Income Tax and Pension Deadline  – What happens on 16 November 2017?

Although, like all dates, it comes around each and every year, this one can throw up more than its fair share of complications on an annual basis.

On or before 16 November 2017 people in the self-assessment system must submit their 2016 personal tax return (declaration of income and capital gains) and pay their income tax balance for 2016, while also making a preliminary tax payment for 2017.

 

You have one last chance to reduce your Income Tax bill for 2016 – by making a LUMP SUM PENSION CONTRIBUTION.

If you want advice now on how to make a lump sum pension investment instead of paying an unnecessarily large portion as tax, call (01)8693400 OR USE THE ENQUIRY FORM HERE

 

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 net 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.

 

Pension Tax Savings

This assumes 100% of your contribution is invested in the Pension.

 

 

WORKED EXAMPLES

 

Meet John, a 31 year-old self-employed IT Contractor

Pensions Contribution Impact on Preliminary Tax

John’s final liability to Income Tax, PRSI and USC for 2016 was €30,000 and his marginal rate of tax was 40%.

In October 2016, he made a preliminary tax payment of €25,000 for 2016 (100% of his 2015 tax liability), leaving a balance payable of €5,000 on or before 31 October 2017.

He has decided to make a Preliminary Tax payment of €30,000 for 2017 (i.e. 100% of his 2016 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 2017? Let’s assume his final liability for 2017 turns out to be €40,000.
 
Johns’s tax dueWithout Pension ContributionWith Pension Contribution (€6,000)
2016 Tax Balance 31/10/2017€5,000€2,600
2017 Preliminary Tax 31/10/2017€30,000€27,600

 

By claiming relief in 2016 on this pension contribution, he reduces his 2016 tax balance by €2,400 (€6,000 @ 40%).  As he is basing the amount of his 2017 Preliminary Tax payment on 100% of his 2016 liability, this payment can also be reduced by €2,400.

If he were to make another Pension Contribution next year, he can reduce the 2017 balance of tax and make another deferral of tax for 2018 and so on until retirement.

> Read more about how IT Contractors’ can save on tax here.

 

Meet Mary, a 42 year-old HR Manager

Pensions Contribution Impact on Preliminary Tax

Mary is a member of her employer’s group Pension scheme.  She earned €80,000 between 1 January and 31 December 2016.

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 his 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 him.

By making this pension contribution Mary has invested an additional €12,000 into his 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.

> Read more about how how we assess your company pension here.

Who 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 16 November 2017 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 2016 tax balance and 2017 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 2016 on qualifying pension contributions paid on or before 16 November 2017.

 

GETTING ADVICE

IF YOU WANT TO ACTION THIS QUICKLY TO SAVE TAX NOW, CALL PHILIP OR IAN ON 01-8693400 OR USE THE ENQUIRY FORM HERE

 

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.

 

Laws and tax rules may change in the future.  The information here is based on our understanding as of October 2017.  We recommend that you seek specific tax advice to your particular circumstances.
Figures assume 100% of your pension contribution is invested in the pension.  If you invest in a pension you will not have access to your money until you retire.  The value of your pension may go down as well as up and may also be affected by changes in currency exchange rates.