Reduce Your Tax Bill Now!
28 October 2021
Why are these dates so important - 31st October and 17th November 2021?
The 31st October 2021 is the final date on which you can claim tax relief on backdated pension contributions. This date is extended to 17th November 2021 if you or your accountant use the Revenue Online Services (ROS) to pay your tax bill.
Personal contributions to Personal Pension Plans, Personal Retirement Savings Accounts (PRSAs), PRSA Additional Voluntary Contributions (AVCs) or AVCs made before the above dates are deductible against an individual’s 2020 income tax bill. This is subject to a current maximum annual earnings amount of €115,000.
In short, this is your last chance to get some money back from the tax man for 2020. It makes much more sense to pay yourself as opposed to paying Revenue. Getting the tax relief is very straight-forward. If you owe tax, you or your accountant can calculate the tax relief you are entitled to on your pension contribution and this can be offset against the tax you pay. Alternatively, if you have already paid the tax and are due a refund, Revenue will reimburse you by way of a cheque or bank transfer.
Take the example of a self-employed person with a tax bill of €10,000 for 2020 and a preliminary tax bill of €10,000 for 2021. Both must be paid by 31st October 2021. This person could just write a cheque to Revenue for €20,000 and be done with it. Alternatively, they could put some money aside for their retirement and pay €5,000 into a pension plan. Assuming they are a higher rate tax payer this will reduce their tax bill for 2020 by €2,000 (€5,000 x 40%). As preliminary tax is 100% of last year’s bill, their 2021 preliminary tax bill will automatically reduce by €2,000 also.
So, instead of paying Revenue €20,000, they can pay their own pension plan €5,000 and pay a reduced amount of €16,000 to the tax man. Their total spend is just €1,000 more but for that extra €1,000 they have cleared their 2020 tax bill, cleared their 2021 preliminary tax bill and saved €5,000 into their own pension fund – it really is a win-win situation!
Saving for your retirement is still incredibly tax efficient. As well as the tax relief explained above, any growth in your pension plan is completely tax free, unlike most saving methods which may be liable to DIRT Tax of 33%, Exit Tax of 41% or Capital Gains Tax of 33%. Also, when you retire you can take part of your pension fund as a tax-free lump sum so contributing to a pension continues to make financial sense!
If you would like to discuss this further, you should contact your Financial Advisor, who can confirm how much of a pension contribution you can get tax relief on and inform you as to what type of pension contract is most appropriate for your circumstances.
Jacinta Clerkin, BSc QFA FLIA RPA, is a Qualified Financial Advisor, Fellow of the Life Insurance Association and Retirement Planning Advisor. You can contact her through John F. Loughrey Financial Services by telephone on 074-9124002 or by email on jacinta@jfl.ie
