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.
We are fast approaching the Revenue “Pay and File” tax deadline. For those wishing to make a Pension Contribution to help reduce their tax liability in 2020, they must make the Pension Contribution to the Pension Provider and elect for tax relief to be backdated to 2022 before 31 Oct 2023.
For those customers who are registered to use the Revenue Online Service (ROS), the extended deadline for online tax returns is Wednesday, 15 Nov 2023.
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 2023 in respect of their:
1. Final Tax Assessment for 2022;
2. Preliminary Tax for 2023.
Example
John is self-employed, aged 45 years, and his Net Relevant Earnings for 2020 were €80,000. He paid €15,000 Preliminary Tax in 2021 and his total tax bill for 2022 is €22,000. This leaves him owing €7,000 for 2022. He does not currently pay pension contributions.
2022 Net Relevant Earnings €80,000 and €15,000 Preliminary Tax paid in October 2023
Scenario 1
No Pension Contribution
Balance of tax due from 2022 is €7,000 (i.e. €22,000 less €15,000)
The preliminary Tax due for 2023 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 2023, John makes a €20,000 Pension Contribution and backdates the tax relief to 2020.
Actual Tax Bill for 2022 reduced to €14,000 i.e. the total Tax Bill for 2022 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 2022.
Therefore, a refund of €1,000 is due from the Revenue.
Preliminary Tax due for 2023 is €14,000 (i.e. 100% of 2021’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 2022. She makes a pension contribution of €20,000 by 31 October 2023, which is within the age-related limits allowed. With her return of income for 2020, she informs her local tax office by 31 October 2023 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’.
Pensions tax saving advice for Employees
Employees may be entitled to a refund of some of the Income Tax they paid in 2022. This can be achieved by personally making a lump sum to a personal pension plan, PRSA or PRSA AVC, by 31 October 2023 and electing to backdate the tax relief to 2022, subject to the age-related limits.
Example
Jane is a 35-year-old employee who paid Income Tax at the 40% rate in 2022. She makes a pension contribution of €10,000 by 31 October 2023 and informs her local tax office by 31 October 2023 that she wishes to backdate relief on this to 2022. She is entitled to the following refund:
40% Taxpayer
Gross Pension Contribution €10,000
Tax Refund €4,000
Net Outlay €6,000
For more information
Contact: Ken O’Gorman – Director – QFA, SIA, MCIBS
Pensions & Investment Specialist – One Quote Financial Brokers on:
01 845 0049
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!
