Making the most of the tax relief available if self-Employed or PAYE
If you are self-employed you must calculate your tax liability and make a payment by 31st October 2019 (12th November if registered with ROS) in respect of your:
1. Final Tax Assessment for 2018; 2. Preliminary Tax for 2019.
The good news…
You can reduce your 2018 Final Tax liability and your 2019 Preliminary Tax liability by making contributions to a Personal Pension plan or to a PRSA plan by 31st October 2019 (or 12th November 2019 for ROS users) and electing to backdate the tax relief to 2018.
Example:
John is self-employed, aged 45 years, and his Net Relevant Earnings for 2018 were €80,000. He has paid €18,000 Preliminary Tax in 2017 and his total tax bill is €25,000. This leaves him owing €7,000 for 2018. He does not currently pay pension contributions.
The two scenarios below show just how a lump sum pension contribution can save John lots of money!
Scenario 1 (No Pension Contribution)
Balance of tax due from 2018 is €7,000 (i.e. €25,000 less €18,000)
Preliminary Tax due for 2019 is €25,000 (i.e. 100% of 2016’s Final Liability)
Total tax due on the 31 October is €32,000
Scenario 2 (After Pension Contribution)
Before 31st October 2019, John makes a €20,000 Pension Contribution and backdates the tax relief to 2018.
Actual Tax Bill for 2018 reduced to €17,000 i.e. the total Tax Bill for 2018 of €25,000 less tax relief of €8,000 {40% on the pension contribution of €20,000} However, €18,000 Preliminary Tax was paid already in October 2017. Therefore, a refund of €1,000 is due from the Revenue.
Preliminary Tax due for 2019 is reduced to €17,000 (i.e. 100% of 2018’s final liability).
Total tax due on the 31st October is €17,000 – €1,000 refund = €16,000
An exciting opportunity for employees
As an employee, you have an opportunity to receive a significant refund of the Income Tax you paid through the PAYE system in 2018. This refund can be achieved through off-setting certain personal retirement saving/pension contributions made by you before 31 October 2019 against your Income Tax payments made in 2018. An extended deadline of 12th November 2019 also applies if you qualify to file and pay using Revenue Online Service.
Making a pension contribution can be a very tax-efficient way for you to save for your retirement, with relief of up to 40% available against Income Tax paid in 2018. And, there are some very attractive features regarding how your pension capital can be used at retirement.
Tax Relief for Employees
John is a 45yr old employee in an occupational pension scheme who paid Income Tax at the 40% rate in 2018. He makes an AVC single premium contribution of €10,000 by October 31st 2019 and informs his local tax office by October 31st 2019 that he wishes to backdate relief on this to 2018. He is entitled to the following refund:
Gross Pension Contribution €10,000
Tax Refund € 4,000
Net Outlay € 6,000
The information contained in this document is based in Southeast Financial Services understanding of legislation and Revenue practice as at September 2019 which may change in the future. This article aims to give information, not advice. Always do your own research and/or seek out advice from an Accountant or Financial Broker before acting on anything contained in this article.
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