We are fast approaching the 31st October deadline for making pension contributions. So what exactly does this mean?
It means that 31st October (or 14th November 2017 if you are one of the 90% of us who use the Revenue Online Services (ROS) to pay your tax bill) is the final date on which you can claim tax relief on backdated pension contributions - In short – it represents a last chance to get some money back from the tax man for 2016!
Example A – PAYE employee
If you pay a lump sum AVC by cheque and claim tax relief on this AVC by 31 October you can get tax relief in respect of the previous calendar year.
For example, if you pay a lump sum AVC by 31 October 2017 you may get tax relief in respect of any unused tax relief for 2016 providing you claim this relief from the Revenue by the 31 October 2017.
|Additional Voluntary Contribution paid 25 October 2017
|Reduction in 2016 tax bill (40% tax payer)
|Actual cost to you of additional €2,000 into your pension
The 2017 rates of income tax are:
Standard Rate 20%
Higher Rate 40%
Subject to affordability, individuals on the higher rate of tax should consider maximising their pension contributions before the end of 2017 in order to benefit from the higher rate of relief available at 40%.
Example B – self employed individual
Let’s imagine you are a self-employed person who has a tax bill of €10,000 to pay for 2016 and preliminary tax of €10,000 for 2017 by 31 October 2017. You could write a cheque to Revenue for €20,000 and job done.
Imagine instead, you write a cheque for €5,000 for your pension. This will have the effect of reducing last year’s tax bill by 40% of that€5,000 (i.e. €2000). As preliminary tax is 100% of last year’s bill, you also reduce the preliminary tax by the same amount (i.e. €2,000).
So you have a choice – you can pay Revenue €20,000 or you can put €5,000 in your pension and pay Revenue €16,000 (i.e. €20,000 - €2,000 - €2,000). Your total spend is only €1,000 more but for that extra €1,000 you pay Revenue the amount due and also have €5,000 in your pension fund – it’s a win win situation!
You need to ensure that you continue to contribute to a pension (monthly contributions are probably the most convenient method of making contributions from a cash-flow point of view) because if you don’t you will find that your tax bill next year will be increased without the tax relief from the pension contribution in the above example.
The following table shows the percentage of your income that you can get tax relief on when contributing to a pension plan, depending on your age and subject to a current maximum annual earnings amount of €115,000p.a.
Maximum % of taxable earnings allowable for tax relief on your pension contributions
Pension contributions made for 2017 must be deducted from the maximum tax-allowable contribution calculated based on these limits.
Saving for your retirement is still incredibly tax efficient.
As well at the tax relief previously mentioned, the funds in which your contributions are invested currently benefit from tax-free growth, unlike most saving methods which may be liable for DIRT Tax of 39% or Capital Gains Tax of 33%. This means pension funds benefit from being able to reinvest the non-taxed returns to generate higher future returns and should build up quicker than a fund that has to pay tax on its investment returns.
Also, when you retire you can take part of your pension fund as a tax-free lump sum. The amount you can take depends on the type of pension plan you have in place. It is important to remember that your regular pension income or ARF may be subject to tax.
Our circumstances change as we move through the different stages in our life from capital accumulation in our working life to capital drawdown in our retirement years. Contributing to a pension continues to make financial sense and it is more reliable than waiting for that Lotto win!
For more information please contact your normal CPAS representative.