Intaxication, the state of being euphoric from getting a tax refund!

This euphoria usually lasts until about the time you realise it was your money to begin with. It's then replaced by a nice sense of satisfaction from knowing you've actually acted quite shrewdly. For years, I’ve seen hard working people put everything they’ve ever earned straight back into their businesses. This is fine, so long as it's not to the financial detriment of the business owner personally. I’ve also been around long enough to see how quickly things can change. Business’s which were in vogue yesterday, closing today. Jobs that are in demand today might not be so popular tomorrow. Previously very successful businesses, suddenly gone, out of fashion. 

In respect to the above, I am now going to focus on the great annual giveaway. An opportunity not to be missed, but unfortunately left behind by many. The deadline is fast approaching and if you don’t use this opportunity, you lose it!

I'm talking about paying yourself first before paying the taxman in the form of a pension contribution.

For higher rate tax payers, this gain can be quite significant. For every Euro you pay yourself, the Government will give you 40 cents back. This is an absolute no-brainer. As always, there are some small restrictions. You’re limited to a certain percentage of your net relevant earnings, depending on your age.

These age limits are as follows:

• Under 30 15%
• 30 to 39 20%
• 40 to 49 25%
• 50 to 54 30%
• 55 to 59 35%
• 60 and over 40%

To make it kind of fair on everyone, there is one other restriction. There’s a cap on the amount of income you can write off these payments against. This earnings limit is set at €115,000.

Are you self-employed, a proprietary director or an employee in non-pensionable employment? If so, you’re required to file an annual self-assessed tax return to finalise your 2017 accounts. This must be done by 31st October. If you file online (ROS), you have until 14th November to do so. Remember, these are deadline dates to have all paperwork complete and in place, so don't procrastinate. If you have a tax liability for 2017, then you still have a short window of opportunity to do something about it.

So, for example, let’s assume you’re a 42 year-old self-employed dentist. You have a tax liability of €50,000 on your 2017 earnings which you are now finalising. Preliminary tax of €45,000 has already been paid on those earnings so there’s a €5,000 outstanding balance now due. There’s also a preliminary tax liability due for 2018 and calculated as 100% (basis b) of last year’s final liability. So, a total liability of €55,000 due to be paid by 30th October.

You are now faced with two main options: 

1) Pay this €55,000 tax bill now and waive good-buy to that hard earned money for ever.

2) Make a payment to yourself in the form of a pension contribution. In doing so, not only have you seriously reduced your tax liability, but also put money aside for your future. How so?

Well, let's say this dentist now makes a €25,000 personal pension contribution and elects to have it back-dated to last year’s year of assessment. As a higher rate tax payer, this attracts relief at 40% so that’s €10,000 wiped off the 2017 tax liability straight away. That’s right, €25,000 in his pension and €10,000 knocked off tax bill.

Grant it, this dentist has to come up with the €25,000 to get the relief in the first place. But, by reducing last year’s final tax liability by €10,000, he's also reduced the 2018 preliminary tax liability by the same amount. A DOUBLE TAX ADVANTAGE, and a net cost to cash-flow this year of just €5,000. And remember, €25,000 saved for the future. Of course, this double tax advantage only occurs in the 1st year and will even out to one year’s tax advantage for each year going forward.

So, want to get intaxicated? If you would like to action on the above or find out a little more, contact me directly on 096-75951 or email [email protected] 

Please share this blogpost if you think it has been informative or might help some others you know. Remember, all introductory meetings are held entirely at our expense, so feel free to get in touch today to book yours! 

Lifestyle Financial Planners offer tax-efficient, wealth management, retirement and estate planning solutions to our clients. Paul is a Certified Financial Planner CFP? and holds a Masters Degree from UCD in Financial Services and Risk Management. 

The information contained in this article is for general information only. It should not be used as the basis for any form of agreement or advice. We recommend readers seek separate tax and legal advice where necessary. This information does not take into account your own particular circumstances. Errors & Omissions Accepted. Investment funds can fall as well as rise.

Lifestyle Financial Planners Ltd trading as Lifestyle Financial Planners is regulated by the Central Bank of Ireland.