Reduce your tax bill through pensions

The tax return deadline is just around the corner. The deadline for those submitting their return on paper is 31 October and 13 November for those submitting it online through the Revenue's ROS system. A common way to reduce your tax bill is through pension contributions. So, how does this work?

Example
40 year old earning €100,000.
Under Revenue rules, he can contribute 25% of earnings to a pension.

• Earnings - €100,000
• Income tax for 2013 - €32,400
• He also has to pay preliminary tax for 2014. There are a number of ways of calculating this amount but a common method is 100% of the 2013 tax bill; €32,400
• Total tax due on 13 November - €64,800

Make a pension contribution

• Maximum pension contribution - €25,000
• Tax relief on that contribution (41%) - €10,250
• Reduced tax bill for 2013 - €22,150
• Remember, preliminary tax for 2014 is 100% of 2013's tax bill, so that is also €22,150.
• Reduced tax bill - €44,300
  [*]Tax saving - €20,500

The total cost of pension and tax will cost you €69,300, an additional €4,500 than if you just paid your tax bill.

But, you as well as settling your tax liability, you now have €25,000 invested to grow tax free and be spent on something fancy when you retire.


Steven
www.bluewaterfp.ie

Incredible to see a pensions adviser who is so shortsighted that he only sees preliminary tax in terms of the cashflow saving to be made this year and not the increased tax which would be due next year!

You are perfectly entitled to make a pension contribution the following year too.

I work with numerous accountants who recommend to their clients that they make pension contributions to reduce their tax liability. Are they short sighted too?


Steven
www.bluewaterfp.ie

SBarrett said:

The total cost of pension and tax will cost you €69,300, an additional €4,500 than if you just paid your tax bill.

Click to expand...

This is the line in your post that I take issue with. You have not reduced your 2014 tax liability at all - just the portion of it which is due to be paid in preliminary tax. You are leaving out the fact that you have effectively claimed the tax relief on the double in this year which is just "kicking the can down the road".

Of course you are entitled to make pension contributions every year but you will not be able to claim double tax relief every year.

I think it is clear enough that it is preliminary tax for 2014.


Steven
www.bluewaterfp.ie