Borrow for AVC to reduce tax bill?

T

Thomas1

Registered User
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Hi Guys

Last year I had a tax bill for an investment property of c. €8k. Instead of paying the tax, I made a €20k contribution to an AVC thus reducing the tax due to €0. I am PAYE primarily but self assess for the rental property.

I'll be in the same situation this year but won't have the €20k saved by October so will need to borrow if I want to contribute €20k to my AVC again.

What do people think of borrowing to make the contribution? My thoughts are:
  • Basically I'm borrowing to invest in equities which, in principle, sounds bananas. However, I am (in effect) getting a return of 66% on the funds on Day 1 i.e. the €20k investment is costing me €12k as I would otherwise have an €8k tax bill which is cash never to be recovered
  • I'm worried the government is going to reduce the 40% tax relief in the coming years so should I not try and benefit as much as possible now?
  • I'll be clearing the loan within 6 months from cash flow so it is not a long term liability
For information purposes, I am in my 30s and the €20k will be nearing the maximum I can contribute to my pension with the tax relief.

Many thanks for any thoughts you may have.

Thanks
Tom
 
It may turn into a perpetual cycle of debt to pay your tax bill and make a pension contribution. You are using money to pay off last years borrowings, so can't save for this years tax bill.

I would try to get yourself in a situation where you don't have to borrow to pay your tax bill. If that means a year of paying €8,000 tax and no pension, so be it. Having control of your finances and not having to borrow to pay tax is better in the long term.


Steven
www.bluewaterfp.ie
 
The nature of pension schemes is that most people do borrow to invest in equities!

If you contribute to a pension while you have a mortgage, you are effectively, borrowing to invest in equities.

Most people have no problem with this, although my minority opinion is that you should clear your mortgage first unless you are in your 40s and there is a danger that you will run out of tax relief. Or if you are on a cheap tracker, you should not clear it.

So it depends on what rate you are borrowing at and how quickly you pay back the loan. Given that you will be clearing the loan over 6 months, which means that you have it for an average of 3 months, I don't see a problem with this assuming the interest rate is about 6%.

I am assuming you have no other loans apart from your mortgage?

Brendan
 
@steven, I had considered the perpetual cycle you mention but I'm expecting an income increase next year which would prevent this happening again.
The thoughts of 'burning' the €8k aren't sitting well either.

@Brendan, I have a homeloan (3%) and the investment property mortgage (tracker) so I suppose I am turning down a 5% guaranteed gross return (by not clearing my PDH mortgage) to avail of the tax relief. I have no other debt.

Thanks for your help guys, I was just making sure I had it reasonably correct in my head.

Regards
Tom
 
Thomas1 said:
I have a homeloan (3%) and the investment property mortgage (tracker) so I suppose I am turning down a 5% guaranteed gross return (by not clearing my PDH mortgage)
Click to expand...

You are turning down a 5% return but you are getting the tax benefits of pensions.

Brendan
 
There is a false economy OP thinking you are not paying tax
The pension contribution is reduced by 40%
So if say you didn't have the tax bill you would be putting 20k into your pension
Instead you are : paying your tax bill and putting 12k into your pension
 
moneymakeover said:
There is a false economy OP thinking you are not paying tax
The pension contribution is reduced by 40%
So if say you didn't have the tax bill you would be putting 20k into your pension
Instead you are : paying your tax bill and putting 12k into your pension
Click to expand...

I'm not sure what you mean moneymakeover? I (or anyone on the higher rate) is getting the benefit of 20k into a pension rather than paying 8k tax which would be lost forever.
 
moneymakeover said:
But you're only getting 12k into pension

And it's costing you 20k
Click to expand...
No, the other way around.

He's putting 20k into pension, which gives him an 8k tax refund, that he nets against his 8k tax liability.

It's no different to having a salary deduction made for pension contributions, just he's looking at his PAYE and rental income as 2 distinct things.

So the question is should anyone borrow money to get their maximum tax relief from pension contributions.
 
Correct he takes 20k of gross incone

Requests to put it into pension

Generates 8k in tax relief

Uses the 8k against tax bill on rental income

Thereby only 12k goes into pension

There is no magic way of avoiding the tax
 
I think you have it a bit wrong moneymakeover, the gross 20k goes into the pension and the 8k relief zeros the tax bill. I’m still left with the full 20k in the pension.

Update: you may be trying to say that I’m sourcing the 20k from my after tax PAYE income which would be correct but I am still avoiding the 8k rental income tax liability.
 
Not wishing to burst any bubbles, but under Revenue rules you cannot borrow funds to invest in an AVC.
 
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