The top tax-free investments
There's not much you can get tax free these days, but Charlie Weston has all the tips to save some precious euro before the new, tougher Budget is announced at the end of this year
Published 28/10/2010 | 05:00
THERE are two words that are magical when they come together. They are "tax" and "free". These days there is precious little you can obtain tax free.
But we have rummaged through the tax code to come up with the last remaining tax-free purchases and investments you can get your hands on.
Grab these soon because, with another savage budget on the way in December, they may disappear quickly.
Your employer can give you a gift voucher up to the value of €250 and this gift is not subject to income tax, the income levy, health levy or PRSI (pay related social insurance).
The €250 gift card or voucher is tax free even if the employee is receiving other taxable benefit in kind. Nor does the employer have to pay any tax on such a gift.
There is no requirement to make a return to the Revenue Commissioners in relation to this benefit.
According to the Revenue Commissioners, payments can only be made in one instalment.
So encourage your employer to give you a year-end or a Christmas bonus of a €250 gift voucher and avoid having to pay any tax on it.
Money may not grow on trees, but if you make money out of an approved forestry investment you will not have to pay any tax on it.
Just 10pc of Ireland's land area is forested. This compares with a European average of 35pc. In countries like Finland and Sweden, the figure is 60pc to 70pc.
Irish forests grow faster than those in Scandinavia. Also worth noting is the fact that the industry is experiencing a boom in wood sales, with a major increase in wood prices.
Returns from investing in forestry are tax free up to €125,000, and forestry investment is less volatile than stockmarket returns.
On the downside, you are locked into a forestry fund for at least 12 years and it is an illiquid asset. This means you can have difficulty buying and selling shares you have in a forestry fund.
In Ireland, average annual growth for the sector over the medium to long term runs at 5pc to 7pc, net of inflat- ion.
One of the most respected and successful forestry investment fund managers is IFS (Irish Forestry Services) asset managers, based in Dun Laoghaire in Dublin.
IFS's Paul Brosnan says it is not all unsightly conifers as there is a statutory requirement to grow 15pc to 20pc broadleaf in Irish forests.
One of IFS's funds that matured earlier this month delivered a gross return of 6.2pc a year.
The average investment in this fund in 2000 was €9,400, which will generate a payout of just over €17,000.
An Post's savings bonds or certificates are an absolute no-brainer.
With An Post bonds, you get 3.23pc a year or 10pc over the three-year period of the bond. And that is tax free.
Saving certs have to be held for five-and-a-half years and the annual rate works out at 3.53pc -- or 21pc over the full five-and-a-half years. Again, that is tax free.
In contrast, all deposit accounts are subject to DIRT (deposit interest retention tax) of 25pc unless you are over 65 and your income is less than €20,000 a year (€40,000 for a couple). Furthermore, there is no penalty for exiting the An Post products. For savings certs, interest is calculated on a six-monthly basis and no interest is paid if they are encashed within six months of purchase.
For An Post bonds, interest is calculated on an annual basis and no interest is paid if they are encashed within the first year. And the bonds and certs are State-guaranteed.
Put €1,000 into a bond for three years and you will have €1,100 at the end of the term -- and you will not owe the Revenue anything.
You can buy a swish new bicycle and safety equipment worth up to €1,000 tax-free through a scheme introduced two years ago.
The funding of the bicycle can be organised in one of two ways.
The employer can buy the bicycle as a company benefit for the employee, or the employee pays for the bicycle by paying it off in installments from his or her salary.
But either way, the bicycle must be purchased by the employer.
If employers pay for the bicycle, they can claim it as a tax exempt benefit-in-kind.
If the employee pays for it through a salary sacrifice there will be savings on tax and PRSI.
If you are a top-rate taxpayer, you can save 41pc on the cost of a new bicycle, but you will only get a 20pc discount if you are on the lower rate.
You also save on PRSI which means a higher-rate taxpayer gets 47pc off the retail price, with a lower rate taxpayer getting a 26pc reduction.
So if you buy a bicycle and accessories worth say, €500, you will save €265 on the usual retail price, while those on the lower rate will only save €130.
The more expensive the bicycle, the greater the saving achieved.
There is nothing to stop you buying a bike and accessories worth more than €1,000, but the tax relief will only apply to the first €1,000.
If you want to buy a bicycle through this scheme, your employer must agree to it.
Travel tax free
There are not too many things in life that you can get tax free.
But public transport tickets are one of those items you can get without a cent going to the taxman.
The scheme involves employers providing employees with bus and rail commuter tickets.
The employer saves on PRSI, while employees save on tax and PRSI payments.
Employees participating in the scheme benefit from reduced tax and PRSI payments of up to 47pc.
Employees receive tickets either as part of their salary package (salary sacrifice) or in lieu of an annual bonus. Savings arise because tickets are not subject to tax or PRSI.
Perhaps the biggest tax break available to the PAYE worker is the tax relief for investing in a pension.
At its simplest, the tax relief on pensions means that if you pay tax at the 20pc rate then you can get 20pc off the money put into your pension.
If you are taxed at the higher 41pc rate, then you get tax relief at this rate.
This means that if you put €100 into a pension it will only cost you €59, because you get tax relief of 41pc multiplied by €100, which equals €59.
Employees will also get back the contribution to the health levy and their PRSI when they put money into their pension, up to certain limits.