Self employed need to have source of private pension income
. I AM a self employed sole trader and my Accountant has advised me that I may contribute to my Pension in order to bring down my income tax liability for 2010. Can you please outline what my options are in this respect.
A. Your accountant is correct. The tax return deadline is October 31st or November 15th if you are filing your 2010 returns using the Revenue OnLine System. The Government allow tax relief to be obtained on Pension contributions in order to incentivise the private individual to save for retirement.
The recent reforms under the Social Welfare and Pensions Act 2011 has already ensured that individuals need to make sure they have a source of private pension income and not to be reliant on the state contributory / non-contributory pension once they retire. The state pension retirement will gradually be extended out to age 68.
Pension contributions added to your Pension before the October / November deadlines are allowable for tax relief and can help you to lessen your 2010 tax liability.
An individual can backdate a personal contribution paid in the current year to the immediate previous tax year for tax relief purposes. You are currently entitled to claim tax relief at your marginal rate of income tax of up to 41%.
There are certain limits that need to be considered here before adding to your Pension Fund.
1) There is a Revenue ceiling as to the size your Pension pot can grow too. This limit is currently set at €2.3 Million. If you are at or near this figure you will need to ensure any further contribution will not push you over this limit.
2) There is also a limit as to the size of the contribution you are entitled to make. This limit is based on your age and also your income. The limits are: Age Tax Relief Limit (% Net Relevant Earnings) Less than 30 15% 30 to 39 20% 40-49 25% 50-54 30% 55-59 35% 60 and over 40%
3) You may only gain tax relief on your income up to €115,000. It is worth mentioning that the Government have in recent years reduced the limits with regards to Pensions. The €2.3 Million ceiling has been reduced from €5.4 Million and the €115,000 income limit has been reduced from €150,000 in recent times.
Whilst mixed messages have been coming from Government sources, there is the possibility that the ability to obtain tax relief at the 41% marginal rate may be reduced over the course of the next few budgets.
From this point of view, it may be prudent to ensure Pension contributions are made to your Pension before the October / November deadlines so as to ensure you can obtain relief at the 41% rate where applicable.