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Claim tax back and take care of your retirement this tax season

Let’s face it, no one likes to pay tax, so any tax back offer from the Revenue is well a look, particularly when it relates to saving for your retirement.

With the retirement age now set to increase to 68 in 2039[1], having enough in your pension pot to support the type of retirement lifestyle you want, when you want it, is now more important than ever.

That’s why making a lump sum contribution to your pension plan before the deadline of 31 October makes sense; not only does your retirement fund receive a boost, but you could end up with up to 40% tax back on your contribution.

Your top-up needs to be made by 31 October 2021 to claim the tax back for the 2020 tax year, or if you use the Revenue Online Service (ROS) to both file your tax returns and pay your taxes you have until 17 November 2021 to file and pay for 2020.

There are a number of options for employees, the self-employed and for company directors when it comes to making an AVC. Let’s explore them in a little more detail.

Tax back for employees

If you are an employee, you can personally make a lump sum contribution to a personal pension plan, PRSA or PRSA AVC, depending on your circumstances, by 31 October 2021 and backdating the tax relief to 2020.

If you are in pensionable employment (where you are a member of an occupational or statutory pension scheme), you can make contributions to a Group Additional Voluntary Contribution (AVC) arrangement or to a PRSA AVC plan.

If you are not in pensionable employment (your employer is contributing to a PRSA arrangement on your behalf), you can make contributions to a Personal Pension plan or a PRSA plan.

Depending on the rate of tax you pay for 2020, you can claim tax back at the same rate on the lump sum amount contributed to your pension (up to 40%).

Tax back for the self-employed

Self-employed people are required by law to calculate and pay their tax liability by 31 October 2021 as it relates to their final tax assessment for 2020 and their Preliminary Tax for 2021.

While the rigours of being self-employed are known to many, it is straightforward for self-employed people to reduce their final tax liability for 2020 and Preliminary Tax for 2021 by making contributions to a Personal Pension plan or to a PRSA plan by 31 October 2021 and backdating the tax relief to 2020.

In fact, making a pension contribution is one of the most tax efficient ways self employed people can save for retirement. Check the example below where John, a 45-year-old self-employed person saved €16,000!

Tax back for Proprietary Directors

Proprietary directors who own or control 15% or more of the shares in a company are required by law to file a self-assessment tax return by 31 October for the previous year. You must also pay the balance of any income tax, PRSI and USC outstanding from the previous year by that date, and review whether you will need to pay Preliminary Tax for 2021.

There are a number of options for directors when it comes to paying a lump sum into a pension plan. If your company does not make contributions on your behalf to an Occupational Pension arrangement you can make contributions to a Personal Pension plan or a PRSA plan. If, however your company does contribute to an occupational arrangement on your behalf, you can make a contribution to a Group Additional Voluntary Contribution (AVC) arrangement or to a PRSA AVC plan.

Your non-PAYE relevant earnings might be able to be contributed to a Personal Pension plan or PRSA plan (check whether Revenue terms apply with regard to dual income arising from concurrent employments).

What else is there to know?

There are a few other things to know about making an AVC.

There is a cap on earnings of €115,000 that applies to contributions. Any pension contributions you made in 2020 are deducted from the maximum tax-allowable contribution calculated based on these limits.

Retirement benefits are also subject to separate Revenue limits.

Finally, age related maximum contributions apply, according to the table below. Your age is that at your birthday in 2020.

How to make an AVC

To take advantage of the AVC you need to make your top-up prior to 31 October 2021. Get in touch with one of our qualified financial advisors who can help you manage the process. Give us a call today on 091 670 123.

[1]  Hosford, Paul. Pension Age to increase to 68 under new plans. Irish Examiner. 8 October, 2021.

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