Taxes Consolidation Act 1997 section 781

Charge to income tax: commutation of entire pension

Section 781 imposes a 10% income tax charge on the portion of a lump sum paid on commutation of a pension in special circumstances that exceeds the maximum lump sum which could normally have been paid.

• Where an approved scheme or statutory scheme permits full commutation of a pension in special circumstances (such as trivial pension amounts or serious ill-health), tax at 10% is charged on the excess of the commutation payment over the amount that could have been paid in normal circumstances.
• The taxable amount is the commutation payment reduced by the higher of two deductions: the maximum that could have been commuted under a 3/80ths-per-year-of-service formula (up to 40 years), or the maximum that could have been commuted under the scheme's own rules for partial commutation — whichever produces the lower tax charge.
• The 10% charge is assessed on the scheme administrator under Case IV of Schedule D, and the administrator may retain the tax from the commutation payment made to the employee; the amount taxed at 10% is not treated as income for any other purpose.
• The charge does not apply where the employee's employment was carried on outside the State; where a scheme has lost its approved status, only the rules in force at the date approval was withdrawn are taken into account.