Pension is one of best income tax planning opportunities

Income tax returns for self-employed are due to be filed by October 31, or November 12 in the case of those who both pay and file online.

For most taxpayers, the financial results for 2014 are in, and the taxes thereon are set.

However, taxpayers have one last opportunity to help mitigate their tax bill — by making pension contribution.

Where a pension contribution is made before the relevant deadline, the taxpayer can elect to have such a contribution treated as a deduction against their 2014 profits.

Such an election must be made before the applicable deadline and notified to the Revenue Commissioners, usually through the individual’s tax return.

The benefits from making pension contributions can be up to 41% income tax relief, depending on the marginal rate of tax of the individual.

Contributions also have a knock-on benefit when it comes to preliminary tax.

Where a taxpayer has a liability for 2014, they are generally expected to make a payment towards their tax for 2015, again by the relevant deadline.

In such cases, to satisfy the Revenue rules preventing interest from applying on underpaid preliminary tax, a taxpayer is expected to pay 100% of their 2014 liability, or 90% of their 2015 liability.

As pension contributions can have the benefit of reducing a taxpayer’s 2014 liability, so too do they reduce the exposure for preliminary tax.

Given how valuable the tax relief for pensions can be, there is a whole host of rules which limit and restrict the amount of tax savings that can be availed of.

For example, in the case of employees, contributions can only be made with the relevant employer’s scheme, if one is in existence.

The amount of income that can be sheltered by pension contributions is restricted in a variety of ways, firstly only self-employed or earned income can be sheltered by contributions.

Secondly, only a certain percentage of income can be sheltered by pension contributions.

Thirdly, if an individual has earnings over €115,000, their maximum deduction is based on an income cap of €115,000.

By way of example, the maximum pension contribution for a 50-year-old earning €150,000 is only €34,500 (being 30% of €115,000).

Fourthly, the maximum pension fund that can be accumulated per person after January 1, 2014, is €2m.

The accompanying table shows the percentage of income that can be sheltered by pension contributions.

In addition to any tax relief on pension contributions, under Irish legislation, pension funds benefit from tax-free growth.

Understanding how your pension works, and what benefits may accrue to you, is of fundamental importance.

Many of those with private pensions are aware that it is usually possible for them to access up to 25% of their pension fund tax-free (capped at €200,000). However, accessing the balance of your pension scheme can be complex.

If an individual’s residual fund after accessing 25% tax free on retirement is below €63,500, the individual may be restricted from accessing their pension pot at times of their choosing, and instead may have to settle for accessing their fund over a long number of years, through annuity payments.

On withdrawal of the balance of their fund (after the tax-free portion), a taxpayer will be liable for tax on their pension at their marginal rate.

Surprisingly, a recent study by the ESRI on pension members found that two-thirds of those surveyed did not know what amount would be paid out on retirement and/or whether the payments would be lump-sums, monthly payments or both.

The good news for would-be contributors is that last week’s Budget confirmed that the annual pension levy which has existed since 2011 and had been as high as 0.75%, is effectively abolished.

All in all, pensions still represent one of the most significant tax planning opportunities, when it comes to income tax.

When it comes to pensions, relevant tax and financial advice should be obtained as appropriate.


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