€10K PRSA example, doesn't sound all that great a deal

S class said:

Try doing it this way

Take your 6k take home from your 12.5k earnings.
Then borrow 6.5 K from your wife.
Make a 12.5k AVC.
Claim back 5k tax refund.
Give the tax refund plus 1.5k (taken from your tax credits, generously provided by the government) back to your wife.

Your 12.5k AVC will have cost you 7.5k.
You have received a 40% tax refund.

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I like your style!

But unfortunately borrowing 4k/6.5k appears to be a Revenue forbidden catalyst, required in order to make the "reaction" work.

Conan said:

Not wishing to burst any bubbles, but under Revenue rules you cannot borrow funds to invest in an AVC.

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Additionally, most of most people's money is already taxed, including that of our spouses.
As borrowing is excluded, the population as a whole cannot average greater than investing net income in an AVC.
So the net income then becomes the notional "grossed up" income.
In this example the €6k would be the amount invested and the rebate would be only €2.4k.
Clearly it doesn't apply to "strong" savers and savvy investors just to most ordinary people.

Not being allowed to borrow in order to maximise the rebate to which you're entitled is clearly a regulation
designed for the benefit of the exchequer.

The idiocy of looking at rebates from the perspective of the net income rather than the gross income is made
starkly apparent by considering what happens if PRSI and or USC rates are altered.
Doing so not only affects the amount of those deducted, it also affects the amount of tax refunded on AVC contributions.
The calculation needs to be independent of those other deductions and the way to do that is to consider gross
rather than net income.

?

jimmij said:

But unfortunately borrowing 4k/6.5k appears to be a Revenue forbidden catalyst, required in order to make the "reaction" work.

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Really?
Tell us more.

T McGibney said:

Really?
Tell us more.

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Say your age related allowances permit you to put €10,000 in an AVC but you only have €6000 available.
You're not allowed to borrow the additional €4,000 to do it even if someone's prepared to lend it to you.
The most you can do is to put that €6k in and get €2.4k back (assuming you're a 40% taxpayer).

Your best approach is not to make AVCs until if or when, the Irish tax system changes to suit you.

In the meantime make your views known when politicians seek your vote over the next few weeks.

You should particularly highlight the double taxation of USC and Prsi relating to pensions.

jimmij said:

Say your age related allowances permit you to put €10,000 in an AVC but you only have €6000 available.
You're not allowed to borrow the additional €4,000 to do it even if someone's prepared to lend it to you.
The most you can do is to put that €6k in and get €2.4k back (assuming you're a 40% taxpayer).

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Says who?

S class said:

Your best approach is not to make AVCs until if or when, the Irish tax system changes to suit you.

In the meantime make your views known when politicians seek your vote over the next few weeks.

You should particularly highlight the double taxation of USC and Prsi relating to pensions.

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LOL.

T McGibney said:

Says who?

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Someone called Conan in the linked post. Is he wrong then? No one contradicted him at the time.

jimmij said:

The calculation needs to be independent of those other deductions and the way to do that is to consider gross
rather than net income.

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The calculation is independent of other deductions

jimmij said:

Someone called Conan in the linked post. Is he wrong then? No one contradicted him at the time.

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You made the assertion. You have nothing to back it up apart what someone said years ago in an anonymous post.

Fortune said:

The calculation is independent of other deductions

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T McGibney said:

You made the assertion. You have nothing to back it up apart what someone said years ago in an anonymous post.

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Well we're all anonymous here and make assertions all the time. If I'm wrong fine but at the moment that's all I have to go on.
Perhaps you have some knowledge that you can share.

jimmij said:

Well we're all anonymous here and make assertions all the time. If I'm wrong fine but at the moment that's all I have to go on.
Perhaps you have some knowledge that you can share.

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I asked you. And I'm not anonymous.

You shouldn't be making assertions here on things you admit you know nothing about.

T McGibney said:

I asked you. And I'm not anonymous.

You shouldn't be making assertions here on things you admit you know nothing about.

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EDIT: You're right, I don't know. I've had a look around the web in the meantime and couldn't find anything official.

Fortune said:

The calculation is independent of other deductions

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It is when it comes to deducting tax, it isn't when it comes to calculating the rebate.
Firstly I'd point out that the age related limits reference gross income.
So Revenue themselves admit that it determines how much you can put into AVCs by referencing gross income.

Say tax is 40% in both cases below
If combined PRSI/USC is 12% then the income tax rebate is 80% of the income tax deducted from the gross income
If combined PRSI/USC is 24% then the income tax rebate is 60% of the income tax deducted from the gross income

Vary PRSI/USC and the rebate varies that's the very definition of dependent.

jimmij said:

Well we're all anonymous here and make assertions all the time. If I'm wrong fine but at the moment that's all I have to go on.
Perhaps you have some knowledge that you can share.

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Assuming you're a higher rate tax payer, a pension contribution will have the income tax deducted returned to you. So an amount of income, has tax deducted at 40%. If you pay it to your pension, you get that 40% back. There is no interaction with USC or PRSI.

jimmij said:

.
Firstly I'd point out that the age related limits reference gross income.
So Revenue themselves admit that it determines how much you can put into AVCs by referencing gross income.

Say tax is 40% in both cases below

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I have quoted the parts of your post which are correct.

Fortune said:

Assuming you're a higher rate tax payer, a pension contribution will have the income tax deducted returned to you. So an amount of income, has tax deducted at 40%. If you pay it to your pension, you get that 40% back. There is no interaction with USC or PRSI.

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If because of increased PRSI/USC rates you're left with a lower net income, then unless you can magic up money from thin air you're going to be putting less into AVCs and getting less tax back.

@jimmij I made a few posts earlier in this conversation but I dropped out and have just been observing since.

I hope you'll take this as constructive but people are genuinely trying to explain the position and I feel that you tend to be selective in the way that you respond which often misses the substantive points raised for you.

Most people on this forum post in order to exchange information with others, not to win an argument or make a point.

I know it must be frustrating when everyone else does not agree with you but remember that people are giving their time and in many cases substantial experience and expertise freely.

3CC said:

@jimmij I made a few posts earlier in this conversation but I dropped out and have just been observing since.

I hope you'll take this as constructive but people are genuinely trying to explain the position and I feel that you tend to be selective in the way that you respond which often misses the substantive points raised for you.

Most people on this forum post in order to exchange information with others, not to win an argument or make a point.

I know it must be frustrating when everyone else does not agree with you but remember that people are giving their time and in many cases substantial experience and expertise freely.

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Thanks 3CC point taken. I'll leave this here. Thanks to all who responded. I was arguing a point which didn't seem to make any sense to anyone else but seemed logical to me.

jimmij said:

If because of increased PRSI/USC rates you're left with a lower net income, then unless you can magic up money from thin air you're going to be putting less into AVCs and getting less tax back.

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Your personal cashflow doesn't alter the fact that you are getting a refund of the 40% income tax you paid.

For the avaoidance of doubt, here is an example of tax when not payng to a pension and when paying 10k to a pension. Note the net income is reduced by €6k for a €10k pension contribution, clearly showing incometax relief at 40%.