Self Employed

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.