How to legitimately lower your tax payments

JOE GILL: How to legitimately lower your tax payments

Tax is a tricky subject. At one level I get the concept that paying general tax helps our elected politicians to finance the services that most agree are key to civil society.

Policing, rescue services, health and prisons are just some of the elements in a modern democracy that require adequate funding.

Yet, at another level it is important to ensure general taxation does not migrate to a level that punishes endeavour and eliminates the ability of an individual or family to achieve financial independence.

Back in the 1970s, the Irish political system went out of control around tax. Income tax rates above 70% surfaced and were triggered at relatively low-income levels.

There were, remarkably, political parties that stood over such an egregious assault on individual freedoms.

The short-hand message was "keep working hard and your government will take most of your income away for its own purposes".

Thankfully we live in an environment where this attitude to tax is less pronounced. I was, however, surprised to hear from an American friend how far the gap in tax had opened up between Ireland and the US.

She was shocked at the income level at which our marginal tax rate of 50% kicked in.

Moreover, indirect taxes on things like cars, drinks and hotel rooms made the combined take alarming to her.

Like a lobster settled in warming water we may be a bit too sanguine about how much tax we actually pay these days.

For sure, there seems to be no part of the Irish political pantheon willing to make a very strong case for cutting taxes.

So, the next best thing is to ferret out ways to legitimately minimise your tax payments.

It was relatively late in my working career when the benefits of diverting gross income towards government-sponsored tax-cutting savings hit me in the face.

Ever since I have adopted a highly disciplined approach to maximising the amount of money injected each year to a government-approved pension scheme.

For each €100 invested the Exchequer sends me a cheque for over €40. The €100 works away each year invested in assets and generating tax-free dividends and capital gains.

At a certain age, which is not as old as some think, I can trigger events that release some of these proceeds tax efficiently.

As importantly, a nest egg is building that will form part of my assets whenever I head to that great stock market in the sky.

So, here is today’s piece of constructive advice. Maximise the amount of money, no matter what your age, into government-sponsored tax reduction savings schemes. Do so consistently every year that you work, and if possible do so in regular monthly sums.

By doing so you are engaged in so-called average dollar investing which helps ride through the volatility that defines financial markets, and particularly equities.

The magic of compounding, together with disciplined investment choices and a bit of luck, will develop for you a highly valuable fund later in your career.

These tax-efficient savings structures can grow to a material sum before the Government stops supporting them.

As much as €2m can be accumulated before the tax breaks stop. That is an enormous figure for many people but it is worth noting even that sum creates limited risk-free returns in a world of record low-interest rates.

Irish 10-year bond yields fell below zero last month, meaning a €2m lump sm invested in it provides no annual income.

Those wanting to retire, early or late, have to think cleverly about the future. A mix of shrewd asset management and astute use of tax breaks provided by the Exchequer is key to success.

Joe Gill is director of origination and corporate broking with Goodbody Stockbrokers. His views are personal.

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