Tax Relief For Self Employed
The scariest time of the year is sneaking up on us yet again just like a blood-thirsty vampire.
No, not Halloween – it’s the simultaneous October 31st deadline for the self-employed to file their tax returns.
However, there are ways to ease the pain: tuck money away in a pension fund. Investing in a pension is a great way to save tax. Here’s why. If you’re on the higher tax rate, you save 40 percent of your contributions. Yep, you read that right.
Every €200 you put in your pension can cost only €120. That’s a whole lot of savings.! And who doesn’t love savings. Let’s say you’re lucky enough to earn €100,000 a year, and you put €20,000 into your pension. Your net earnings for tax purposes would reduce to €80,000. This would save the 40 percent tax you would have paid on the €20,000 – i.e. €8,000. And so, a €20,000 contribution costs €12,000 net.
The self-employed can also use pension contributions to smooth out the tax burden caused by an uneven income stream. In particularly lucrative years, put more into a pension to bring down a hefty tax bill.
The more you earn, the more you can contribute and benefit from tax relief.
It’s tempting to pay the minimal amount to your pension – there are so many more appealing ways to spend an excess €100, especially after a long week.
But the most common mistake people make is to under-save for their pension. Even if you start saving at 20, putting 2-3 percent of your income into a pension isn’t enough.
You need at least 10 percent to build up to a decent nest egg for retirement, even if you start at 20 – and many times more than that if you leave it extremely late
So, what are those PRSAs all about? It’s basically a contract between you and the provider. The value of the final benefits depends on the amount you pay in and the investment return achieved before you retire – less any fees and charges, of course.
This is also called a portable pension. It’s a private pension fund you can take with you wherever you go, whether self-employed or even from job to job
There are two types of PRSAs – standard and non-standard.
You can choose the type of investment you want to make depending on your attitude to risk, which is something we will take you through in the form of a risk assessment before you decide anything.
You can contribute as much as you like to your PRSA, as long as you meet the minimum contribution levels, which can range from €10 a month upwards.
A nice feature for the self-employed is the element of flexibility, which can come in handy when times are tough, just as it is when you’re in the black.
You don’t have to make regular contributions to your PRSA. But most providers set up your account to be paid monthly, quarterly, half-yearly and yearly.
There’s even flexibility about when you can make payments to avail of more tax relief in a particularly good year.
You can still pay a once-off special pension contribution after the end of a tax year – as long as it’s before the following 31st of October, according to Revenue.ie.
“If you do, you can choose, on or before 31st of October, to have the tax relief for the contributions allowed in the earlier tax year,” the Revenue advises. Good to know.
If you use Revenue Online Service (ROS), the deadlines for making contributions are also extended until Nov 14 2020
So, there you have it: tax advice for the self-employed!
Why not book your free 15 min call to plan for your retirement .