Reduce your tax bill through pensions

The tax return deadline is just around the corner. The deadline for those submitting their return on paper is 31 October and 13 November for those submitting it online through the Revenue’s ROS system. A common way to reduce your tax bill is through pension contributions. So, how does this work?

Example of how reduce your tax bill through pensions

In our example, we have a 40 year old earning €100,000. Under Revenue rules, he can contribute 25% of earnings to a pension.

• Earnings  – €100,000
• Income tax for 2013 – €32,400
• He also has to pay preliminary tax for 2014. There are a number of ways of calculating this amount but a common method is 100% of the 2013 tax bill; €32,400
• Total tax due on 13 November – €64,800

Reduce your tax bill through pensions

• Maximum pension contribution – €25,000
• Tax relief on that contribution (41%) – €10,250
• Reduced tax bill for 2013 – €22,150
• Remember, preliminary tax for 2014 is 100% of 2013’s tax bill, so that is also €22,150.
• Reduced tax bill – €44,300
• Tax saving – €20,500

The total cost of pension and tax will cost you €69,300, an additional €4,500 than if you just paid your tax bill.

But, you as well as settling your tax liability, you now have €25,000 invested to grow tax free and be spent on something fancy when you retire.

If you have any questions, please contact me directly at steven@bluewaterfp.ie