How to Reduce your Income Tax Bill
Every year thousands of people across Ireland use their pension as a great way of reducing their tax liability. Not only is contributing to a pension the most tax-efficient way to claim tax back from Revenue, it is also the most effective method of growing your wealth for retirement.
If you feel you are paying too much tax, the good news is that you can claim tax relief and you may even be entitled to a refund of some of the Income Tax you paid in 2022/23.
1. Tax relief on contributions – You can claim tax relief on contributions at your higher rate of income tax, 20% tax relief for lower earners and 40% tax relief for higher earners on all pension contributions.
2. Tax free growth – You do not pay tax on investment growth within your pension fund (No CGT, DIRT, or income tax).
Pension Contribution Limits
There are annual limits on the amount you can contribute to your pension while receiving tax relief. Contributions are limited by your age and income level, and full tax relief within these limits may be obtained. The maximum amount of earnings allowable for calculating tax relief is €115,000 per year.
Fiona is 45 and earns €60,000 per year. The maximum she can contribute to her pension is 25% of €60,000, which is €15,000. In this example, Fiona is in the higher tax bracket, and has a marginal rate of tax at 40%.
This means she can claim 40% tax relief (€6,000) back from the state on all her contributions, and will only being paying a net amount of €9,000, while realizing the total €15,000 contribution into her pension.
If you are Self Employed
If you are self-employed you must calculate your tax liability and make a payment by 31 October 2023 (or 15 November 2023 for ROS users) in respect of your:
1. Final Tax Assessment for 2022;
2. Preliminary Tax for 2023.
You can reduce your 2022 Final Tax liability and your 2023 Preliminary Tax liability by making contributions to a Personal Pension Plan or PRSA and electing to backdate the tax relief to 2022.
Rob is self-employed, aged 45 years, and his Net Relevant Earnings for 2022 were €80,000. He has paid €15,000 Preliminary Tax in 2022 and his total tax bill for 2022 is €22,000. This leaves him owing €7,000 for 2022. He does not currently pay pension contributions. The two scenarios below show just how a lump sum pension contribution can save Rob lots of money!
If you are a Company Director
If you are a Proprietary Director (i.e. a director who owns or controls more than 15% of the shares in your company), you are obliged to file self-assessment tax returns by 31 October 2023 (or 15 November 2023 for ROS users) in respect of last year, even if all of your income is taxed under the PAYE system.
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 reduce your 2022 total tax liability and you may even receive a refund from Revenue. This can be achieved by personally making a Lump sum pension contribution 31 October 2023 and also by this date electing to backdate the tax relief to 2022.
Anne Marie is a proprietary director i.e. a director who owns or controls more than 15% of the shares in her company. She paid Income Tax at the 40% rate in 2022. She makes a pension contribution of €20,000 by 31 October 2023, which is within the age-related limits allowed. With her return of income for 2022 she informs her local tax office by 31 October 2023 of this payment and of her desire to backdate the tax relief on this to 2022. She is entitled to the following refund:
What type of pension plan?
Your company can contribute to an occupational pension scheme or PRSA on your behalf, in respect of your income from your company. You may also make Additional Voluntary Contributions (AVC’s), a PRSA AVC or even contribute to another PRSA plan of your choice if the company is already paying into the occupational pension on your behalf (subject to scheme rules).
If your company does not contribute to an Occupational Pension arrangement or PRSA on your behalf, you can make contributions to a Personal Pension plan or a PRSA plan in respect of your income from your company.
If you are an Employee
If you feel 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 by making a lump sum contribution to a Personal Pension, PRSA or PRSA AVC, depending on your employment circumstances, by 31 October 2023 (or 15 November 2023 for ROS users) and electing to backdate the tax relief to 2022.
Johanne is a 35 year old employee who paid Income Tax at the 40% rate in 2022. She makes a pension contribution of €10,000 by 31 October 2023 and informs her local tax office by 31 October 2023 that she wishes to backdate relief on this to 2022.
She is entitled to the following refund:
How do I get started?
1. Complete the below form.
2. A Financial Advisor will help you calculate the contribution amount needed to reduce your tax liability.
3. Advise on a suitable pension option for you.
4. Assist with your Revenue return submission (to be filed on ROS to claim income tax relief on pension contributions).
Speak with a Financial Advisor:
Fill out your details and inquiry below, and one of our Qualified Financial Advisors will get back to you shortly.