Keep putting your pension fund on the long finger? What we’re about to share with you will be all the motivation you need to start making pension contributions as soon as possible. In Ireland, pensions are a bit of a holy grail when it comes to tax-efficient investments. Serious tax savings can be made for proprietary directors, the self-employed and employees with just a little bit of financial insight.
Government pension reforms by 2020
Before we get to the good news, it is worth noting that there is now a ticking clock attached to these tax benefits due to reforms to the State pension that are expected by 2020. The main change will be the introduction of an auto-enrolment pension system which will involve compulsory contributions from the employee, the employer and the state. The effect this may have on higher taxpayers is that the current tax relief available could suffer a blow, possibly resulting in just 33% tax relief on pension contributions instead of the current 40% available. Although the finer details of the government’s pension system reform have not been released, the message we can take away is that the time is now if you want to avail of the current very attractive tax benefits available with pension contributions!
Tax savings on pension contributions for proprietary directors
If you control 15% or more of a company then, as a proprietary director, you are obliged to file a tax return by 31st October in respect of last year. If you also receive non-PAYE income, then you will have to pay the appropriate Income tax, PRSI and USC as well as pay Preliminary Tax for the current year. However, you can reduce your tax liability by making lump sum pension contributions before 31st October. The maximum amount of these contributions is subject to the following age restrictions:
Age band % of net relevant earnings
up to age 29 15%
30 – 39 20%
40 – 49 25%
50 – 54 30%
55 – 59 35%
Let’s look at an example of how this would work in practice. If Peter, a proprietary director, is 45 years old and earns €50,000 per annum from employment, he can make a maximum personal pension contribution of €12,500. If he pays 40% in tax, then his tax relief will be €5,000 (40% of his contribution of €12,500).
Pick your pension plan
If you have shares in a company, you may benefit from an occupational pension. In this case, you can make your personal pension contributions to a Group Additional Voluntary Contribution (AVC) or to a PRSA AVC plan. If you do not have an occupational pension or you have non-PAYE earnings, you can make personal pension contributions to a personal pension plan or PRSA plan (subject to Revenue rules and regulations).
Tax savings on pension contributions for the self-employed
Being self-employed means that you too must calculate your tax liability and make a payment by 31st October, which comprises your Final Tax Assessment for the previous year and your Preliminary Tax for the current year. Your maximum pension contributions are subject to the same age restrictions as in the table above.
Let’s look at an example of how this would work in practice. Anne, who is self-employed and 42 years old, earned €80,000 net in 2018. She paid €18,000 Preliminary Tax in 2018 and her total tax bill is €25,000. This means she owes €7,000 in tax this year. If she was to pay a pension contribution of 25% (€20,000) before 31st October 2019, then her tax benefit would be €8,000 (40% of the €20,000 pension contribution). Her tax bill is, therefore, reduced to €17,000. But she has already paid preliminary tax the year before of €18,000, so, in this case, Anne is actually due a refund from Revenue of €1,000!
Pick your pension plan
As a self-employed individual, you do not have access to the traditional occupational pension system. Therefore, your option is a personal or private pension plan managed by a life assurance or investment company. Your pension is still subject to tax law and, therefore, tax relief is available to you. You can apply for tax relief online through Revenue Online Service (ROS).
As you can see, there are fantastic tax savings to be made with lump-sum pension contributions. If you were looking for an excuse to get started on your pension fund, then this is it. With State pension reforms on the way, who knows exactly what changes will be made to these tax benefits in the coming years, so we say take advantage of this tax-saving opportunity while you can.