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.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.
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.
Conan note my example is using after tax 10k.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.
Really? The overwhelming financial advice for almost everyone is to make pension contributions.tell those naïve people who think if they don't make the pension contribution they are in some way missing out
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.
This is the bit you have wrong. If you contribute 10k to pension, then your pension increases by 10k.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
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 pensiononly increases by 6kstays 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.
You're not adjusting this figure?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.
Rental income is not earned income. You pay 10k into your pension. You invest 10k in cash in your pension.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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