Reduce Your Tax Bill Now!
21 November 2023
The 31st October 2023 is the final date on which you can claim tax relief on backdated pension contributions. This date is extended to 15th November 2023 if you are self-employed and 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 2022 relevant earnings, subject to a current maximum annual earnings amount of €115,000, for income tax purposes along with age related limits where the older you are the more you can contribute to your pension. Your Financial Advisor can help you calculate the most tax-efficient amount that you should pay toward your pension planning.
Take the example of a self-employed person with a tax bill of €10,000 for 2022 and a preliminary tax bill of €10,000 for 2023. Both must be paid by 31st October 2023. This person could just write a cheque to Revenue for €20,000 and be done with it. Alternatively, he could write himself a cheque for €5,000 and pay this into a pension plan. Assuming he is a higher rate taxpayer this will reduce his tax bill for 2022 by €2,000 (€5,000 x 40%). As the preliminary tax is 100% of last year’s bill, his 2023 preliminary tax bill will automatically reduce by €2,000 also.
So, instead of paying Revenue €20,000, he can pay his own pension plan €5,000 and pay a reduced amount of €16,000 to the tax man. His total spend is just €1,000 more but for that extra €1,000 he has paid his 2022 tax bill, met his obligations for his 2023 preliminary tax bill and saved €5,000 into his own pension fund – it really is a win-win situation.
If you are a PAYE employee then you have already paid all of your tax for 2022. If you make a pension contribution in relation to last year's earnings you would actually get a refund of the tax you have already paid. If we take a similar example to that above and you choose to pay €5,000 into a pension where you have paid tax at the higher rate you would get issued with a refund of €2,000, so it actually only costs you €3,000 to save €5,000 into your pension.
If you are an employee and do not use the Revenue ROS system, you must make the payment by the 31st of October in order to be able to claim tax relief in regard to your income in 2022.
Saving for your retirement is incredibly tax-efficient. As well as the tax relief explained above, any growth in your pension plan is completely tax free, unlike most personal 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!
In short, this is your last chance to get some money back from the tax man for 2022. It makes much more sense to pay yourself as opposed to paying Revenue. If reducing your tax bill is of interest to you be sure to give us a call before the October 31st deadline.
Marie Carr, CFP® MSc BBS QFA RPA SIA is a CERTIFIED FINANCIAL PLANNER™. You can contact her through John F. Loughrey Financial Services by telephone on 074-9124002 or by email on marie@jfl.ie
