Using Revenue to boost your pension


BY JOHN ELLIS, FINANCIAL ADVISOR

WE have written before that maximising your pension contributions is a very effective way to save for your retirement and can be very tax efficient.
As the cutoff dates for making your tax return nears here are ways you can save toward your retirement with the blessings of Revenue.

Tax-saving opportunities for Proprietary Directors
If you are a proprietary director, someone who owns or controls more than 15% of the shares in your company, you have to file a self-assessment tax return by 31 October in respect of last year even if all your income is taxed under the PAYE system. But if your income includes non-PAYE income you must pay any balance of Income Tax, PRSI and USC outstanding from last year. You will also need to consider paying Preliminary Tax for the current year.
You can reduce your 2020 total tax liability and you may even receive a refund from Revenue by personally making a single premium contribution to a pension by 31 October 2021 and electing to backdate the tax relief to 2020, subject to the age-related maximum contribution limits.
Example: Maria 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 October 31 and with her return of income for 2020 she informs Revenue by October 31 of this payment and of her wish to backdate tax relief on this to 2020. She is then entitled to a refund of €4,000.

Tax-saving opportunities for self-employed
If you are self-employed, you must calculate your tax liability and make a payment by October 31 in respect of your Final Tax Assessment for 2020 and Preliminary Tax for 2021.
You can reduce your 2020 final tax liability and your 2021 preliminary tax liability by making contributions to a Personal Pension plan or to a PRSA plan by October 31 and by choosing to backdate the tax relief to 2020.
Example: Martin is self-employed, aged 45 years, and his Net Relevant Earnings for 2020 were €80,000. He paid €15,000 Preliminary Tax in 2019 and his total tax bill for 2020 is €22,000. Thereby owing €7,000 for 2020. He has no pension.
According to Zurich Ireland a lump sum pension contribution can save Martin a lot of money! Before October 31 he makes a €20,000 Pension Contribution and backdates the tax relief to 2020.
His 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

Tax-saving opportunities employees
You are an employee who feels you are paying too much tax. You could be entitled to a refund of Income Tax you paid in 2020 by personally making a lump sum personal pension plan, PRSA or PRSA AVC contribution, depending on your employment circumstances, by October 31 and choosing to backdate the tax relief to 2020, subject to the age-related limits.
Refunds are claimed by informing Revenue by October 31 that tax relief on the contribution paid by this date is to be backdated to 2020.
Example: Lily 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 October 31 and informs Revenue by October 31 that she wishes to backdate relief on this to 2020. She is entitled to a refund of €4,000.

John@ellisfinancial.ie – 086 8362633

Previous Let me womansplain a thing or two...
Next Parent – child sleep wars