Are We Maximising Tax Credits?

ELO

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Age: 49
Spouse’s/Partner's age: 49

Annual gross income from employment or profession: €28k
Annual gross income of spouse: €75k

Monthly take-home pay: €5.9k

Type of employment: Me: Private Sector
Spouse: Civil Servant

In general are you:
(a) spending more than you earn, or
(b) saving? Yes 2-3k per month towards home renovations

Rough estimate of value of home: €320,000
Amount outstanding on your mortgage: zero
What interest rate are you paying? zero

Other borrowings – car loans/personal loans etc: No

Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card? zero

Savings and investments: €65k state savings, €40k deposit accounts (saving for home renovations)

Do you have a pension scheme? Me: PRSA. Spouse: Civil Service pension pre 95

Do you own any investment or other property? 1 bed apartment rent €1.1k pm. No mortgage, value approx €200k

Ages of children: 13, 10, 8

Life insurance: Yes €150k each and spouse DIS benefit €100k


What specific question do you have or what issues are of concern to you?
We are jointly assessed and our credits for 2021 have been adjusted to allow for estimated tax due on rental income. I started a PRSA in January and I have adjusted my credits to get the tax relief during the year. The rest of my cut-off has been assigned to my spouse. I returned to work last year part-time after a number of years without paye income and I made a payment into my prsa for last years paye income. I have a prsa worth €16k from a previous employment and a prb worth €7.5k from before that. The new prsa only has a value of €5.5k currently and I'm adding €500pm at the moment.

I have two concerns:
Are we using our tax credits in the best way? Is there anything we could be doing or looking at to reduce our tax bill.

Related to this, I am concerned about my pension (or lack of), I only receive 20% relief on my prsa contributions but I will need to pay my maximum limit to get anywhere with building up the fund. Are we stuck with the 20% relief or can we do anything between us on this?

Finally, should I transfer my old prsa fund into the new one or am I better off leaving the two prsa funds separate or does it matter? As far as I know I can't do anything with the prb.

Actually one more question, does anyone know if the TWSS can be taken into account when calculating the maximum that can be paid into pensions?

If anyone has any other comments/advice on any of the information above, please feel free to share. All comments and advice are very much appreciated.
 

RedOnion

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5,990
Related to this, I am concerned about my pension (or lack of), I only receive 20% relief on my prsa contributions but I will need to pay my maximum limit to get anywhere with building up the fund
You should be getting 40% relief if you've allocated bands correctly.

Is rental income in joint names?
 

RedOnion

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5,990
Just to expand on my comment above and how you can get 40% relief on pension contributions.

From a mechanics point of view, it sounds like your employer is not making the PRSA deductions from salary, so you have adjusted credits. You will only get 20% relief, but once you complete your tax return after year end you'll get the correct relief.

Your salary is 28,000
You can currently get tax relief on 25%, or 7,000 (Note: you can get relief on contributions up to 30% of your salary in the year you turn 50.)
This brings your income down to 21k, so it looks like you'd only get relief at 20%.

There is 25,300 of your tax band that you cannot transfer to spouse. By transferring the balance to spouse, they can earn a higher amount at 20%, so you are benefiting from that.

If the rental income is in joint names, you're paying tax on 4,300 of it at 20% instead of 40%.

The net effect is the same as if you were getting 40% relief on your full pension contributions.

Remember, in retirement, you will still have individual tax bands, so it's important to plan that not all retirement income is in spouses name as it might not be tax efficient. They could end up paying higher rate tax, and you not utilising your full tax band. It might be worth considering getting the investment property into your sole name from a tax planning perspective - over 20+ years in retirement inefficient tax planning will add up.


Actually one more question, does anyone know if the TWSS can be taken into account when calculating the maximum that can be paid into pensions?
Yes. TWSS is considered part of 'Net Relevant Earnings'. It's addressed in the following Revenue document:

"It is open to you as an employee to elect to make a “non-ordinary” or “special” contribution to your pension scheme before your return filing date for the 2020 tax year. When doing so, as the subsidy payment will form part of your “net relevant earnings” for pension purposes, the subsidy received will be counted towards your age-related percentage limit and overall earnings limit for the purpose of calculating allowable tax relief on the pension contributions."


Finally, should I transfer my old prsa fund into the new one or am I better off leaving the two prsa funds separate or does it matter? As far as I know I can't do anything with the prb.
I'd only combine them if you can get lower fees, or if it's easier for you to have less paperwork. If they were larger amounts you might have a plan to 'retire' them earlier, but it doesn't look like the amounts are significant enough to be worrying about that.
 

ELO

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5
Thanks for such a detailed reply, I must admit though I'm only barely following it... You are correct, I pay the prsa contributions myself, not by salary deduction and rental income is in both names. I'm a little confused on the 40% and how we might be able to claim it but I'll have a look at the form 11 and it might make more sense to me then as I haven't had to account for pensions contributions on the return in the past. If you don't mind, I may come back with questions at that point.

Thanks for pointing out that I can increase my contributions to 30% for this year and for the TWSS info. On the €25,300, is this the amount that Revenue say I can't transfer or is this a calculation you've made from the figures I gave?
 

RedOnion

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5,990
On the €25,300, is this the amount that Revenue say I can't transfer or is this a calculation you've made from the figures I gave?
This is from Revenue / Tax acts.

I might have explained the 40% relief poorly. It might be easier with a simple example.

Let's say you are earning exactly 25,300, and you've transferred remainder of tax band to spouse.
And you also have 5,000 rental income in your name.

If you don't make a pension contribution, you will pay 40% tax on the rental income (i.e. 2k).

But if you put 5,000 into pension, you are getting 20% relief (1k tax refund). Plus, you've now 'freed up' 5,000 of your lower rate band, so instead of paying 40% on rental income, you only pay 20% (i.e. 1k).

So the net effect of your pension contribution is 20% relief, plus 20% lower tax on the rental income. i.e. the same net effect as getting 40% tax relief on pension.

Does that make more sense?
 

ELO

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It does thanks. For the 2020 return that makes sense because I made the pension contribution as a lump sum and hadn't adjusted credits during the year. Will it work for the 2021 return if I've adjusted my tax credits and already gotten the tax relief if you know what I mean? That's where I probably need to look at form 11 as I'm not sure what info I need to put in. I assumed that if I've already gotten the tax relief then the contributions wouldn't form part of the return but maybe that's not the case.
 

Sunshine39

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17
This is very interesting, my situation very similar to op. We used the approach outlined by RedOnion in our 2020 tax return but via an AVC to the higher earners pension as the limit hadn’t been reached. I assumed that was better as we’d get 40% rather than 20% relief but I’m not so sure based on the point that not all income in retirement should be in the higher income earners name, which I hadn’t considered. Is it better to top up contributions via AVCs to the higher income earners pension only if the lower income earners pension is fully funded?
I’m no expert (clearly ) but when you complete your 2021 form 11 ELO, the overall position is assessed / calculated and balanced out so it shouldn’t matter that you claimed relief each month.
Sorry for hi-jacking your post!
 

ELO

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5
No problem Sunshine, I'm open to all discussion around this as I'm far from an expert myself! That makes sense to have income and contributions in both names as you can't transfer all of your standard rate cut-off when in receipt of pension. Good to hear that all prsa contributions will be included to balance out our tax liability and we'll get the 40% relief. For some reason I thought it was assessed differently. I just have to find an hour now to input the figures and work it out.
 
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