In a weird way the impending tax return deadline is a reassuring sense of normality amidst an otherwise very abnormal year. But what does it mean for you and can you save some tax for yourself rather than send another cheque to Revenue?
In this respect we can break ourselves into three distinct groups. Some of you reading this will be Sole Traders. Self Employed individuals who don’t have a Ltd company and simply pay your tax for each year under the self-assessment guidelines usually in the form of a significant lump sum payment around this time of year.
Others are either company directors or former company directors who are finalising personal tax returns for last year. In the normal course of events you probably won’t have a significant liability. If you do it’s usually due to the fact you have rental income from investment properties or have a small income from another line of work.
In both scenarios you will have a liability for 2020 and a preliminary tax liability for 2021. The example below takes you through the mechanics of both but also the value of using a pension to reduce these liabilities
2020 Net Relevant Earnings of €80,000 and €15,000 Preliminary Tax Paid in October 2020
Scenario 1 – No pension Contribution
Balance of Tax Due from 2020 is €7,000 (i.e., €22,000 less €15,000)
Preliminary Tax Due is €15,000 (i.e., 100% of 2020’s liability)
Total Payment to Revenue is €29,000 (€22,000+ €7,000)
Scenario 2 – After Pension Contribution
Before 31/10/21 John makes a pension contribution of €20,000 and backdates the tax relief to 2020
Actual tax bill for 2020 is reduced to €14,000 i.e., the total tax bill for 2020 of €22,000 less tax relief of €8,000 (40% of contribution of €20,000)
However, €15,000 Preliminary Tax was already paid in October 2020 so therefore a refund of €1,000 is due from Revenue.
Preliminary Tax due is €14,000 (ie 100% of 2020’s liability)
I’m not going to re-state the overall benefits of having a pension other than to say that I know that for some people they are seen as a waste of time due to an anecdote of a previous experience but please, this is like saying all cars are useless because yours didn’t start this morning.
They are there for a reason. You can either choose to save for your own retirement or not but pensions do not equal risk. You don’t have to assume investment risk with a pension if you don’t want to. But remember that over 100,000 people will retire this year to a lifestyle of comfort and it’s not because the Govt are giving them €248.30 per week in the form of the State Pension!
We’re happy to talk you through your options so If you’d like to discuss your own situation or get a quote as to how much tax you can save please contact us at 01-2966120 or email firstname.lastname@example.org