It’s Income Tax time again: time to gather up those receipts, get out those tax forms and sharpen up the pencil.
Paying more tax than is absolutely necessary is absolute robbery. Over the next two weeks, I would suggest to all who are either Self Employed, Employees or Proprietary Directors, to take a few moments to educate themselves, on how to reduce their Income Tax Bill today and keep more money on the Family Balance Sheet.
My key point here is, take action. As Benjamin Franklin one said ”We are taxed twice as much by our idleness”.
In the remainder of these ramblings I will focus on the Self Employed, but similar opportunities also exist for Employees and Proprietary Directors to reduce their 2018 Income Tax Bill.
This time of year is a key focus for all Self Employed people as it is the time of year to pay tax. For those who file their 2018 Form 11 Return and make the appropriate payment online through ROS, Tuesday the 12th November 2019 is THE key date.
By this date any Income Tax balance due for 2018 is due to be paid, plus the Preliminary Tax Payment for 2019. For those who still use the paper method the 31st October 2019 is the key date.
Before this date, the Self Employed have one last chance to reduce their Income Tax Bill for 2018 and their Preliminary Tax Bill for 2019, by making a pension contribution and electing to backdate it against their 2018 Income Tax liability.
Pension Contributions are one of the few remaining deductions on which income tax relief at your marginal rate applies. Therefore if you pay Income Tax at 40% the tax relief granted is 40%.
The best way to illustrate how this would work is through an example.
Peter is a Single person age 35, with a Self Employed Income of €60,000. Peter’s marginal rate of Income Tax is 40%.
With no pension contribution Peter pays a total of €15,440 in Income Tax for 2018, plus €15,440 in Preliminary Tax for 2019. By making a Pension Contribution of €12,000 (20% of Earnings), before the 12th November 2018, and electing to backdate it against his 2018 Income, Peter can reduce his final tax bill for 2018 to €10,640 and hence his Preliminary Tax is also reduced to €10,640.
There are a number of ways this transaction has been of financial benefit to Peter
- He has reduced his 2018 Income Tax Bill
- He has reduced his 2019 Preliminary Tax Bill
- He has added €12,000 to his Retirement Savings
- He has added €12,000 of an asset (ie: Death Benefit on Pension is Fund Value)
As a 35-year-old, if Peter continued to benefit from this Tax Saving and paid €12,000 into his pension fund every year between now and his state pension age of 68 and the fund grew at 6% per annum, he would have €899,000 of a fund value in his pension at 68. After Tax Relief it would have cost him €237,600 to put it together over 33 year.
Not too shabby!
So what do you do next? When you are discussing your Tax Situation in the next few weeks with your accountant pose them the following questions
- What is the Maximum Contribution I can put into a pension and backdate it against 2018 income?
- If I make this Pension Contribution what will it reduce my 2018 Final Tax Bill to?
- What will my 2019 Preliminary Tax Bill be as a result?
Don’t delay, as the opportunity to get Tax relief against your 2018 income is only available for the Self Employed who file online up to the 12th November 2019.
Should you wish to make a Pension Contribution or would like to request further information on what contribution may be suitable for you please contact me, David Peavoy on 087-2902206 or alternatively by email on david@peavoyfinancial.ie
David Peavoy BA, QFA, LIAP is the Owner of Peavoy Financial Planning whose practice is based in Office 5b, Portlaoise Enterprise Centre, Clonminam Business Park, Portlaoise, Co Laois.
David Peavoy T/A Peavoy Financial Planning is regulated by the Central Bank of Ireland
Disclaimer: All data and information provided within this blog is for information purposes only. It should not be taken as specific advice for your situation. Peavoy Financial Planning makes no representations as to the accuracy. completeness, or suitability of any information and will not be liable for any errors, omissions or delays in this information or any losses, injuries or damages arising from its use
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