Pensions Tax Saving Advice – Ireland

Pensions Tax Saving Advice – Ireland

Pensions tax saving advice is about getting a clear understanding of how to get maximum contribution tax relief going in, tax-free growth during, and tax-free cash coming out.

We all want to retire with a healthy pension income and a pension plan remains the most tax-efficient method of achieving this no matter whether you’re a company director, self-employed, or an employee, all allowable pension contributions get full tax relief, all pension funds grow tax-free and every pension plan grants a tax-free lump sum as part of your overall benefits options at retirement.

Pensions tax saving advice for Employees

Employees may be entitled to a refund of some of the Income Tax they paid in 2020. This can be achieved by personally making a lump sum to a personal pension plan, PRSA or PRSA AVC, by 31 October 2021 and electing to backdate the tax relief to 2020, subject to the age-related limits.

Example
Jane is a 35-year-old employee who paid Income Tax at the 40% rate in 2020. She makes a pension contribution of €10,000 by 31 October 2021 and informs her local tax office by 31 October 2021 that she wishes to backdate relief on this to 2020. She is entitled to the following refund:

40% Taxpayer
Gross Pension Contribution €10,000
Tax Refund €4,000
Net Outlay €6,000

Pensions tax saving advice for the Self-employed

Those who are self-employed must calculate their tax liability and make a payment by 31 October 2021 in respect of their:

1. Final Tax Assessment for 2020;

2. Preliminary Tax for 2021.

Example
John is self-employed, aged 45 years, and his Net Relevant Earnings for 2020 were €80,000. He has paid €15,000 Preliminary Tax in 2019 and his total tax bill for 2020 is €22,000. This leaves him owing €7,000 for 2020. He does not currently pay pension contributions.

2020 Net Relevant Earnings €80,000 and €15,000 Preliminary Tax paid in October 2020

Scenario 1
No Pension Contribution

Balance of tax due from 2020 is €7,000 (i.e. €22,000 less €15,000)
Preliminary Tax due for 2021 is €22,000 (i.e. 100% of 2020’s Final Liability)
Total payment to Revenue is €29,000

Scenario 2
After Pension Contribution

Before 31 October 2021, John makes a €20,000 Pension Contribution and backdates the tax relief to 2020.

Actual Tax Bill for 2020 reduced to €14,000 i.e. the total Tax Bill for 2020 of €22,000 less tax relief of €8,000 {40% on the pension contribution of €20,000}
However, €15,000 Preliminary Tax was paid already in October 2020.
Therefore, a refund of €1,000 is due from the Revenue.

Preliminary Tax due for 2021 is €14,000 (i.e. 100% of 2019’s final liability).
Total payment to Revenue is €13,000

Pensions tax saving advice for Proprietary Directors

Proprietary Directors (i.e. a director who owns or controls more than 15% of the shares in their company) are obliged to file self-assessment tax returns by 31 October in respect of last year, even if all of their income is taxed under the PAYE system.

Example
Sarah is a proprietary director i.e. a director who owns or controls more than 15% of the shares in her company. She paid Income Tax at the 40% rate in 2020. She makes a pension contribution of €20,000 by 31 October 2021, which is within the age-related limits allowed. With her return of income for 2020, she informs her local tax office by 31 October 2021 of this payment and of her desire to backdate the tax relief on this to 2020. She is entitled to the following refund:

40% Taxpayer
Gross Pension Contribution €20,000
Tax Refund €8,000
Net Outlay €12,000

Note:
Owner director of small companies should fund their Executive Pensions through their company and not personally,

Notes:
• Owner directors of small companies should fund their Executive Pensions through their company and not personally to save on PRSI & USC.
• If you use the Revenue Online Service (ROS) to both file your tax returns and pay your taxes you have until 17 November 2021 to file and pay for 2020.
• Age bands apply to the maximum % of net relevant earnings you can contribute in any one year to your pension and receive full tax relief.
• Pension contributions made by you in 2020 must be deducted from the maximum tax-allowable contribution calculated based on these limits.
• An earnings cap of €115,000 applies to contributions.
• Age is age on your birthday in 2020.
• Retirement benefits are subject to separate Revenue limits.
• Reference throughout this document to ‘Tax’ refers to ‘Income Tax’.

For more information

Contact: Ken O’Gorman – Director – QFA, SIA, MCIBS
Pensions & Investment Specialist – One Quote Financial Brokers on:
01 845 0049 or call me directly on: 087 665 8516.

Or enquire online and give us a quick outline of how we can help. There is no charge for initial advice or any obligation to proceed!