Tuesday 28 February 2017

Reduce your yearly hefty tax bill by making a pension contribution

Simon Ball

PENSIONS have been very much in the news over the last 18 months. Firstly, there was the furore over the pensions levy, be it from private sector employees or public sector workers.

Then Budget 2011 capped the value of pension fund that an individual can have, and also the amount of contribution that can be made. However, despite these cuts and levies, pension contributions are still one of the only methods remaining to reduce one's tax bill.

The income tax filing deadline of October 31, 2011, for 2010 tax returns will shortly be upon us. Now with the kids back to school once more and the Irish 'summer' ended, it is an opportune time for those who wish to claim additional tax relief to examine the options available to them.

Payments to a PRSA will be allowed from an individual's 'relevant earnings' for the year of assessment in which the premium is paid.

Relevant earnings means:

•Income arising in respect of remuneration from a non-pensionable office or employment.

•Income from the carrying on of a trade or profession, ie, self-employed.

The maximum amount which can be deducted in any year of assessment depends on the age of the individual and can be summarised as follows:

Age Percentage

Up to 29 15pc

Age 30-39 20pc

Age 40-49 25pc

Age 50-54 30pc

Age 55-59 35pc

Age 60 and over 40pc

In the case of certain 'specified individuals', (eg, certain sportspeople and occupations of a limited duration) the 30pc applies regardless of age.

Net relevant earnings means the amount of the individual's relevant earnings (as defined above) less:

•Losses and capital allowances.

•Charges on income.

The maximum amount of tax relievable contributions an individual can make in any one year to pension products has been reduced from €150,000 in 2010 to €115,000 for 2011. This means that the maximum tax relievable pension contribution that can be made in 2011 is €47,150 -- ie, €115,000 at 41pc (assuming the individual is aged 60 or over).

Example:

Joseph is 61 years of age and has net relevant earnings for 2010 of €150,000. His allowable contributions for tax purposes for 2010 are €150,000 at 40pc = €60,000 (pre Budget 2011 rules).

He made pension contributions to his approved scheme of €20,000 during 2010. Since the Budget changed the earnings limit to €115,000, the updated allowable contribution that Joseph can make is by reference to the new limit, €115,000 at 40pc = €46,000.

As the filing deadline for 2010 income tax returns is October 31, 2011, Joseph can make a 'top-up' payment before the deadline of €26,000 which will reduce his taxable income by a total of €46,000, thus saving him tax at the higher rate of 41pc for 2010.

(It should be noted that if Joseph had made his 'top-up' payment for the 2010 tax year before December 31, 2010, the higher limit of €150,000 x 40pc would have applied).

This not only reduces Joseph's 2010 income tax liability but also his 2011 preliminary income tax liability.

simon@sbtaxconsultants.com

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