Category: Pension Contributions

Company Directors

March 23, 2020

The rules can be more generous here as regards the amounts paid into a scheme which will qualify for tax relief. A cap is placed on the size of the fund rather than on annual contributions. Where there has not been any great pension funding in the past these rules can allow very substantial tax allowable payments in the years coming towards retirement. This is generally referred to as “Back Service Provision”.

If your business is earning profits in excess of your salary requirements you need to consider how this surplus income will be invested and treated for tax purposes. If you trade as a sole trader/partnership you will pay normal income tax at the 20%/ 40% rates as applicable. However if you trade as a limited company the profits would be taxable at a 12.5% tax rate which could make it worthwhile to carry on business through a company. It should also be possible for your company to invest greater sums into a pension fund for your benefit and obtain tax relief thereon. The other alternative instead of pension funding is for direct investment by the company. At retirement the company would be liquidated and the funds paid out to in the form of a capital gain and liable for tax at 33%. However it might be possible to receive a substantial amount tax free under the capital gains tax retirement relief rules. This type of arrangement requires detailed planning in advance.

Self Employed – Pension Funding

March 9, 2018

This is a very important area of tax relief combined with planning for your future. Please read our detailed article on Pension Funding which provides details of the maximum allowable pension contributions for tax purposes. There are now a variety of investment methods open to individuals for investment of funds via a pension structure. Tax relief at your top tax rate is available for contributions paid in and investment growth on your investment accumulates free of tax.

For selfemployed individuals there is a limit on the amount of pension contribution qualifying for tax relief in any one year. This depends on your age and level of earnings.
There is a very useful back dating arrangement allowed for the selfemployed, which gives time to examine your figures before you have to make a payment. You have until the 31st October after the end of the tax year in which to make a pension contribution and tax relief will be allowed in the earlier year. From a cash flow point of view there is almost double tax relief obtained for your first lump sum pension contribution.

Our Pension Contribution Calculator will do the figures for you and show the maximum amount you can put into your pension for tax relief purposes. If you are making regular contributions throughout the year it will also show you how much of a pension contribution top up you can make to obtain tax relief in the previous tax year.

 

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PRSI Refunds

April 29, 2013

 

PRSI Refunds for Years up to 2010

Employees who are not in a company scheme but make their own pension contributions directly to an insurance company may be entitled to a refund of PRSI as well as income tax relief on the pension contributions. The relief has been abolished from 2011 onwards. This PRSI refund claim is often overlooked as it must be claimed separately through the office of the Collector General in Limerick and not through your normal tax return.

A simple claim form – Application for PRSI refund in respect of Pension Contributions – must be completed and sent to the Collectors General office in Limerick. This form can be downloaded from the Revenue website.

State Pensions

April 29, 2013

Both employees and the self-employed qualify for the state pension. If you are self employed and have been paying PRSI at the S rate all your working life you will be entitled to the state pension when you reach 66. You do not have to retire to claim it.

However, self-employed individuals need to check their PRSI payment status where they incur losses as for any year that they have a loss they will not have made any PRSI payment. To ensure that they make a PRSI payment for the year an election to make voluntary PRSI payments for the year in which a loss is incurred should be made.

It is important to do this as soon as possible after the year for when a loss arose as a two year time limit may be applied. This is dealt with the relevant section in Social Welfare and is dealt with outside of the normal tax payment system.

Tax Tip

If you are married and your spouse assists in running the business then you should ensure that they receive payment for doing so, and then they will also qualify for the contributory pension at age 66. If you are a sole trader they need to be treated as a partner in the business and pay PRSI under Class S.

For sole traders entering partnership with your spouse could have other tax implications which would need to be examined. However with careful planning this should not be a major issue. In fact it will save you tax under the individualization rules. Your spouse at age 66 should have full entitlement to a contributory pension at no extra cost to you. There will be no extra PRSI cost as the same amount of income will be liable for PRSI regardless of whether you are a sole trader or a partnership. The same position can be achieved if you carry on business through a limited company. However your spouse will be treated as a normal employee for PRSI purposes. Your spouse will qualify for the contributory pension at no extra cost.

Is it worthwhile making Pension Contributions?

April 29, 2013

This is one of the best ways of receiving significant tax relief while investing for your future. There are now a great variety of pension investment structures that provide a lot more choice and control over your pension fund. Generally speaking, employees will be involved in a company pension scheme. If your employer does not provide one you can set up your own pension fund.

You should always seek independent professional advice in this area before committing yourself to paying into a pension fund to ensure it will meet with your requirements.

We recommend that individuals make provision for their pension contributions on an ongoing basis, as it can be difficult to source the required lump sum payment on a once a year basis. Where monthly contributions are being made individuals in nonpensionable employment can arrange to get the benefit of the tax relief through their tax credit certificate. This means their income will be reduced for tax purposes through the PAYE system and they will benefit immediately from the tax relief due on the pension contribution.

For self-employed individuals, they will be able to factor in their monthly payments as a deduction when calculating their normal preliminary tax payment on account.
We can provide more detailed advice on the potential tax benefits for you by way of consultation for which an extra charge would arise.

The earlier you start funding your pension the better. You are missing out on valuable tax relief when you are not making contributions to a pension fund.

If you are self-employed and relying on the state pension you should ensure that you make voluntary contributions for any tax year for which you incur a loss as otherwise you will not have paid any PRSI for the year. Voluntary contributions are paid separately from your tax payments and must be organised through the Social Welfare section that delas with voluntary contibutions. There is a certain minimum number of PRSI contributions to be made in order to qualify for the full state pension.

Employees

April 29, 2013

Company Pension Schemes

Company pension schemes are provided by most employers for the benefit of their employees. Where employees contribute to such schemes tax relief will be allowed through the PAYE system at source by the employer. The amount contributed by the employee is deducted from their gross pay before tax is deducted. This ensures that the employee receives their tax relief without having to claim the benefit of the relief from the tax office. Generally speaking the amount of contribution by employees will be less than the amount which could be paid by them for maximum tax relief purposes. This has given rise to employees making additional pension contributions, which are commonly referred to as AVCs.

Additional Voluntary Contributions (AVCs)

These payments are subject to the same percentage and income limits as already explained for self employed pension contributions i.e. a maximum percentage allowable based on age and an income ceiling on the amount for which tax relief can be claimed. These limits are applied after taking into account any contributions already made by the employee to a company pension scheme, any employer and employee contributions to PRSAs and any personal pension payments made by the employee for the tax year in question.

The use of AVCs is particularly important for employees coming near pension age and is a useful tool for tax planning for retirement purposes. There are different options at retirement as to how the value of your AVC fund is dealt with, which with careful planning can ensure substantial tax relief and an improved pension position at date of retirement.

At retirement the value of the AVC fund may be transferred to an approved retirement fund account, which means the funds remain under the control of the employee. Alternatively the value of the AVCs can be used to increase your general pension fund and the level of pension available at retirement.

Normally you can arrange with your employer for the payment of AVCs through your payroll system, which means you will benefit from a reduction in both Income Tax and PRSI. AVC payments may be made during the tax year for tax relief in that particular year. As with individuals who are either self-employed or in non-pensionable employment there is a backdating facility to the preceding tax year. This allows you reclaim tax paid in the previous tax year e.g. AVC payment made in tax year 2016 and tax relief claimed for the payment in tax year 2015.

Use of AVC’S When Retiring

If you are due to retire within the next few years you should examine the use of AVCs to take maximum advantage of the tax relief due. This can help increase your future pension benefits at a relatively low cost as shown in the example below;

Assumptions

Year Earnings
€
2016

80,000
2017

90,000
2018

100,000
  • Retiring on 31st December 2018 at age 65.
  • Entitled to AVC tax relief on 40% of earnings

Recommendation:
Make maximum AVC pension payments for each tax year.

Tax Relief:

Tax Year AVC Payment
€		 Tax Relief
€		  Net Cost
€
2016

32,000

12,800

19,200
2017

36,000

14,400

21,600
2018

40,000

16,000

24,000
Total

108,000

43,200

64,800

 

Result:

Estimated Value of AVC fund €110,000
At a Cost of €64,800

For an after tax cost of €64,800 the individual concerned has an AVC pension fund worth an estimated €110,000. The AVC fund would be in addition to whatever benefits the employee is entitled to under the company pension plan. However unlike the company pension scheme the employee can take direct control over the future investment of the AVC fund. In the event of the death of the employee the remaining value of the AVC fund will then pass to their family.

Self Employed

April 29, 2013

Pension Planning for Retirement

All self employed individuals need to consider their retirement as early as possible. It may involve the transfer of the business within the family or a disposal of the business or its assets. The object of the exercise is to ensure that there will be sufficient resources available to provide some form of pension to the owners of the business.

Pension funding will be a major part of the retirement planning process. Needless to say the more you have invested in your pension scheme the better. Unfortunately a lot of self employed overlook the need to set aside funds for their own pension funding as cash can be a scarce resource when running a small business.

When and How to Claim Tax Relief 

Normally you will take account of your pension contributions when calculating your preliminary tax payment each October. Many self employed individuals pay their pension contributions once a year by way of a lump sum payment rather than monthly contributions. This lump sum payment can be claimed against the preceding tax year provided it is paid by the end of October following the end of the tax year.

The making of a lump sum payment at the end of October to coincide with your normal preliminary tax payment date and filing of your tax return can give a double benefit for cash flow purposes. The pension contribution can be claimed as a tax deduction in the earlier tax year. This reduces your tax liability for that year, which in turn allows you to reduce the preliminary tax payment being made on account for the current tax year.

Example of pension contributions reducing preliminary tax payment 

Assume the following:

Taxable profit for year 2016

€       60,000
Tax/PRSI due on profit

€20,000
Maximum Allowable Pension Contribution

€15,000
Preliminary Tax paid on account for 2016

€0
  Pension Payment
€

2015
€

2016
€

      Total Paid
€
No Pension Relief Claim
Pension Payment on 31/10/16

0

0
Tax Payments

20,000

   20,000

40,000
Tax Due on 31/10/16

40,000
With Pension Payment
Pension Payment on 31/10/16

 15,000

15,000
Revised Tax Payments

14,000

    14,000

28,000
Total Due on 31/10/16

43,000

 

Result: 
For more or less the same outlay our client has satisfied their liability for tax payments on the 31/10/2016 and also saved €15,000 into their pension scheme.

*The preliminary tax payments for 2016 tax year are based on paying 100% of the tax liability for year 2015. Whatever balance of tax liability is owed for year 2016 will become due for payment on 31/10/2017. The tax liability for tax year 2016 can be reduced by making another pension contribution in October 2017.

Pension Contributions General Info

April 29, 2013

Arrangements for making pension contributions have never been easier following the introduction of PRSA’s, Self Administered Schemes etc. This is also one of the few remaining areas where there are very generous tax reliefs available. It is also possible to make pension contributions after the end of the tax year and still get the benefit of the tax relief against the earlier tax year. This is a very important tax and financial planning arrangement which should be considered every year.

Who Can Claim?

Any individual who is either Self Employed or in non-pensionable employment. In addition employees in a company pension scheme can also make Additional Voluntary Contributions (AVC’s) to maximise their pension funding and save tax.

What Tax Relief is Due?

If you pay tax at the top rate then your tax relief is worth 40% of whatever premium you are paying. If your tax rate is 20% then the tax benefit is at a rate of 20%.

Example: 

Premium Paid Rate Tax Relief Net Cost

€12,000

40%

€4,800

€7,200

€12,000

20%

€2,400

€9,600

 

 

Is there a Limit on the Amount of Pension Contribution Qualifying for Tax Relief?

There are two limits which restrict the amount qualifying for tax relief, based on earnings and age. Our calculators work out the maximum allowable amount for tax purposes.

The limit on the amount of earnings which can be taken into account when calculating the relief is €115,000.

The amount of pension contribution qualifying for tax relief is further restricted to a percentage of your qualifying earnings. The allowable percentage amount depends on your age. The scale is as follows;

Tax Year
Under 30 Years 15%
30 to 39 20%
40 to 49 25%
50 to 54 30%
55 to 59 35%
60 and Over 40%

 

Therefore the maximum allowable pension contribution that can be made for a tax year is

 Under 30  €17,250
30 – 39 €23,000
40 – 49 €28,750
50 – 54 €34,500
55 – 59 €40,250
60 + €46,000

 

Only income from employments or self employed earnings qualifies for pension tax relief. Pension tax relief is not allowed against Rental Income, Investment Income or Capital Gains.

The income of spouses is treated separately for tax relief purposes.

Pension tax relief can be claimed for contributions made by an individual until they reach 75 years of age.

Certain charges on income are deducted from your earnings, e.g. maintenance payments, before applying the allowable percentage applicable to your age.

Tax Saving Tip

Self employed individuals should, if married, consider trading as a partnership with their spouse (assuming spouse has no other income). This will double the allowable limits for pension tax relief and reduce the effect of the reductions in the rate of tax relief which applies for 2011.

Pension Contributions General Info

April 29, 2013

Arrangements for making pension contributions have never been easier following the introduction of PRSA’s, Self Administered Schemes etc. This is also one of the few remaining areas where there are very generous tax reliefs available. It is also possible to make pension contributions after the end of the tax year and still get the benefit of the tax relief against the earlier tax year. This is a very important tax and financial planning arrangement which should be considered every year.

Who Can Claim?

Any individual who is either Self Employed or in non-pensionable employment. In addition employees in a company pension scheme can also make Additional Voluntary Contributions (AVC’s) to maximise their pension funding and save tax.

What Tax Relief is Due?

If you pay tax at the top rate then your tax relief is worth 40% of whatever premium you are paying. If your tax rate is 20% then the tax benefit is at a rate of 20%.

Example: 

Premium Paid Rate Tax Relief Net Cost

€12,000

40%

€4,800

€7,200

€12,000

20%

€2,400

€9,600

 

 

Is there a Limit on the Amount of Pension Contribution Qualifying for Tax Relief?

There are two limits which restrict the amount qualifying for tax relief, based on earnings and age. Our calculators work out the maximum allowable amount for tax purposes.

The limit on the amount of earnings which can be taken into account when calculating the relief is €115,000.

The amount of pension contribution qualifying for tax relief is further restricted to a percentage of your qualifying earnings. The allowable percentage amount depends on your age. The scale is as follows;

Tax Year
Under 30 Years 15%
30 to 39 20%
40 to 49 25%
50 to 54 30%
55 to 59 35%
60 and Over 40%

 

Therefore the maximum allowable pension contribution that can be made for a tax year is

 Under 30  €17,250
30 – 39 €23,000
40 – 49 €28,750
50 – 54 €34,500
55 – 59 €40,250
60 + €46,000

 

Only income from employments or self employed earnings qualifies for pension tax relief. Pension tax relief is not allowed against Rental Income, Investment Income or Capital Gains.

The income of spouses is treated separately for tax relief purposes.

Pension tax relief can be claimed for contributions made by an individual until they reach 75 years of age.

Certain charges on income are deducted from your earnings, e.g. maintenance payments, before applying the allowable percentage applicable to your age.

Tax Saving Tip

Self employed individuals should, if married, consider trading as a partnership with their spouse (assuming spouse has no other income). This will double the allowable limits for pension tax relief and reduce the effect of the reductions in the rate of tax relief which applies for 2011.