not already been appealed to the Appeal Commissioners; if not, it certainly should be. Whether it is worth taking to court given the cost involved relative to any gain, I doubt. Certainly, Government would be advised to clarify the position.

This column is a reader service and is not intended to replace professional advice. Please send your questions to QA, c/o Dominic Coyle, The Irish Times, 24-28 Tara Street, Dublin 2, or to dcoyle@irishtimes.com.