Deirdre pays €25,000 into a RAC in December 2020 but can only claim tax relief on €20,000 in 2020. What happens to the €5,000 balance?

Deirdre pays €25,000 into a RAC in December 2020 but can only claim tax relief on €20,000 in 2020. What happens to the €5,000 balance?

• A. She can carry it forward and claim tax relief on it in 2021 against any relevant earnings she may have in 2021
• B. She can backdate it for tax relief purposes to 2019
• C. It is refunded to her by the life company
• D. She cannot claim tax relief on it

Answer: (A)

The key idea is that unused tax relief on pension contributions can be carried forward to offset against future earnings. Tax relief on RAC contributions is limited to your net relevant earnings in the year, so if you contribute more than that relief allows in a year, the excess isn’t lost—it can be claimed against future earnings. Here, €20,000 of relief is available for 2020, leaving €5,000 of the €25,000 contribution unable to be relief-claimed in 2020. That €5,000 balance can be used in a future year, specifically in 2021, against any relevant earnings Deirdre has then (assuming at least €5,000 of relevant earnings in 2021). It is not refunded by the life company, and it cannot be backdated to 2019. If there are no sufficient earnings in 2021, the unused relief may remain unclaimed.

The key idea is that unused tax relief on pension contributions can be carried forward to offset against future earnings. Tax relief on RAC contributions is limited to your net relevant earnings in the year, so if you contribute more than that relief allows in a year, the excess isn’t lost—it can be claimed against future earnings.

Here, €20,000 of relief is available for 2020, leaving €5,000 of the €25,000 contribution unable to be relief-claimed in 2020. That €5,000 balance can be used in a future year, specifically in 2021, against any relevant earnings Deirdre has then (assuming at least €5,000 of relevant earnings in 2021). It is not refunded by the life company, and it cannot be backdated to 2019. If there are no sufficient earnings in 2021, the unused relief may remain unclaimed.