Using AVC to reduce Rental Tax Liability - Is it Possible?

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moneymakeover said:
Both cases below I'm assuming PAYE worker paying high rate of income tax.

Example 1
No rental income
Contribute 10k from savings to pension
Say high rate tax 40%
Actual contribution 10/.6 = 16.67k into pension

Example 2
Rental income
Next year I do the same but this time I have 6.67k in rental profit. What happens?

Declare 6.67k rental profit
Contribute 10k lump sum from savings as before
Revenue calculates I have tax relief of 6.67k and reduces tax bill.
Actual contribution will be: 10k into pension this time.

I think I saved paying tax but really no gain. Because now I have contributed less to my pension than previous year.
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If you contribute €10k in each case to the Pension, then your net cost is €6k after tax relief. It's the same in either example. Your pension tax saving is €4k. Your tax liability on the rental income is unchanged.
 
RedOnion said:
With respect, I'm an accountant, and your post makes absolutely no sense to me.

If you've the same amount of PAYE income in each case, and contribute the same amount to your pension, then the tax relief is exactly the same.

Making a statement to the effect that having rental income reduces the amount you can contribute to a pension is one if the most absurd things I've seen posted here.
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Please note I said pay the pension contribution from savings.

The tax on the rental income does in fact reduce the resulting effective pension contribution.

There is no silver bullet to avoid paying tax on rental income.
 
Conan said:
If you contribute €10k in each case to the Pension, then your net cost is €6k after tax relief. It's the same in either example. Your pension tax saving is €4k. Your tax liability on the rental income is unchanged.
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Conan note my example is using after tax 10k.

I said "from savings".

In this case the revenue will give additional relief

Which is where the 6,667 comes from.

Effectively contributing 16,667

If you contribute €16,667k in first case to the pension, then your net cost is €10k after tax relief. In the second in example. Your pension tax saving is €6,667. Your tax liability on the rental income is 6,667. They cancel each other out.
And the effective increase in pension is 10k
Unlike the first case.
 
My understanding in a simplified way

Scenario - 1
PAYE income: €100K
Pension in employment: 0
Rental income: 0
Tax Bill: €40K

Scenario - 2
PAYE income: €100K
Pension in employment: €10K
Rental income: €10K
Tax Bill: €40K

Tax bill stays the same in both scenarios as the total income after the pension stays the same but you have addition 10K in your pension in the 2nd scenario. Yes, you are taking €10K for the pension from your PAYE income pot as you can't use rental income for the pension purposes. You are just taking €10K from your right pocket instead of left pocket ?
 
What GG said is correct
They can be netted off against each other
But it's important to tell those naïve people who think if they don't make the pension contribution they are in some way missing out.
 
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You are just taking €10K from your right pocket instead of left pocket ? [/QUOTE said:
Not really, from my point of view.

I have (say) €5k sitting in my bank waiting to be paid to revenue in tax due.

Instead of giving it to Revenue in tax, I can add my €5k savings / bonus / whatever & put €10k into an AVC.
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To clarify, and what I should have said,

It's important to tell those naïve people who think they are in some way missing out on tax relief on rental income if they don't make a pension contribution.

Of course pension contributions are important.
Just not to be confused with saving on rental income tax.

There is a nuance to it whereby you can think you're avoiding tax. But you're just reducing your effective pension contribution.
 
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"But you're just reducing your net pension contribution."

I thought this assertion had already been contradicted?
 
Scenario - 1a
PAYE income: €100K
Pension in employment: 0
Rental income: 0
Tax Bill: €40K
Net Income: 60K

Scenario - 1b
PAYE income: €100K
Pension in employment: €10K (6k from after tax income and 4k from tax)
Rental profit: 0
Tax Bill: €36K (40k - 4k pension relief)
Net Income 54k

Scenario - 2
In this scenario the accountant tells me I have made 10k profit on my rental property.
I have a 4k tax liability
Say I wasn't making any pension contribution (like 1a above)
I was going to write a cheque from my hard earned savings account for €4k but the accountant tells me :
Hey I have a great trick: just contribute 10k to your pension. Like in case 1b

What happens?

PAYE income: €100K
Pension in employment: €6K (€6k from after tax income)
Rental profit: €10k
Tax Bill: €40K (40k - 4k pension relief + 4k rental liability)
Net Paye Income €54k

Notice what happens: the net paye income is same: 54k
The tax man gets an extra 4k
The pension only increases by 6k

My take home pay is the same.
Myself and the accountant are great buddies
But the tax bill for the rental has been paid from what would have been the pension
and the revenue commissioners get their €40k : 36k plus 4k rental property tax.

What is the difference between 1b and 2?
In 1b we get 10k pension contribution
In 2 we get 6k pension contribution and revenue gets the 4k
 
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moneymakeover said:
just contribute 10k to your pension. Like in case 1b

What happens?

PAYE income: €100K
Pension in employment: €6K (€6k from after tax income)
Rental profit: €10k
Tax Bill: €40K
Net Paye Income €54k

Notice what happens: the net paye income is same: 54k
The tax man gets an extra 4k
The pension only increases by 6k
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This is the bit you have wrong. If you contribute 10k to pension, then your pension increases by 10k.
If you fix your calculations, you'll end up with the exact position that others have explained thoroughly earlier.
10k of pension contribution costs net 6k, regardless of where the money has come from.
 
well I disagree :)
In my calculations the tax is paid for the rental income
What you're describing the revenue commissioners don't get their 4k
 
The flaw in you’re original Scenario 1 is that you are investing €16.7k and then getting a tax refund of 40%, bringing the net cost down to €10k. It’s not the case that you invest €10k from savings and the Revenue add €6.7k. In your Scenario 1 you actually have to invest €16.7k and therefore you have €16.7k in the Fund. In the second Scenario you invest €10k and get a tax rebate of €4K but you only have €10k in the Fund as compared to Scenario 1.
I still think you are comparing apples and oranges.
 
Okay if you prefer as follows

Example 1
No rental income
Contribute 16.67k from savings to pension
Say high rate tax 40%
Actual contribution 16.67k into pension
Revenue will refund 6.67k
Net cost after revenue refund 10k (!)
I would have said this is same as my original just the sequence slightly different.

So what I'm saying still holds.

second scenario was different example.
10k comes out of gross paye
The 4k is reduced from going to revenue commissioners
Okay?
 
moneymakeover said:
Scenario - 1a
PAYE income: €100K
Pension in employment: 0
Rental income: 0
Tax Bill: €40K
Net Income: 60K

Scenario - 1b
PAYE income: €100K
Pension in employment: €10K (6k from after tax income and 4k from tax)
Rental profit: 0
Tax Bill: €36K (40k - 4k pension relief)
Net Income 54k

Scenario - 2
In this scenario the accountant tells me I have made 10k profit on my rental property.
I have a 4k tax liability
Say I wasn't making any pension contribution (like 1a above)
I was going to write a cheque from my hard earned savings account for €4k but the accountant tells me :
Hey I have a great trick: just contribute 10k to your pension. Like in case 1b

What happens?

PAYE income: €100K
Pension in employment: €6K €10k (€6k from after tax income and 4k from tax)
Rental profit: €10k
Tax Bill: €40K (40k - 4k pension relief + 4k rental liability)
Net Paye Income €54k - Im not sure what you are emphasising here, your income is now €110k in this scenario?

Notice what happens: the net paye income is same: 54k
The tax man gets an extra 4k
The pension only increases by 6k stays the same 10k

My take home pay is the same.
Myself and the accountant are great buddies
But the tax bill for the rental has been paid from what would have been the pension
and the revenue commissioners get their €40k : 36k plus 4k rental property tax.
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I couldn't really follow your thought process. Some things highlighted.
 
% of earned income can attract tax relief. If this % used up you don't get any further tax relief. If you have €10k rental income and you still have €10k of your % earned income allowance left you invest the €10k in your avc. Your avc pot has increased by €10k you claim back €4k from revenue.

You have invested €10k in your avc but it has only cost you €6k in actual cash.
 
Itchy said:
I couldn't really follow your thought process. Some things highlighted.
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You're not adjusting this figure?

Tax Bill: €40K (40k - 4k pension relief + 4k rental liability)
What I'm saying very simple, the normal 4k tax relief is used up by paying the tax bill for the rental property
 
The Horseman said:
% of earned income can attract tax relief. If this % used up you don't get any further tax relief. If you have €10k rental income and you still have €10k of your % earned income allowance left you invest the €10k in your avc. Your avc pot has increased by €10k you claim back €4k from revenue.

You have invested €10k in your avc but it has only cost you €6k in actual cash.
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The 10k is earned income consists of 6k after tax plus 4k tax

Because 10k going to pension, the revenue concedes 4k of relief

BUT the 4k of relief doesn't end up in pension because it is used to offset the 4k tax bill for the rental property
 
moneymakeover said:
The 10k is earned income consists of 6k after tax plus 4k tax

Because 10k going to pension, the revenue concedes 4k of relief

BUT the 4k of relief doesn't end up in pension because it is used to offset the 4k tax bill for the rental property
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Rental income is not earned income. You pay 10k into your pension. You invest 10k in cash in your pension.

Revenue give you back 4k. So you have invested a net of 6k actual cash. Your pension has increased in value by 10k and it has cost you 6k.
 
In my example above I was taking 10k of gross paye income

You're taking 10k of after tax savings.

That's equivalent to 16.67k gross income

In your example, you say revenue give you back 4k. I know that's what happens normal lump sum pension contribution (no rental income).

But what happens when there is rental income/tax liability?
 
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