Does this add up: Pension lump sum to offset Tax bill

Hello,

For my 2018 tax return, my accountant says I owe 9.5k in Tax - largely from an investment property. I am PAYE otherwise. I wish to make a lump sum deposit to my pension to help reduce my tax payable. If I make a 15k deposit my tax liability will be 0 according to the accountant.

My pension administrator says I can make a deposit before Oct 31 and that I have scope to make a maximum deposit of 18k.

Is this too good to be true? Are there any negatives that anyone can think of or pitfalls etc for 2019 and future tax returns?

Many thanks!
Mboy

Mammysboy said:

Hello,

For my 2018 tax return, my accountant says I owe 9.5k in Tax - largely from an investment property. I am PAYE otherwise. I wish to make a lump sum deposit to my pension to help reduce my tax payable. If I make a 15k deposit my tax liability will be 0 according to the accountant.

My pension administrator says I can make a deposit before Oct 31 and that I have scope to make a maximum deposit of 18k.

Is this too good to be true? Are there any negatives that anyone can think of or pitfalls etc for 2019 and future tax returns?

Many thanks!
Mboy

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Surely your tax accountant is in the know? You employed him for advice.

Leper said:

Surely your tax accountant is in the know? You employed him for advice.

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I'd like to get a second opinion here. My accountant is of the type that does simple tax returns and does not really provide a lot of advice. Getting feedback here will educate me any what specifics I may be able to ask my accountant and pension administrator.

Mammysboy said:

I'd like to get a second opinion here. My accountant is of the type that does simple tax returns and does not really provide a lot of advice. Getting feedback here will educate me any what specifics I may be able to ask my accountant and pension administrator.

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Fair enough.
Regards
Lep

You can write off the pension against the other using AVC but I think you would still need to pay tax as 40% relief on 15k is 6k. You cannot write off PRSI or USC either so I don't know how you could have a 0 liability but I am a pure lay person in this and no expert.

There is not a silver bullet here

If you make 15k pension contribution it costs you 7k

The 8k you then use on your tax liability

You pay the bill either way

You invest your 18k you get back 7k. So you have a pension contribution of 18k that only cost you 11k. Check the limits based on your age and earned income.

You can make pension contributions to offset your tax bill but the maximum contribution that you can make in any one year for tax relief purposes, is related to your age and calculated as a percentage of your gross income. The maximum gross income figure for relief purposes is €115,000. The maximum tax relief you can receive as a % of your earnings is:
< 30 = 15 %
30-39 = 20%
40-49 = 25%
50-54 = 30%
55-59 = 35%
>60 = 40%

The gross income figure that you can use to calculate this figure is known as net relevant earnings i.e income from Sch E employment (PAYE) or from Sch D Case I or II ( self emp trade or profession).

Rental income does not fall under the heading of net relevant earnings.

If you are receiving PAYE income & private rental income (separate to PAYE employment) only the gross PAYE income can be used to calculate the tax relief allowed for pension purposes.

Apologies you don’t mention whether you are already making pension contributions or whether your employer is making pension contributions in relation to your PAYE income. Either of these will determine the type of pension contribution you need to make.

Mammysboy said:

For my 2018 tax return, my accountant says I owe 9.5k in Tax - largely from an investment property. I am PAYE otherwise. I wish to make a lump sum deposit to my pension to help reduce my tax payable. If I make a 15k deposit my tax liability will be 0 according to the accountant.

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To reduce your tax liability from €9.5k to zero you would need to reduce your taxable income by €23,750, (that is €9,500 / 0.4). There may be some other aspects to the calculation but it is difficult to see where the €15k is coming from.

You cannot get tax relief for a pension contribution on rental earnings so you would have to have sufficient taxable income from the PAYE job, and not already be using it for existing pension contributions.

Mammysboy said:

My pension administrator says I can make a deposit before Oct 31 and that I have scope to make a maximum deposit of 18k.

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This is not something a pension administrator would have direct knowledge of. This may well be the answer to a different question.