Pay less income tax by contributing to your pension
You don’t have to pay income tax on any money you invest in your pension up to certain annual levels set as a percentage of your overall income. The older you are – or the closer you are to retirement – the higher these limits and the more you can contribute tax free. This is to incentivise people to save as much as possible to give themselves a decent income in retirement. For example, if you are 60 or older, you can contribute up to 40% of your income to your pension tax free.
It’s worth remembering that even with the recent increase to the state pension in budget 2019, the maximum state pension is just €248.30 per week, so it is well worth taking advantage of the government’s incentives to make sure you have enough to live comfortably in retirement.
So here’s what to do:
Contact your adviser or your pension provider to find out how much you contributed to your pension in 2017. If it is less than your age-related limit, and you can afford to, top up your pension by way of a lump sum. Some employer pension schemes may not allow lump-sum contributions, in which case you can add to your pension via an additional voluntary contribution (AVC) – read a recent blog on AVCs here.
How saving €10k costs you €6k
Let’s say you pay income tax at the higher rate (40%) and you are in a position right now to contribute an extra €10,000 to your pension for 2017, it will only cost you €6,000 because you are ‘saving’ €4,000 in tax (40% of 10,000). It’s a no brainer, if you have any excess cash at all.
Check the age-related limits on the Revenue website here. The maximum amount of earnings taken into account for calculating tax relief is €115,000 per year.
So that’s a very good reason to take note of the October pay-and-file deadline! The cut-off point for paperwork is 31st October but most people advise Revenue by way of ROS (Revenue Online Service), gaining an extra two weeks – the ROS deadline is 14th November.
If you have lost touch with the person who set up your pension, one of our experienced pension specialists here at Clear Financial would be very happy to help.
MB Planning Ltd. T/A Clear Financial is regulated by the Central Bank of Ireland. Registered in Ireland No. 494837 Registered Address: Rathcoole Premier Office Centre, Main Street, Rathcoole, Co Dublin.
Please note that MB Planning Ltd. T/A Clear Financial is not a tax adviser. You are advised to get independent tax advice from a qualified tax adviser.