October brings with it change, leaves shedding from deciduous trees, beautiful shades of brown and orange on the ground, fewer hours of daylight and Budget Day! Right now, pensions are on the agenda and all political parties are keenly aware of it and while Budget 2022 might deliver trickery on other fronts it looks like it will deliver a treat on the pension front. The first issue is whether to increase the State pension rate and the other ongoing issue is the increase of the pension qualification age from 66 to 67 years. This legislated increase should already have happened this year, with it increasing again to 68 in 2028. However, the 2020 general election saw the coalition parties ambushed on this issue. So, a State pension rate increase and a more phased increase of the pension qualification age might well be on the cards.
We need to hold tight to see how this plays out but in the meantime one thing remains steadfast in October and that is the “Pay and File” deadline. For those who want to reduce their income tax liability, pensions still certainly deliver a treat!
Who does the Pay and File deadline apply to?
The deadline applies to those in the ‘self-assessment’ system:
- Self-employed individuals
- Proprietary directors
- Those in receipt of investment or rental income
- PAYE Employees through their AVC’s (additional voluntary contributions)
Those who both pay and file their tax returns through Revenue Online Service (ROS) have until the 17th November 2021 to pay a pension contribution and elect to backdate the income tax relief against the 2020 tax year. Those who do not qualify for the ROS extension must do this by 31st October 2021.
What tax relief is available on a pension contribution?
Tax relief is still by far the greatest advantage of saving into a pension. Income tax relief is still available on contributions made personally to a personal pension plan, PRSA or employee Additional Voluntary Contributions (AVCs) to an occupational pension scheme. Income tax relief is available on up to 40% of the contribution for a top rate taxpayer, or 20% for a standard rate taxpayer.
For example, if you are paying tax on your salary at the highest rate, you are entitled to a 40% saving on any pension contributions you make.
|You Pay||The Government Pays||Total Invested|
Let’s put it another way, if the €200 is invested in a pension, that’s a 66% return on the contribution.
Pension Contributions and Their Impact on Income Tax
Let’s look at how a pension contribution can reduce your tax bill with an example. Let us assume Client A’s final liability to Income Tax, PRSI and USC for 2020 was €22,000 and their marginal rate of tax was 40%. In October 2020, they made a preliminary tax payment of €15,000 for 2020 (100% of their 2019 tax liability), leaving a balance payable of €7,000 on or before 31 October 2021.They have decided to make a Preliminary Tax payment of €22,000 for 2021 (i.e. 100% of his 2020 liability). What would be the impact if Client A were to make a qualifying Personal Pension Contribution of €20,000 by tax deadline 2021?
|Client A - Tax Due||Without Pension Contribution||With Pension Contribution (€20,000)|
|2020 Tax Balance 31/10/2020||€7,000||€1,000 Refund Due|
|2021 Preliminary Tax 31/10/2021||€22,000||€14,000|
The result being: the actual tax bill for 2020 is €14,000, preliminary tax of €15,000 was already paid therefore a refund of €1,000 is due from the Revenue. As the client is basing the amount of their 2021 Preliminary Tax payment on 100% of the 2020 liability, this payment can also be reduced by €8,000. Therefore the total payment to Revenue is €13,000.
Can Employees Avail of the Tax Deadline?
Yes, employees also have the opportunity to pay a pension contribution and set it against their 2020 tax bill. To claim income tax relief, you must pay your contribution to the appropriate pension contract for your circumstances.
- PRSA or Personal Pension: where you are an employee with Schedule E income during 2020 but not a member of your employer’s company pension scheme.
- AVC or PRSA AVC: where you are an employee with Schedule E income during 2020, a member of your employer’s company pension scheme during 2021 and still in that same employment.
Maximum Pension Contributions Allowed
For contributions paid in 2021 and set against 2020 earnings, an earnings cap of €115,000 applies for tax relief purposes to the total contributions to PRSAs, personal pensions and employee / AVC contributions to occupational pension schemes. The following table sets out the maximum allowable tax relief limits for pension contributions based on increasing age bands:
|Age||% of Net Relevant Earnings|
|Up to 29||15%|
Source: The Pensions Authority www.PensionsAuthority.ie
Let’s look at how a pension contribution can reduce an employee’s tax bill. Client B is a member of their employer’s group pension scheme. They earned €80,000 between 1 January and 31 December 2020. Personal Pension contributions during this period amounted to 5% of salary, €4,000.
As Client B is 36, they are entitled to obtain tax relief of 40% on pension contributions up to €16,000 (20% of total salary). As such, Client B decides to make an AVC of €12,000 on or before the tax deadline to avail of the maximum tax relief allowable to them. By making this pension contribution Client B has invested an additional €12,000 into their pension and should receive a tax refund/rebate of €4,800 paid directly into their bank account.
The need for professional retirement advice has never been more important. Based on our experience with clients, many people incorrectly tend to view the deadline as simply an opportunity to reduce their income tax bill. This may be true, as demonstrated above, but it is equally important to consider how your current and historic pension contributions are invested. Seeking the advice of a financial advisor puts you in the best position to meet your long-term goals. Cantor Fitzgerald can work with you to review your pension arrangements and formulate a cohesive retirement and investment strategy. We understand that retirement can mean different things to different people and have a range of pension solutions to suit your individual pension needs.
Laura Reidy is Head of Pensions at Cantor Fitzgerald Ireland
Contact details for each individual team member can be accessed here on our website should you wish to speak with a Portfolio Manager or Account Executive.