Netting Rental Tax Due via AVC

D

DublinHead54

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Hi all,

I have never used AVCs and whilst I understand the premise I don't understand how they work in practice. I am a PAYE worker, and my company offers either a lumpsum AVC or a monthly AVC. My question is that if I do it through payroll is the tax deducted at source such that my net monthly tax bill reduces or does it simply accumulate as a tax credit?

I have a rental tax income liability of ~4k per year and I understand that I can't reduce the tax due via AVCs, however, if I made AVC contributions of 10k per year resulting in 4k tax relief and thus make tax due at the end of the year 0? Does that make sense?

My logic is that the AVC is somewhat free money via reducing taxable PAYE income so I should avail of that to net down my overall tax bill rather than looking first at reducing mortgage on the rental property given that I do need to up my pension a bit as it is behind schedule.
 
People get overly confused by this stuff.

You can only offset pension contributions against employed or self-employed income.

If you do it through payroll, you get the relief at source.

But lots of people don’t do that, and when they’re submitting their tax return for the prior year, they say “Ah, I see the tax on my rental income is €4k...I’ll bang €10k into my pension and make that go away!”

And cash-wise, that’s what’s happening, but in reality it’s a €4k tax liability on rental income being offset against a €4k refund due for an AVC against employed/self-employed income.
 
Gordon Gekko said:
People get overly confused by this stuff.

You can only offset pension contributions against employed or self-employed income.

If you do it through payroll, you get the relief at source.

But lots of people don’t do that, and when they’re submitting their tax return for the prior year, they say “Ah, I see the tax on my rental income is €4k...I’ll bang €10k into my pension and make that go away!”

And cash-wise, that’s what’s happening, but in reality it’s a €4k tax liability on rental income being offset against a €4k refund due for an AVC against employed/self-employed income.
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I agree and I used the term 'reduce' when drafting the post and subsequently changed it to 'netting'. The 4k rental tax bill remains the same, I am just creating an offset tax refund by AVC.

I think it makes sense rather than focusing on reducing the mortgage whilst I have some surplus cash.
 
What rate is the mortgage at?

Even if it’s high, because of the tax deduction for mortgage interest, you’re plan probably makes sense.
 
Gordon Gekko said:
What rate is the mortgage at?

Even if it’s high, because of the tax deduction for mortgage interest, you’re plan probably makes sense.
Click to expand...

It is 2.6%, my thinking is that I need to up my pension (Only started 2 years ago), I have some excess cash to make AVCs over the next 5 years. It appears logical to take the tax relief via AVC and maximize the time the pension pot can grow. Rather than directing excess cash to mortgage as it will not make a massive difference given it would be reducing the deductible mortgage insurance.
 
Yes, you should maximise your AVCs.

However, I think it’s best to do it through payroll.

Personally I find it easier that way, as you just think that your net monthly pay is the after-AVC amount.

Versus writing big lumpy cheques which can be painful.

You want your AVC to become something like your home mortgage or a bill that just becomes second nature.
 
Gordon Gekko said:
Yes, you should maximise your AVCs.

However, I think it’s best to do it through payroll.

Personally I find it easier that way, as you just think that your net monthly pay is the after-AVC amount.

Versus writing big lumpy cheques which can be painful.

You want your AVC to become something like your home mortgage or a bill that just becomes second nature.
Click to expand...

If I do it monthly how would the play out come the end of the year? Would I see a tax bill on rental income of 4k, but a tax credit of 4k from the monthly AVC? or does the tax relief amount flow into my net pay and aggregate? I have somewhat confused myself.
 
Dublinbay12 said:
If I do it monthly how would the play out come the end of the year? Would I see a tax bill on rental income of 4k, but a tax credit of 4k from the monthly AVC? or does the tax relief amount flow into my net pay and aggregate? I have somewhat confused myself.
Click to expand...
You will see it through payroll. If you are paying tax at the 40% then add 1k per month to the pension and your monthly net pay will reduce by only 600. You will still need to 'hand over' the 4k to revenue in October for your rental income.
 
I do think you’re confusing yourself.

Your choice today is whether to write a cheque for €4k in November to cover your tax, or one for €10k into your pension.

Or to still write a cheque for €4k in November and do €10k of AVCs through payroll where you’ll see your monthly pay drop by €500 (i.e. €6k x 12).

In both instances, a €10k cash outlay gets you €10k in your pension plus your €4k tax bill paid.
 
Thanks all!

Somehow the writing the cheque at year end for the AVC feels like a cleaner solution not sure why!
 
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