How a Pension can Reduce Your Income Tax Bill Now in One Fell Swoop
Income Tax and Pension Deadline – Taking Action before your annual tax return
Although, like all dates, it comes around each and every year, this one (extended this year) can throw up more than its fair share of complications on an annual basis.
On or before 10 December people in the self-assessment system must submit their personal tax return (declaration of income and capital gains) and pay their income tax balance for 2019, while also making a preliminary tax payment for 2021.
How does a Pension Contribution reduce your Income Tax liability?
Pension Contributions are one of the few remaining deductions, on which Income Tax relief at marginal rates still applies (i.e. up to 40% relief). Many other deductions are relieved at the standard rate of Income Tax, i.e. 20%.
For individuals who pay income tax at 40% and invest €10,000 in a Pension, the nett cost is €6,000 when they claim tax relief on eligible contributions, within Revenue limits related to age and earnings.
That’s equivalent to a return of 66% on your net contribution.
This assumes 100% of your contribution is invested in the Pension.
MEET JOHN, A 31 YEAR-OLD SELF-EMPLOYED IT CONTRACTOR
PENSIONS CONTRIBUTION IMPACT ON INCOME TAX
John’s final liability to Income Tax, PRSI and USC for 2019 was €30,000 and his marginal rate of tax was 40%.
In October 2019, he made a preliminary tax payment of €25,000 for 2019 (100% of his 2018 tax liability), leaving a balance payable of €5,000 on or before 31 October 2020.
He has decided to make a Preliminary Tax payment of €30,000 for 2020 (i.e. 100% of his 2019 liability).
JOHN’S TAX SAVINGS
What would be the impact if John were to make a qualifying Personal Pension Contribution of €6,000 by tax deadline 2019? Let’s assume his final liability for 2018 turns out to be €40,000.
|Johns’s tax due||Without Pension Contribution||With Pension Contribution (€6,000)|
|2020 Tax Balance 31/10/2019||€5,000||€2,600|
|2021 Preliminary Tax 31/10/2020||€30,000||€27,600|
By claiming relief in 2019 on this pension contribution, he reduces his 2019 tax balance by €2,400 (€6,000 @ 40%). As he is basing the amount of his 2020 Preliminary Tax payment on 100% of his 2019 liability, this payment can also be reduced by €2,400.
If he were to make another Pension Contribution next year, he can reduce the 2019 balance of tax and make another deferral of tax for 2020 and so on until retirement.
MEET MARY, A 38 YEAR-OLD HR MANAGER
Pensions Contribution Impact on Income Tax
Mary is a member of her employer’s group Pension scheme. She earned €80,000 between 1 January and 31 December 2019.
Her Personal Pension contributions during this period amounted to 5% of her salary, €4,000.
As Mary is 42, she is entitled to obtain tax relief of 40% on Pension Contributions up to €16,000 (20% of her total salary). As such, Mary decides to make an AVC of €12,000 on or before the tax deadline to avail of the maximum tax relief allowable to her.
By making this pension contribution Mary has invested an additional €12,000 into her Pension.
A number of weeks later Mary receives a P21 balancing statement from Revenue in the post and a tax refund/rebate of €4,800 paid directly into her bank account.
9Who does the income tax deadline apply to?
The deadline applies to those in the ‘self-assessment’ system, i.e. the following people:
- Self-employed people, e.g. a plumber operating as a sole trader or a partner in an accountancy practice;
- Proprietary directors (i.e. a director who owns or controls more than 15% of the share capital of the company);
- Those in receipt of investment or rental income;
- PAYE Employees through their AVC’s (additional voluntary contributions) if not currently maximising their pension contributions. In this event a P21 balancing statement will be sent out by Revenue a few weeks after the tax deadline along with a refund/rebate on their AVC contributions. The refund will be made by Revenue via cheque or electronic fund transfer (EFT) to their bank account.
If you don’t submit your tax return on time, a surcharge of up to 10% of your tax liability may apply. If you don’t pay the correct amounts of tax on time, interest will be charged on the tax paid late.
Who does the extended deadline of 10 December 2020 apply to?
The extend deadline applies to people in the self-assessment system, who use the Revenue Online System to both;
- submit their tax return on line
- pay their 2019 tax balance and 2020 preliminary tax online.
The extended deadline will not apply in situations where the tax return is filed online, but payment is made by cheque.
Does the extended deadline apply to pension contributions?
If you are eligible for the extended deadline, it will also apply to Pension Contributions, i.e. they can elect to claim relief in 2019 on qualifying pension contributions paid on or before 10 December 2020.
Where should you in invest your pension?
At Ocean, we review the best managed pensions in Ireland and can place you in the correct fund for you – whether you are investing a lump sum and/or making regular payments.
If you are thinking about starting a regular monthly payment pension and or want to get your’s reviewed, you can complete the quick form below.