Q My Accountant said that I need to pay into a pension as soon as possible to reduce my tax bill this year. Can you explain what I need to do and how much tax I can save?
Paying into a pension to reduce your tax liability is an opportunity that is available for all, including employees, civil service workers, proprietary directors and sole traders. There are contribution and time limits, however. It’s a very individual thing so I’d advise that you get some advice from a Financial Broker as soon as possible. Please see below for a summary in the meantime.
Tax-saving opportunities for the Self-employed:
If you are self-employed, you must calculate your tax liability and make a payment by 31st October or 15th November if using the Revenue Online Service (ROS) This deadline also applies to a pension contribution and electing to backdate the tax relief to the 2022 tax year in respect of your:
1. Final Tax Assessment for 2022;2. Preliminary Tax for 2023.
The good news…
You can reduce your 2022 Final Tax liability and your 2023 Preliminary Tax liability by making contributions to a Personal Pension plan or to a PRSA plan by 31st October 2023 (or 15th November 2023 for ROS users) and electing to backdate the tax relief to 2022.
Example: John is self-employed, aged 45 years, and his Relevant Earnings were €80,000. He has paid €15,000 Preliminary Tax and his total tax bill is €22,000. This leaves him owing €7,000 for 2022. 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 is €7,000 & Preliminary Tax due for 2023 is €22,000 (i.e., 100% of 2022’s Final Liability) Total tax due on the 31st of October is €29,000
Scenario 2 (After Pension Contribution)
John makes a €20,000 Pension Contribution and backdates the tax relief to 2022. Tax Bill reduced to €14,000 However, €15,000 Preliminary Tax was paid already in October 2022. Therefore, a refund of €1,000 is due from the Revenue. Preliminary Tax due for 2023 is reduced to €14,000 (100% of 2022’s final liability). Total tax due is €14,000 – €1,000 refund = €13,000
Tax-saving opportunities for Employees:
The good news…
If you are an employee who feels you are paying too much tax, the good news is that you may be entitled to a refund of some of the Income Tax you paid in 2022. This can be achieved by personally making a lump sum contribution and electing to backdate the tax relief to 2022, subject to the age-related limits.
Example: Jane is a 35 year old employee who paid Income Tax at the 40% rate in 2022. She makes a pension contribution of €10,000 and informs her local tax office that she wishes to backdate relief on this to 2022. She is entitled to the following refund:
Gross Pension Contribution €10,000
Tax Refund € 4,000
Net Outlay € 6,000
Note: For employees who paid Income Tax at the 20% rate in 2022, the refund of Income Tax will be €200 for every €1,000 contrib-uted to a pension plan.
Tax-saving opportunities for Proprietary Directors:
1. If you are a proprietary director, you are obliged to file self-assessment tax returns by 31st October or 15th November if using (ROS) in respect of last year, even if all of your income is taxed under the PAYE system.
2. If your income includes non-PAYE income you must pay any balance of Income Tax, PRSI and USC outstanding from last year. You will also need to consider paying Preliminary Tax for the current year.
You can also reduce your 2022 total tax liability and you may even receive a refund cheque from the taxman. This can be achieved by personally making a lump sum pension contribution by the deadline and electing to backdate the tax relief to 20122, subject to the age-related maximum contribution limits.
Example: Sarah is a proprietary. She paid Income Tax at the 40% rate in 2022. She makes a pension contribution of €20,000. With her re-turn of income for 2022 she informs her local tax office of this payment and of her desire to backdate the tax relief on this to 2022. She is entitled to the following refund:
Gross Pension Contribution €20,000
Tax Refund €8,000
Net Outlay €12,000