Now it’s time to go back to the basics and look at how you can reduce your overall tax bill through smart pension planning. It’s actually one of the best ways to avail of tax relief while safeguarding your financial future.
Let’s look at the various options available to do this. When looking for a pension that right for you and/or for your business, it’s essential that you research thoroughly and that ultimately you are in control of your pension fund. It is easier to make pension payments on a regular basis as opposed to multiple large lumps sums. This way it’s less financially impacting to your monthly salary or business takings.
As an employee, depending on the type and size of company that you work for, there may be a company pension scheme, which you can opt to get involved in. If your employer does not provide one you can set up your own pension fund.
Company Owners and Self-employed
As a company owner, you can also elect your own pension fund and you will be able to factor in the monthly payments as a deduction when calculating your preliminary tax payment on account.
For the self-employed if they make their pension contribution prior to the income tax deadline, they will pay less tax immediately as the contribution should reduce both their final liability for the year and their preliminary bill for the following year.
For companies and self-employed, the 31st October 2017 is an important date for Income Tax returns (mid November if filing & paying returns over ROS) as this is the final date for making a pension contribution and opting to backdate the tax relief to the previous year i.e. 2016
When preparing for retirement, in order to ensure you have the desired retirement income it’s a good idea to maximise pension contributions. You can do this whilst also minimising your tax bills. Here’s how it works -
The highest tax many people pay is tax on their income which, combined with PRSI and the Universal Social Charge (USC), can exceed 50% of marginal income. As pension contributions benefit from relief on income tax at your highest rate, pensions are a legitimate way of cutting this tax bill. Additionally, any growth achieved by the pension fund is exempt from capital gains tax and DIRT.
Similarly, when pension benefits are drawn down, tax, PRSI and the USC will be payable at the rates applicable at that time. However in retirement many people will find themselves in a lower tax bracket and so will pay less tax.
For those who are still higher-rate taxpayers in retirement, it may be possible to avoid the full impact of higher-rate tax. One option for lowering the tax payable is preserving pension money in an Approved Retirement Fund or Approved Minimum Retirement Fund.
Here are some examples to illustrate the points set out above:
EXAMPLE 1: Jim is 42 and earns €50,000 per annum from employment. His maximum individual pension contribution is 25% of €50,000 – or €12,500. Jim’s marginal rates of tax will depend on his personal circumstances, but a total marginal rate of 40% would be normal for someone on this level of income. Due to tax relief, making the €12,500 contribution to his pension will cost Jim a reduction of only €7,000 in his take home pay.
EXAMPLE 2: Mary is 60 and earns €300,000 per annum. Because Mary is wealthy retirement income is not a concern for her, but she does want to minimise her tax bill. Her maximum contribution is however limited to €46,000 i.e. 40% of the maximum net relevant earnings figure of €115,000.
As with any financial decisions, it’s a good idea to seek independent professional advice in this area before committing yourself in any way. I’d be delighted to talk to you about any questions you may have about tax efficiency and pensions. Simply contact me on Leanne.firstname.lastname@example.org
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