Tax Return Deadline is fast approaching!!
As you know, if you’re self-employed you must pay your 2018 income tax liability by 31st October, or 12th November if using Revenue Online Service (ROS ).
What you might not realise is that there is income tax relief available on pension contributions. This means that if you make a once-off, lump sum pension contribution before the self-assessment deadline and backdate the tax relief to 2018, you may be able to reduce your income tax liability.
You can get income tax relief on all pension contributions up to an annual limit depending on your age, and subject to an annual earnings cap of €115,000.
| Age | % of Net Relevant Earnings |
| Under 30 | 15% |
| 30-39 | 20% |
| 40-49 | 25% |
| 50-54 | 30% |
| 55-59 | 35% |
| 60 and over | 40% |
- As well as income tax relief, there are other tax-effective benefits of having a pension. While DIRT or Exit Tax apply to other investments, any growth achieved by pension funds is not subject to tax, making it easier for individuals to build up their retirement fund.
- At retirement, based on current legislation you are entitled to a minimum of 25% of your total retirement pot as a tax free lump sum, subject to a maximum lifetime tax free lump sum limit of €200,000. A number of options are available for the balance of the fund – it can be used to purchase an annuity which is a pension income for life, or it can be reinvested in an Approved Retirement Fund (ARF), from which a regular withdrawal is taken.
For example,
- Mary is self-employed and aged 45 and has an income of €50,000. She pays income tax at the marginal rate of 40%.
- Mary has a 2018 tax liability of €6,000 due on 31st October
- She decides to make a pension contribution of €12,500 before 31st October, and backdate the tax relief to 2018.
- Because Mary can obtain income tax relief on this contribution, she is entitled to relief of €5,000 from Revenue.
- Therefore, Mary’s tax bill for 31st October is now reduced to €1,000 (€6,000 less €5,000). As well as this, she has an additional €12,500 in her pension pot.
Remember, there is no option to defer the 2018 tax relief – if you do not take this opportunity now you will not get another chance to reduce your 2018 income tax payment.