In the light of the new Tax at Source Legislation, which entered into force on 1 January 2021, employees subject to Swiss source tax should carefully consider whether a voluntary contribution to pillar 3a or a pension fund buy-in still creates a tax benefit.
1. Employees who are tax resident in Switzerland
Resident employees subject to tax at source who are not obliged to file a Swiss tax return (due to annual gross salary below the threshold of CHF 120’000 and no other taxable income or assets) can optionally file a tax return to claim a tax deduction for their pillar 3a contribution or pension fund buy-in. For the tax year 2021, such a request can be made for the first time (filing deadline 31 March 2022).
Individuals considering this option should be aware of the following points: Firstly, from a one-time optional filing an on-going Swiss tax return filing obligation arises. Secondly, when a tax return is submitted, the tax liability is calculated on the basis of ordinary tax rates and the net taxable income. This takes into account the municipal tax rate at the taxpayer’s place of residence. The source tax rates, however, are calculated on a cantonal average of the municipal tax rates. As a result, if the employee lives in a municipality where the municipal tax rate is higher than the cantonal average, the expected tax benefit from a pillar 3a contribution or a pension fund buy-in may be partially or fully consumed by the higher tax rate. On the other hand, additional factors may also negatively impact the expected tax savings, e.g. if the effective monthly pension fund contributions are lower than the lump-sum contributions considered in the source tax rate. Further, the worldwide income of the taxpayer and his/her spouse is taken into account when determining the applicable tax rate. Subsequently, the ongoing tax return filing obligation may even lead to additional tax bills in the following tax years, if no additional tax deductions can be claimed (e.g. if no pillar 3a contribution is made).
The situation for resident employees who have a legal obligation to file a Swiss tax return remains unchanged, and the new legislation thus has no impact on previous considerations regarding pillar 3a contributions and pension fund buy-ins.
2. Employees who are tax resident abroad
Non-resident employees subject to tax at source can optionally file a Swiss tax return to claim additional tax deductions, provided that they qualify as “quasi-resident”. The conditions of a quasi-residency are met if at least 90% of the worldwide gross income (including spousal income) is subject to tax in Switzerland. The conditions must be reviewed and met separately for each tax year.
Unlike resident taxpayers, no on-going filing requirement will arise for non-residents. Nevertheless, non-resident employees must bear in mind that the tax benefit of their pillar 3a contribution or pension fund buy-in may also be partially or fully consumed by a higher tax rate (due to a high municipal tax rate or the tax progression effect of their worldwide income) or by a different tax base. Non-residents who do not qualify as quasi-resident have no possibility to obtain a Swiss tax deduction for their pillar 3a contribution or pension fund buy-in.
In conclusion, before making voluntary contributions to pillar 3a or a pension fund buy-in, a careful analysis of the expected tax benefit is strongly recommended for employees subject to tax at source.