Too tax-efficient?

B

barrabus

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Personal details

Age: 50
Spouse’s/Partner's age: 47

Number and age of children: 1 teen


Income and expenditure
Annual gross income from employment or profession: €65k (50k tax exempt)
Annual gross income of spouse: €65k (50k tax exempt)

Monthly take-home pay: Varies due to erratic nature of our income.

Type of employment: Both self-employed artists/company directors.

In general are you:
(a) spending more than you earn, or
(b) saving?

Saving

Summary of Assets and Liabilities

Family home €1.4m with €400k mortgage
€200k personal savings
€100k company cash
PRSA pension: €100k x 2 (just started)
Shares : 25k approx in individual tech shares via Revolut
20k physical gold (inherited)
Site with planning permission €130k approx

Family home mortgage information
Lender BOI
Interest rate Fixed 3.4%
If fixed, what is the term remaining of the fixed rate? 4 years


Other borrowings – car loans/personal loans etc: None

Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card?



Do you have a pension scheme? PRSA 100k each.

Do you own any investment or other property? No.

Other information which might be relevant

Life insurance: Mortgage protection insurance 400k & life assurance 350k


What specific question do you have or what issues are of concern to you?

Hello. We've only recently purchased our dream home after many years of saving and building up more straightforward income/credit history via our limited company for mortgage purposes on the advice of our accountant.
Even though we are both fairly well-established in our profession, due to the erratic nature of it it's extremely difficult to get a mortgage, which is why we borrowed the max amount possible in order to buy a large house in a great location and which suits our needs going forward since we both work from home and will likely have our son living with us into adulthood as seems to be the way these days. We hope to never have to move again!

Our accountant set up our salaries up to best maximise both our artists's exemption and individual PAYE allowances, keeping us in the lower tax bracket. This also meant that we pretty much neglected pensions while focusing on the mortgage/house purchase but recently set up PRSAs as above, and began monthly contritubions to them with the intention of adding additional lump sums going forward when cashflow allows.

We're aware that the balance of borrowings and cash looks askew at first glance, but we're grand with that since it's so hard to get borrowings in our field and at our age, and also because of the up and down nature of earnings we always prefer to have a cushion.
But now that our house situation is finally settled and we're made some well overdue inroad into pensions, we need to to find a way to make the remaining cash work for us. Feel it's important to try and diversify and was considering something like a set-and-forget ETF or some kind of fund without time limit restrictions that we could tap into if times got lean or one of us couldn't work, but the deemed disposal element puts me off.

I know the obvious thing would be to add even more to the pensions etc but I feel that we're being almost *too* tax-efficient as is and maybe not seeing the wood for the trees!
Anything else we're missing besides building up pension/paying off mortgage which seems counterintuitive seeing as it was a nightmare to get in the first place. Thank you.
 
barrabus said:
Feel it's important to try and diversify and was considering something like a set-and-forget ETF or some kind of fund without time limit restrictions that we could tap into if times got lean or one of us couldn't work, but the deemed disposal element puts me off.
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The money you pay for deemed disposal is taken into account when you have a real disposal. Seeing as funds and ETFs are all taxed under that regime, your alternative is buy individual shares (hard to do well) or buy investment trusts (more expensive than ETFs, less diversified and a lot more volatile).

My issue isn't with deemed disposal per se, it's the 41% tax on gains, it is far too high.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Steven Barrett said:
The money you pay for deemed disposal is taken into account when you have a real disposal. Seeing as funds and ETFs are all taxed under that regime, your alternative is buy individual shares (hard to do well) or buy investment trusts (more expensive than ETFs, less diversified and a lot more volatile).

My issue isn't with deemed disposal per se, it's the 41% tax on gains, it is far too high.


Steven
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Thank you. So is it that you can offset however much has been taken from the fund over the years when you cash it in? And yes 41% is very steep, especially when such a slice taken out also affects the rate of compounding, an additional drawback. We really are constrained here when it comes to investments outside of pension and property. :(
 
barrabus said:
Annual gross income from employment or profession: €65k (50k tax exempt)
Annual gross income of spouse: €65k (50k tax exempt)
Click to expand...

Have I got this correct.

Your tax return for 2024 looks something like

1725551053541.png
If so, I don't understand why you are making pension contributions at all, as you are not getting tax relief for them?

It would make sense to do them if you have a very good year, where you are paying tax at 40%. It might make sense if you are paying 20% tax.

But I don't really see the sense of it if you are not paying tax. OK, when you retire, you won't have much income taxed at 20% so you could argue that it is accumulating tax-free. But you have all the restrictions of pensions funds and the costs associated with them.

Brendan
 
Not sure how the new auto-enrolment will work with companies owned by their directors.

But if it applies to you, you could get top-ups from the government to any contributions to an auto-enrolment scheme which would be far better than having a PRSA on which you get no tax relief.
 
barrabus said:
building up more straightforward income/credit history via our limited company for mortgage purposes on the advice of our accountant.
Click to expand...

barrabus said:
Our accountant set up our salaries up to best maximise both our artists's exemption and individual PAYE allowances, keeping us in the lower tax bracket.
Click to expand...

OK, I have obviously misunderstood something.

How come you are paying tax at all?

I have not come across artist's tax exemption interacting with a limited company.

Usually, it is a self-employed writer, say, and their earnings are tax-exempt.
If they set up a limited company, does the company get the tax-exemption or the individual?

Is there cash in your limited company? If so, is the limited company paying Corporation Tax?

Brendan
 
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barrabus said:
Family home €1.4m with €400k mortgage
€200k personal savings
€100k company cash

Shares : 25k approx in individual tech shares via Revolut
20k physical gold (inherited)
Site with planning permission €130k approx
Click to expand...

So you have a mortgage of €400k while you have €345k in savings?

To have this "overdraft" facility of €345k, you are paying €12k a year (€345k @ 3.4%)

Forget tax efficiency, this is very financially inefficient. I do understand that artistic incomes are volatile, but you don't need a €345k cushion.

Are the two of you producing the same work? In other words, could you have a bad year while your spouse has a good year or do you both rise and fall together?

I would have thought that a net €100k would be plenty.
 
Brendan Burgess said:
Ah, your incomes are €115k each, €50k of which is tax-exempt?
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You were probably right the first time.

Seeing as the PRSAs have just been started and there is €100k in each one, they were probably funded with Employer Contributions (from the company) rather than as personal employee contributions to the PRSA.
 
barrabus said:
But now that our house situation is finally settled and we're made some well overdue inroad into pensions, we need to to find a way to make the remaining cash work for us.
Click to expand...
Assume this is the nub of your question. You have 200k cash plus other assets but want to make them work harder for you, whilst clearing the mortgage is counter-productive as you lock up that cash rather than retain flexibility which your income pattern may require.

The cash will work hardest for you in a tax-efficient pension wrapper, especially if you can get it in there tax-free. If you need to tap that cash, I believe you can do so from the age of 50, which you already are. And I believe you can have multiple PRSA's so you don't need to crystalise your full pension in the event of an emergency, but rather one PRSA at a time. At worst, say you go with 100k pots, you can access a tax-free lump sum of 25k plus an ongoing income from annuity or ARF which can always be redirected into savings/investments if other income stabilises.

All that said, I think you're doing very well for yourselves and have been pretty smart so far whilst achieving your dream home, well done!
 
Brendan Burgess said:
To have this "overdraft" facility of €345k, you are paying €12k a year (€345k @ 3.4%)

Forget tax efficiency, this is very financially inefficient.
Click to expand...
Isn't this only financially inefficient if their other investments fail to outperform the mortgage rate in the long term? And to be fair, that's their question - how can their other assets be set up to work harder, i.e. outperform the mortgage rate?
 
Brendan Burgess said:
Have I got this correct.

Your tax return for 2024 looks something like

View attachment 9306
If so, I don't understand why you are making pension contributions at all, as you are not getting tax relief for them?

It would make sense to do them if you have a very good year, where you are paying tax at 40%. It might make sense if you are paying 20% tax.

But I don't really see the sense of it if you are not paying tax. OK, when you retire, you won't have much income taxed at 20% so you could argue that it is accumulating tax-free. But you have all the restrictions of pensions funds and the costs associated with them.

Brendan
Click to expand...

Yes that's pretty much it, though we pay PRSI and USC on the combined 130k. True, we thought ourselves that paying into pensions wasn't of much benefit to us in the here and now, but we will still need a nest egg once we retire. Our accountant recommended PRSAs to avoid cash building up in the company.
Brendan Burgess said:
Are the two of you producing the same work? In other words, could you have a bad year while your spouse has a good year or do you both rise and fall together?

I would have thought that a net €100k would be plenty.
Click to expand...

We are both in different areas of the arts and for me, things can be very volatile year to year and depending on commissions and how quickly they pay (or sometimes if at all!) My OH's side is more solid but still only contract to contract so we are naturally very cautious and to be honest, happy enough to pay the price for that 'overdraft' if we can grow/diversify in some way while still having access to funds if required and not have everything tied up in property. It's a psychological thing I suppose rooted in more precarious times.
 
conor_mc said:
Assume this is the nub of your question. You have 200k cash plus other assets but want to make them work harder for you, whilst clearing the mortgage is counter-productive as you lock up that cash rather than retain flexibility which your income pattern may require.

The cash will work hardest for you in a tax-efficient pension wrapper, especially if you can get it in there tax-free. If you need to tap that cash, I believe you can do so from the age of 50, which you already are. And I believe you can have multiple PRSA's so you don't need to crystalise your full pension in the event of an emergency, but rather one PRSA at a time. At worst, say you go with 100k pots, you can access a tax-free lump sum of 25k plus an ongoing income from annuity or ARF which can always be redirected into savings/investments if other income stabilises.

All that said, I think you're doing very well for yourselves and have been pretty smart so far whilst achieving your dream home, well done!
Click to expand...
Thank you, this is exactly it. It's been such a long and tortuorous road to get a lender to even look at us that paying mortgage off early seems crazy but so does hanging on to so much cash! But you are right, we don't want to lock it in.
Your suggestion of multiple PRSAs is a great one but initial concern would be that it would dilute the compounding effect over the longer term.

Wondering if maybe we might well be better off paying ourselves more to avail of the pension tax benefits and thus its more of a win-win all round? But yearly cashflow is so hard to predict.

Brendan Burgess said:
Yes, but a nest egg does not have to be in a pension fund. You would be better off with €200k of a nest egg in directly owned investments than €200k in a pension fund.

Brendan
Click to expand...

Yes, It's a suitable directly owned investment that will provide sufficient growth preferably above the mortgage rate that we're looking for.
 
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You are borrowing €345k at 3.5% to invest.

As a general rule, it's a very bad idea to borrow to invest.
Investing is risky and so the €345k investment may go down in value while the €345k borrowing stays the same.
The income you get on your investment will be taxed at your marginal tax rate - about 25% in your case or 33% if CGT or 41% if a fund.
So you need to get about 5% return before tax and after expenses.

You might achieve that. But it's definitely not worth the risk.
 
Brendan Burgess said:
Your tax return for 2024 looks something like

1725551053541.png

If so, I don't understand why you are making pension contributions at all, as you are not getting tax relief for them?
Click to expand...

Again, can I clarify. You are not paying any tax if your income is €50k tax exempt + €15k taxable.
You are paying PRSI and USC on the €65k.
 
I can occasionally avail of a similar exemption to the OP, albeit not a fixed amount so the tax benefits of a pension are also less beneficial to me but trying to find alternative investment here in Ireland is nigh on impossible - the ongoing palaver surrounding ETFs a case in point. The banks and life companies pretty much have it sewn up.
 
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