Using AVC to reduce Rental Tax Liability - Is it Possible?

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Rebelrebel

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Hi All,

Looking for some advice. My wife and I have a rental property which we started to rent out last year for 2 months. We hired a book keeper to file our tax return this Oct which was a liability of approx a couple of hundred euro and we paid the same in preliminary tax for 2017 liability. Next year however we expect our tax bill for 2017 to be considerably more as we will have rented for the full year and are on a tracker rate so the tax bill may be 6-7k and we will have to pay 90% of that in preliminary tax for 2018 also.

My question is if we have a tax liability next Oct of 7k, is there any way we can reduce this tax liability by us each making a one off AVC totalling, for example, 14k. This 14K would be under the Max tax relief threshold for AVCs as we are not currently maxing out our contributions.

Is that allowed and will it reduce our rental tax liability and if as a consequence our Tax liability is reduced then our preliminary tax for the following year would only be 90% of this new tax liability amount? Is that correct?

Thanks.
 
You can make pension contribution based on your earned income so if you have room based on that then you can make a contribution and get the benefit of that contribution in your Form 11.

You can't make a pension contribution based on rental income.
 
Joe_90 said:
You can make pension contribution based on your earned income so if you have room based on that then you can make a contribution and get the benefit of that contribution in your Form 11.

You can't make a pension contribution based on rental income.
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Thanks for the reply. Apologies if I'm not quite understanding this. So I can increase my AVCs to the maximum on my PAYE earnings, but I will still have to pay the full Tax amount on the rental income. Is that correct? So if I was to do what I suggest in my first post and make an AVC of 14k, I would still have to pay my rental tax liability of 7k plus the preliminary tax for the current year also?
 
AVC’s must be related to employment income. Rental income is not deemed as “earned income”. So you cannot invest AVC specifically out of rental income, but obviously if you do so out of your employment income (assuming you have an attaching occupational pension), the net effect is the same.
 
As far as I understand the process it's as follows (figures are averaged up for ease):

a. Rental income of (say) 10,000, from which after deductions you expect to pay €4,000 in tax.
b. You make a lump sum AVC Payment of €8,000.
c. The AVC payment attracts a tax credit of €4,000.
d. €4,000 tax credit - €4,000 tax due = 0 tax to be paid.
 
You can make a pension contribution from any money you have (your money has no idea if it was earned from an employment or an investment) - but the tax relief is based on your earned income only, and there are limits on the total amount you can invest in a pension fund.

Limitations on AVCs
There are a number of limitations on AVCs:
• Only current active members of occupational pension schemes can contribute to an AVC, i.e. an
employee and current member of their employer’s occupational pension scheme.
• If the consumer leaves employment, he or she has to stop contributing to their AVCs related to that
employment.
• The maximum limit for income tax relief on employee contributions to all occupational pension
schemes of the same employment includes AVCs.
The benefits provided under the employer’s occupational pension scheme and under the AVC cannot
in total exceed the normal maximum Revenue approvable benefits for that individual.
If the combination of both scheme benefits gives rise to benefits in excess of the maximum Revenue
approvable benefits, then the benefits under the employer’s occupational pension scheme will be
reduced and if this gives rise to a surplus it may be returned to the employer as a taxable trading
receipt.
It is therefore important that individuals do not over contribute to AVCs at a level which may give
rise to total benefits in excess of Revenue maximum approvable benefits as otherwise they could
effectively end up subsidising their employer's contribution to the employer occupational pension
scheme.
• AVC benefits can only be taken at the same time as benefits are taken from the employer’s
occupational pension scheme; there is therefore no access to AVC funds before retirement, apart
from a once off access to 30% of the value of AVC funds for a three year period between 27th March
2013 and 27th March 2016.
 
Rebelrebel said:
Thanks for the reply. Apologies if I'm not quite understanding this. So I can increase my AVCs to the maximum on my PAYE earnings, but I will still have to pay the full Tax amount on the rental income. Is that correct? So if I was to do what I suggest in my first post and make an AVC of 14k, I would still have to pay my rental tax liability of 7k plus the preliminary tax for the current year also?
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Yes, but you are reducing the tax liability on your PAYE income. It has the same effect.


Steven
www.bluewaterfp.ie
 
SBarrett said:
Yes, but you are reducing the tax liability on your PAYE income. It has the same effect.


Steven
www.bluewaterfp.ie
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Thanks for the replies everyone.

So Steven, In that case I would be just as well off upping my monthly AVC to the maximum tax relief threshold, assuming I can afford to, rather than making a one-off AVC in Oct? Or it amounts to the same thing really? Thanks again.
 
SBarrett said:
Whichever works best for your cashflow. The tax benefits are the same whether you pay monthly or annual lump sum.


Steven
www.bluewaterfp.ie
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Excellent thanks. I think this gets to the point for me as from a cash flow perspective it probably makes more sense to make a lump sum AVC in Oct once I know my rental Tax liability.
 
You can't 'transfer' the rental income to a non-earning spouse.

You can however use AVCs to set against the tax payable on the rental income.

Very rough figures here: say your tax due on rental income is €5k, you can make an AVC to your pension of €10k and thus have no rental income tax.
 
Thirsty said:
You can however use AVCs to set against the tax payable on the rental income.

Very rough figures here: say your tax due on rental income is €5k, you can make an AVC to your pension of €10k and thus have no rental income tax.
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No you can't.
 
Thirsty said:
Funny how I've done that for the last five years, isn't it?
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No you haven't.
You may think you have. You're getting the tax relief based on your non rental income. Rental income is not allowed for pension tax relief.
 
Neither you nor I are providing free tax advice.

Nor does any sensible person propose that an individual take action based solely on what they read online.

It is up to the OP (and any reader) to take what is posted here as use it as a guide.

Again, what I have stated is not incorrect; it is not illegal and perfectly do-able.
 
It's already been discussed and disproved

Rental income tax has to be paid.

Tax relief can be obtained on pension contributions.

However one does not offset the other.

If you are making pension contributions and submitting rental income you just get less pension contributions than you would get if you didn't have rental income.
 
moneymakeover said:
If you are making pension contributions and submitting rental income you just get less pension contributions than you would get if you didn't have rental income.
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Sorry, that statement is even more misleading.

I've linked to another thread where it's fully discussed.
 
Both cases below I'm assuming PAYE worker paying high rate of income tax.

Example 1
No rental income
Contribute 10k from savings to pension
Say high rate tax 40%
Actual contribution 10/.6 = 16.67k into pension

Example 2
Rental income
Next year I do the same but this time I have 6.67k in rental profit. What happens?

Declare 6.67k rental profit
Contribute 10k lump sum from savings as before
Revenue calculates I have tax relief of 6.67k and reduces tax bill.
Actual contribution will be: 10k into pension this time.

I think I saved paying tax but really no gain. Because now I have contributed less to my pension than previous year.
 
moneymakeover said:
Both cases below I'm assuming PAYE worker paying high rate of income tax.

Example 1
No rental income
Contribute 10k from savings to pension
Say high rate tax 40%
Actual contribution 10/.6 = 16.67k into pension

Example 2
Rental income
Next year I do the same but this time I have 6.67k in rental profit. What happens?

Declare 6.67k rental profit
Contribute 10k lump sum from savings as before
Revenue calculates I have tax relief of 6.67k and reduces tax bill.
Actual contribution will be: 10k into pension this time.

I think I saved paying tax but really no gain. Because now I have contributed less to my pension than previous year.
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With respect, I'm an accountant, and your post makes absolutely no sense to me.

If you've the same amount of PAYE income in each case, and contribute the same amount to your pension, then the tax relief is exactly the same.

Making a statement to the effect that having rental income reduces the amount you can contribute to a pension is one if the most absurd things I've seen posted here.
 
Why do people insist on overcomplicating this?

- Rental income is not pensionable
- However, one pays tax on 2019 rental income via the 2019 income tax return which is submitted on or before 31 October 2020
- That is also the mechanism for claiming tax relief on an AVC or pension contribution in respect of 2019 employment or self-employed income
- So what some people do is make the level of AVC required in order to eliminate the tax liability which arises on the rental income
- It’s purely a cashflow/conceptual point; they are not ‘making a pension contribution against rental income’; there are two distinct things happening, i.e. income tax on rent to be paid and tax relief on a pension contribution in respect of salary/earnings which can be netted off against each other from a cashflow/payment perspective
 
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