Not all income can be pensioned. Only income that comes from a trade, profession or occupation, usually called “earned income” can be pensioned.
Earned income is assessed for income tax under Schedule D and Schedule E.
Taxpayers on Schedule D are the self employed and partners in a partnership. Schedule E taxpayers are all employees including business owners who have incorporated their business as a limited company.
Those taxpayers are allowed to offset their pension contributions against the income tax payable, up to certain limits.
Persons who receive an income in the form of dividends from shares or rental income from a property are assessed for income tax under Schedule F.
Schedule F income is not pensionable because this income is not earned and it is classified as investment income.
Why is this restriction imposed?
Pension plans are tremendously tax efficient and a convenient way for people to provide an income later in life when they are no longer able to work. To encourage people to provide for their retirement years, the Revenue Commissioner forego the income tax that would otherwise be payable on the pension contributions. In addition, any growth in the pension fund is not liable to tax.
Because we will have to finish working at our normal retirement age when our earned income will cease, it makes sense to encourage taxpayers to make their own private pension arrangements so that they won’t become a burden on the State.
Persons in receipt of investment income on the other hand can continue to enjoy that income for as long as they hold on to the underlying assets of shares or property. Their income is therefore not dependent upon their age or their ability to work and so it is not deemed necessary to incentivise those people to contribute to a pension plan by providing them with a tax break.