18 Oct 2017
Posted in: Financial Review
The scariest time of the year is sneaking up on us yet again just like a blood-thirsty vampire. No, not
Halloween – it’s the simultaneous October 31st deadline for the self-employed to file their tax returns.
The unenviable job of totting up and paying a whole year’s tax in one go is facing hundreds of thousands of self-employed people.
However, there is one way to ease the pain: tuck money away in a pension fund. Investing in a pension is the best way to save tax. Here’s why.
If you’re on the higher tax rate, you save 40 percent of your contributions. Yep, you read that right.
Every €200 you put in your pension can cost only €120. That’s a whole lot of savings.
Let’s say you’re lucky enough to earn €100,000 a year, and you put €20,000 into your pension. Your net earnings for tax purposes would reduce to €80,000.
This would save the 40 percent tax you would have paid on the €20,000 – i.e. €8,000. And so a €20,000 contribution costs €12,000 net.
Keep in mind that you may have to pay tax on your pension when you take the money out in retirement, of course, but that may be at a lower rate as older people can get special reliefs and even exemptions from tax.
There’s a lot of lingo to pension planning, but as the maths shows, they can be a particularly useful way for the self-employed to save on tax – as well as offering solid financial planning for the future.
The self-employed can also use pension contributions to smooth out the tax burden caused by an uneven income stream. In particularly lucrative years, simply salt away more pension to bring down a hefty tax bill.
The more you earn, the more you can contribute and benefit from tax
The maximum amount of earnings taken into account for calculating tax relief is €115,000 per year.
And the closer you get to retirement age, the more you can contribute, tax-efficiently. That might come in handy if you leave it late to start building a pension, as you may have to contribute quite a lot!
It’s tempting to pay the minimal amount to your pension – there are so many more appealing ways to spend an excess €100, especially after a long week.
But the most common mistake people make is to under-save for their pension. Even if you start saving at 20, putting 2-3 percent of your income into a pension isn’t enough.
You need at least 10 percent to build up to a decent nest egg for retirement, even if you start at 20 – and many times more than that if you leave it very late. If you’re unemployed, you won’t have that luxury of a company pension. But you can meet a financial advisor for a free retirement review (and a cup of tea) – they can go through all the details and set up the best option for you.
This is also called a portable pension. It’s a private pension fund you can take with you wherever you go, whether self-employed or even from job to job.
So, what are those PRSAs all about? It’s basically a contract between you and the provider. The value of the final benefits depends on the amount you pay in and the investment return achieved before you retire – less any fees and charges, of course.
There are two types of PRSAs – standard and non-standard. With the former, charges are limited to a maximum 5 percent upfront and 1 percent annually. But that still adds up over the lifetime of your pension and you should still try to get the best deal possible.
You can choose the type of investment you want to make depending on your attitude to risk, which is something you can talk in detail about with an EBS Financial advisor.
You can contribute as much as you like to your PRSA, as long as you meet the minimum contribution levels, which can range from €10 a month upwards.
A nice feature for the self-employed is the element of flexibility, which can come in handy when times are tough, just as it is when you’re in the black.
You don’t have to make regular contributions to your PRSA. But most providers set up your account to be paid monthly, quarterly, half-yearly and yearly.
There’s even flexibility about when you can make payments to avail of more tax relief in a particularly good year.
The self-employed must make two tax declarations ever year. In 2017, for example, there will be a final one for 2016 and a preliminary statement for this year.
You can still pay a once-off special pension contribution after the end of a tax year – as long as it’s before the following 31st of October, according to Revenue.ie.
“If you do, you can choose, on or before 31st of October, to have the tax relief for the contributions allowed in the earlier tax year,” the Revenue advises. Good to know.
If you use Revenue Online Service (ROS), the deadlines for making contributions are also extended.
The due date for 2017 has been extended to Tuesday, 14th November. This is for self-assessed taxpayers who make appropriate payments through ROS for preliminary tax for 2017 and any balance due for 2016.
So there you have it: tax advice for the self-employed!
Why not book your free retirement review with EBS now, and we’ll help you plan for a comfy retirement?
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