Dominic Coyleanswers your finance questions.

Value of PRSA without tax relief

I'm a 29-year-old full-time student with a standard PRSA with New Ireland. I'm not working at the moment. I'm in a position to lodge to this account monthly. Does it make sense (tax-wise) to do so? I will not benefit from any tax relief if I am not working and therefore wouldn't really save anything - or would I?

As an alternative, are there any regular savings schemes like the old Pips or Peps that would be a good idea for me instead of adding to the PRSA?

Mr O. O'H., e-mail

Personal Retirement Savings Accounts (PRSAs) are, like all pension products, attractive to those who pay income tax because contributions are allowable against your top rate of tax. That makes them one of the most tax-efficient investments open to the ordinary taxpayer.

However, if you don't pay tax, then this key feature is absent from the decision. At that stage, you are simply comparing investment performance.

There are regular saver accounts available out there paying interest of 6 per cent or slightly more - from AIB, Anglo Irish Bank, Bank of Ireland and Bank of Scotland - anyway, though there are various limits on the amount you can save each month. In the absence of tax relief, you have to assess whether your PRSA return will beat that.

Of course, the PRSA return will have to allow for fund management charges, which in general amount to 6 per cent per annum. Therefore, your PRSA will have to achieve an annual return of 12.5 per cent return or more to be competitive.

I would suggest you are better off investing in the regular saver account for now. When you are working, you can use those accumulated savings to maximise the tax benefit you can receive on pension contributions in any given year. You turn 30 next year and, when employed, will be entitled to receive relief on pension contributions up to a maximum of 20 per cent of your earnings.

Tax liability on interest income

I am retired and, without including the gross interest before DIRT as part of my income, I am comfortably in the 20 per cent tax bracket. The Revenue website says that DIRT meets my full tax liability on deposit interest.

This is disingenuous. Revenue takes the full gross interest paid and adds it to your other income to come up with a gross income figure for the year.

This, in my case, puts a portion of my other income into the 42 per cent bracket and in 2005 I paid tax at 42 per cent on almost €5,000 that would not have been taxed at that rate if the interest had not been included in my gross salary.

Many people who do not return a tax return - particularly the retired who may have a reasonable deposit interest - because they feel they have no liability, may actually have one.

Surely the Revenue should not be allowed this practice if the Act says DIRT meets my full obligation.

Mr S.S. Cork

I cannot say for certain that Revenue have not overtaxed you in the way you outline but I can categorically state that there should be no increase in income tax as a result of Deposit Interest Retention Tax (DIRT).

You are correct when you state that the gross interest figure is returned to the Revenue by the financial institutions and you are required to disclose this gross figure in your annual tax return - Revenue Form 12.

It is also the case that when you receive Form P21, Revenue's income tax balancing statement, this figure will appear as income. What might not appear immediately evident is that this figure is offset by an increase in your 20 per cent tax band.

So, if the 20 per cent tax band for a single person is €32,000, as it is this year, and you have gross interest of €1,200, the figure printed against your 20 per cent tax band allocation on Form P21 would be €33,200.

It is true to say that there is no note to explain how this figure has come about, or that it includes an offsetting increase to compensate for the inclusion of the gross DIRT figure on the income side, so it can certainly cause confusion. It does seem strange that DIRT income is clearly labelled on the income side but not on the credit side.

If there still appears to be a problem for the year in question, you should certainly contact your accountant or your local tax office.

So it remains the case that DIRT, at 20 per cent, does meet your full tax liability on interest income. However, it does not meet all liabilities. While the Revenue will not charge any income tax over DIRT, it will take the 2 per cent health levy on the gross interest income figure. They always get you in the end.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or 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 queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.