Changes to the public sector pension regime, announced by Taoiseach Brian Cowen last week, will come into effect from the beginning of next month. The new pension levy will affect all public sector workers, including civil servants, local authority employees, teachers, gardaí and nurses.

Following the Taoiseach’s announcement, some confusion existed as to whether the pension levy would be applied on a gross or net basis. Initially it was announced that the average public sector employee would pay an additional 7.5 per cent of their income towards their pension, causing uproar among public sector unions. However, it was explained later in the week that this 7.5 per cent figure was in fact the gross impact of the pension levy on public sector wages.

Minister for Finance Brian Lenihan’s clarification on the issue, stressing that the levy would be taken from gross income like any other pension contribution and would thus be subject to tax relief, means that the real impact of the levy is not as severe as was initially anticipated.

So, as with all employees, public servants are entitled to tax relief on their pension contributions, including those paid under the new levy rules.

The tax relief on the levy will mean that in net terms it will actually account for about 4 per cent of the average public sector employee’s wages. ‘‘Taxable income is net of the pension contribution. Only the income levy remains calculated on the gross income amount,” said a spokesman for the Department of Finance.

The pension levy system will work on a sliding scale, with lower paid public servants having to pay the smallest percentage contribution. Before tax relief is applied, a gross levy of 3 per cent will be placed on the first €15,000 earned by any employee. The next €5,000 earned will be levied at a gross rate of 6 per cent and any salary above €20,000 will be levied at a gross rate of 10 per cent. (See panel for actual net cost.)

A spokesman for the Department of Finance said that while the pension levy would deliver a gross €1.4 billion saving to the exchequer, the lower tax take would reduce that figure.

He said this reduction had already been factored into the government’s calculations on the need for spending cuts. In short, the government is insisting it didn’t get it sums wrong.

The pension arrangements come hot on the heels of the 1 per cent income levy announced in last October’s budget.

Coupling the two new measures means public sector employees are going to see a significant reduction in their take-home pay. For example, a single public sector worker earning €40,000 a year in 2008 would have had take-home pay of €25,283 after PRSI, pension contributions of 6.5 per cent and income tax were deducted.

The same worker will now receive annual take-home pay of €23,130 once the 1 per cent income levy and public sector pension levy are deducted. This amounts to an annual reduction of €2,103 or €40 a week.

This reduction is set to rise slightly more in 2010 since it will be the first full year of the pension levy. Public sector workers who are hoping the pension levy is a temporary measure that will be repealed once order is restored to the public finances may be in for a long wait. Public sector pensions are unfunded, which means that while contributions are made by workers, the money is paid into the exchequer and pension benefits come out of government expenditure.

This arrangement has been partially offset by the creation of the National Pension Reserve Fund, which was created to ease the burden that will be put on public finances in the future due to an aging population.

Examples: How much will you pay?

If you work within the public service you will see a dent in your take home pay to the tune of about 4 per cent on average as a result of the new pension levy.

1) Mark is a 27-year-old clerical officer working in the civil service for the last three years. He earns a gross annual salary of €26,672. The gross impact of the pension levy will mean a 5.3 per cent drop in his salary. However, once the tax relief is applied the net effect is that his salary will fall by 4 per cent.

This translates to a net loss of €1,077,which equates to roughly €90 less in his monthly pay packet - the equivalent of about nine cinema trips or roughly the cost of taxing a small car for six months.

Mark will now pay a total of €4,501 each year in tax, PRSI, levies and pension contributions. This is 17 percent of his total salary. 2) John is an assistant principal officer in the civil service, earning a gross annual salary of €66,179. The 47-year-old has worked in the same government department for the last 25 years. He is the sole earner in his home, with his wife working as a stay-at home mother.

The levy will reduce John’s gross salary by 8.1 per cent, but after tax relief the net impact of the levy will be a 4.6 per cent reduction in his take-home pay. He will be €3,059 worse off each year, with his net weekly wages falling by almost €60 - the amount John and his wife spend each week on a meal for two in their local restaurant.

The introduction of the new pension levy means that John will now pay a total of €18,177 each year in tax, PRSI, levies and pension contributions. This is 27 per cent of his total salary.