Pay tax or Pension AVC?

G

Gerard123

Registered User
Messages
294
Tax due on rental property say 5 grand for 2015. Using this as preliminary tax for 2016 means cutting a cheque to the Revenue for 10 grand.

Alternative. Pay the 10 grand into pension AVC and take the deduction against 2015. For ease say the deduction is at 50% so reduces tax for 2015 by 5 grand, ie now no liability. As no liability that is the base for 2016 so no preliminary tax for 2016.

Net result. Pay AVC 10 grand and no tax. Better to have future access to the money in pensions rather than paying tax as the money is gone forever. No net cash impact.

Isn't this a no brainer? What am I missing?

Assume well within pension limits and below value of 2 million pension fund. Appreciate small usc and PRSI to pay plus tax relief at 41% so may end up in small payment situation. But trying to get head around the concept.
 
Last edited:
The 2015 liability is eliminated.

The 2016 liability is only deferred until this time next year. So it's €10k to save €4,000 and defer the payment until next October.
 
Understand that but do the same again next year.

Is it a one time cash flow benefit only and then in future years there's no difference really?
 
We do that every year funding Mrs Slim's Prsa. Rather put it in there than have a tax bill on the rental.
 
No brainer in my opinion, its something I have been doing for years.
There are people who don't like pensions and they have reasons but its a no brainer to me versus paying the tax today.
 
I always thought pension tax relief was not available against rental income as its unearned - am I missing something here ?
 
How does this work in practice?

I assume that if you are a PAYE worker and are paying into an AVC you get tax relief at source? If so, the OP is talking about making additional contributions in September/October for the previous year in order to minimise tax liability.

Joe_90 said:
The 2015 liability is eliminated.

The 2016 liability is only deferred until this time next year. So it's €10k to save €4,000 and defer the payment until next October.
Click to expand...

I'm clear on the first part of your answer but not the second. You don't pay preliminary tax but next year when you (or ros.ie) calculate the tax owed for the previous year you do the same thing again.
 
Thanks all. Yes I do pay PAYE so it would be against occupational income that technically the deduction would be against (same overall pot).

Its the second and third years onwards that I am trying to get my head around. Tax re rental income has only really become an issue now with low rents and losses in the past. Seems like a smart thing to do in year one at least and at least the money is not dead money.

If I had excess cash then no issue, however I don't. So I would simply be looking to see if the money that is payable for tax can be put into an AVC and implications. Seems that would work for year one but years 2 onwards wouldn't be feasible as you would in effect need double the tax charge in cash to pay into an AVC. If you simply diverted the tax charge money, that would give you a deduction equal to half the tax charge so you would still be left to pay c50% of the tax (slightly more actually with USC, PRSI).

Is that right?
 
I am in a similar situation to you. I think the question is around how much tax you pay when the pension is activated i.e. do you end up paying the tax on the AVC at a later stage rather than now?
 
PaddyM said:
I am in a similar situation to you. I think the question is around how much tax you pay when the pension is activated i.e. do you end up paying the tax on the AVC at a later stage rather than now?
Click to expand...

Depends on how big your pension pot is at retirement. The fund accumulates tax free, you get 25% tax free and possibly draw the rest of it at 20%. It's a pretty efficient way of reducing your tax liability.

The other is doing something like an EII scheme but if you invest in one this year, you can only claim 3/4 against 2016 income and can't back date it against 2015.


Steven
www.bluewaterfp.ie
 
You must log in or register to reply here.
Back
Top