Tuesday 20 August 2019

Tax relief can be obtained on your pension contributions

Your one stop shop for expert, independent money advice Q&A

Q . 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 2011. Can you please outline what my options are? A . Your accountant is correct. The tax return deadline is October 31st or November 15th if you are filing and paying your 2011 tax return using the Revenue On Line System. Revenue will allow tax relief to be obtained on Pension contributions in order to incentivise the private individual to save for retirement.

Recent reforms under the Social Welfare and Pensions Act 2011 have already underlined that individuals need to make sure they have a source of private pension income and not to be solely reliant on the state contributory / noncontributory pension once they retire. The state pension retirement age will gradually be extended out to age 68 over the coming years.

Pension contributions added to your Pension before the October / November deadlines are allowable for tax relief and can help you to lessen your 2011 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 to. This limit is currently set at €2.3 Million. If you are at or near this figure you will need to ensure any further contributions will not push you over this limit.

2) There is also a limit as to the size of the contribution you can claim Tax Relief on. This limit is based on your age and also your income. The limits are set out below: Aged attained Tax Relief Limit during the year (% of 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. So for example, an individual aged 45 with an income of €50,000 per annum can gain tax relief of €50,000 x 25% = €12,500. However the same individual, should he or she have an income of €150,000 can gain tax relief of max €115,000 x 25% = €28,750. 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.

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 and whilst this relief is still available.

I would advise that if you have any doubts that you contact a qualified financial adviser.

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