How can I reduce my Income Tax Bill?
This time of year is a key focus for all Self Employed people as it is the time of year to pay tax. For those who file their 2017 Form 11 Return and make the appropriate payment online through ROS, Wednesday the 14th November 2018 is THE key date. By this date any Income Tax balance due for 2017 is due to be paid, plus the Preliminary Tax Payment for 2018.
There is however one last chance for those that are Self Employed to reduce their Income Tax Bill for 2017 and their Preliminary Tax Bill for 2018, by making a pension contribution before the tax deadline and electing to backdate it against their 2017 liability. Pension Contributions are one of the few remaining deductions on which income tax relief at your marginal rate applies. Therefore if you pay Income Tax at 40% the tax relief granted is 40%.
The best way to illustrate how this would work is through an example.
Pension Contribution (Tax savings)
|Peter's Tax Due||Without Pension Contribution||With Pension Contribution of €12,000|
|2017 Total Tax Paid||€15,440||€10,640|
|2018 Preliminary Tax||€15,440||€10,640|
Peter is a Single person age 35, with a Self Employed Income of €60,000. Peter’s marginal rate of Income Tax is 40%. As you can see with no pension contribution Peter pays a total of €15,440 in Income Tax for 2017, plus €15,440 in Preliminary Tax for 2018. By making a Pension Contribution of €12,000 (20% of Earnings), before the 14th November 2018, and electing to backdate it against his 2017 Income, Peter can reduce his final tax bill for 2017 to €10,640 and hence his Preliminary Tax is also reduced to €10,640.
There are a number of ways this transaction has been of financial benefit to Peter
- He has reduced his 2017 Tax Bill
- He has reduced his 2018 Preliminary Tax Bill
- He has added €12,000 to his Retirement Savings
- He has added €12,000 of an asset (ie: Death Benefit on Pension is Fund Value)
As a 35 year old, if Peter continued to pay €12,000 into his pension fund every year between now and his state pension age of 68 and the fund grew at 6% per annum, he would have €899,000 of a fund value in his pension at 68. After Tax Relief it would have cost him €237,600 to put it together over 33 years….Not too shabby!
So what do you do next? When you are discussing your Tax Situation in the next few weeks with your accountant pose them the following question
- If I make the Maximum Pension Contribution I can for 2017, how much can I put into a pension, what will it reduce my 2017 Final Tax Bill to and what will it reduce my 2018 Preliminary Tax to
Don’t delay, as the opportunity to get Tax relief against your 2017 income is only available for the Self Employed who file online up to the 14th November 2018. Should you wish to make a Pension Contribution or would like to request further information on what contribution may be suitable for you please contact me, David Peavoy on 087-2902206 or alternatively by email on
David Peavoy BA, QFA, LIAP is the Owner of Peavoy Financial Planning whose practice is based in Office 5b, Portlaoise Enterprise Centre, Clonminam Business Park, Portlaoise, Co Laois.
David Peavoy T/A Peavoy Financial Planning is regulated by the Central Bank of Ireland
Disclaimer: All data and information provided within this blog is for information purposes only. It should not be taken as specific advice for your situation. Peavoy Financial Planning makes no representations as to the accuracy. completeness, or suitability of any information and will not be liable for any errors, omissions or delays in this information or any losses, injuries or damages arising from its use