This time of year is busy for us with sole traders who are being advised by their accountants to reduce their tax bill by making a pension contribution for 2023. But this opportunity is also available to employees, public service workers and company directors. We are all looking to save on tax and to find a good home for our savings so don't let this opportunity to tick both boxes pass you by as time is running out.
We all know pensions are tax efficient; you get 40% tax relief on contributions or 20% if you're a lower rate tax payer, you pay no tax on the investment growth in the pension, and you get 25% tax free when you retire. But if you didn't max out your contributions for 2023 you can now make a backdated contribution and get a tax refund. It's a no brainer if you have money sitting in your business or personal account. You're saving for the future and getting a refund of tax. Who doesn't want to pay less tax? For example a higher rate tax payer who has €1,000:
So how do you set this up? If you have a company or public service pension you can make an AVC (Additional Voluntary Contribution); if you are self-employed you can start a Personal pension, Master Trust or PRSA (Personal Retirement Savings Account) or do a top up to an existing arrangement. It is important to seek advice around the maximum you can contribute as it depends on a few factors.
Pension contributions are subject to age related limits set by the Revenue:
Age Band | % of Net Relevant Earnings |
Up to age 29 | 15% |
40-39 | 20% |
40-49 | 25% |
50-54 | 30% |
55-59 | 35% |
60 and over | 40% |
*Earnings cap of €115,000 applies to contributions
Employee Example:
Jane is a 35 year old who paid Income Tax at the 40% rate in 2023. She makes a pension contribution of €10,000 by 31 October 2024 and informs her local tax office by 31 October 2024 that she wishes to backdate relief on this to 2023. She is entitled to the following refund:
40% Taxpayer Gross Pension Contribution €10,000 Tax Refund €4,000 Net Outlay €6,000
40% Tax Payer | |
Gross Pension Contribution | €10,000 |
Tax Refund | €4,000 |
Net Outlay | €6,000 |
Sole Trader Example:
John is self-employed, aged 45 years, and his Net Relevant Earnings for 2023 were €80,000. He has paid €15,000 Preliminary Tax in 2023 and his total tax bill for 2023 is €22,000. This leaves him owing €7,000 for 2023. He does not currently pay pension contributions.
No Pension Contribution:
Balance of tax due from 2023 is €7,000 (i.e. €22,000 less €15,000)
Preliminary Tax due for 2024 is €22,000 (i.e. 100% of 2023’s Final Liability
Total payment to Revenue is €29,000
After a €20,000 Pension Contribution:
Actual Tax Bill for 2023 reduced to €14,000 i.e. the total Tax Bill for 2023 of €22,000 less tax relief of €8,000 (40% on the pension contribution of €20,000) However, €15,000 Preliminary Tax was paid already in October 2023. Therefore, a refund of €1,000 is due from the Revenue.
Preliminary Tax due for 2024 is €14,000 (i.e. 100% of 2023’s final liability).
Total payment to Revenue is €13,000.
If you would like to have a chat with an advisor about this you can use our contact form to request a call back.
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