Over the years, I’ve seen the best and hardest of working people put everything they’ve ever earned straight back into their businesses. This is fine, so long as it’s not to the financial detriment of the business owner personally. I’ve also been around long enough to see how quickly things can change. And things are going to change even faster going forward. Many of those previously very successful businesses are all of a sudden out of fashion. Business’s which were in vogue yesterday, out of favour today. More relevant, jobs that are in demand today might not be so popular tomorrow.
Acknowledging the above, I am now going to focus on the great annual giveaway. And no, I’m not talking about the Christmas Bonus; it’s too early for that. Besides, it’s something much greater! This is an opportunity not to be missed, but unfortunately one which is left behind by many. Some fill their boots with as much as they are entitled to get, while others drag their feet and miss the boat. But what am I talking about, what is this annual giveaway and how can you get yours?
I’m talking about paying yourself first before paying the taxman in the form of a pension contribution.
For higher rate tax payers, this gain can be quite significant. For every Euro you pay yourself, the Government will give you 40 cents back. This is an absolute no-brainer. As always however, there are some small restrictions. You’re limited to a certain percentage of your net relevant earnings, depending on your age. These age limits are as follows;
- Under 30 15%
- 30 to 39 20%
- 40 to 49 25%
- 50 to 54 30%
- 55 to 59 35%
- 60 and over 40%
To make it kind of fair on everyone, there is one other restriction. There’s a cap on the amount of income you can write off these payments against. This earnings limit is set at €115,000.
Are you self-employed, a proprietary director or an employee in non-pensionable employment? If so, you’re required to file an annual self-assessed tax return to finalise off on your 2016 accounts. If you file online (ROS), which most people do, you have exactly another week, up until 16th November to do so. If you have a tax liability for 2016, again which most tax-payers do, then you still have a short window of opportunity to do something about it.
So, for example, let’s assume you’re a 42 year-old self-employed dentist with a tax liability of €50,000 on your 2016 earnings. 2016 preliminary tax of €45,000 has already been paid on those earnings so there’s a €5,000 outstanding balance now due. There’s also a preliminary tax liability due for 2017 and calculated as 100% of last year’s final liability. So, a total liability of €55,000 to be paid by next week, the 16th November. You are now faced with two main options;
1) Pay this €55,000 tax bill now and waive good-buy to that hard earned money for good.
2) Make a payment to yourself in the form of a pension contribution. In doing so, not only have you saved for your future, but you’ve also seriously reduced your tax liability. How so?
Well, let’s say this dentist now makes a €25,000 personal pension contribution and elects to have it back-dated to last year’s year of assessment. As a higher rate tax payer, relief will be given at 40% so that’s €10,000 wiped off the 2016 tax liability straight away.
Granted, this dentist has to come up with the €25,000 to get the relief in the first place but there’s also a flip side. By reducing last year’s final tax liability by €10,000, you’ve also reduced the 2017 preliminary tax liability by the same amount. A DOUBLE TAX ADVANTAGE, and a net cost to cash-flow of just €5,000. And remember, you’ve put aside €25,000 for their own future. Of course, this double tax advantage only occurs in the 1st year and will even out to one year’s tax advantage for each year going forward.
So, as you can probably establish, I wasn’t over sensationalising things, when I said I was going to discuss the Great Government Giveaway. Remember though that all good things must come to an end. Alas, the deadline for making a contribution and reducing last year’s tax liability is next Thursday 16th November. Would you like to action on the above or find out a little more? If so, you should contact your own Certified Financial Planner or if you don’t already have one, you can contact me directly.
A Certified Financial Planner is best placed to talk you through a tax efficient retirement planning strategy that is suitable for you. To schedule your free 40 minute initial consultation with us, contact Paul today at 086-8053755 or email firstname.lastname@example.org
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Lifestyle Financial Planners offer tax-efficient, wealth management, retirement and estate planning solutions to our clients. Paul is a Certified Financial Planner CFP® and holds a Masters Degree from UCD in Financial Services and Risk Management.
The information contained in this article is for general information only. It should not be used as the basis for any form of agreement or advice. We recommend readers seek separate tax and legal advice where necessary. This information does not take into account your own particular circumstances. Errors & Omissions Accepted. Investment funds can fall as well as rise.
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