Reduce Income Tax Bill Via Pension Contributions – Business Owners 2023
Reduce Income Tax Bill Via Pension Contributions - Business Owners 2023
Don’t miss your income tax deadline
If you pay and submit your tax returns through the Revenue Online Service (ROS), you have the option to make a pension contribution and request income tax relief for the 2022 tax year until 15th November 2023.
If you don’t meet the requirements for the ROS extension, the deadline for this action is 31st October 2023.
To prevent interest and additional charges by 31st October / 15th November, you must:
- File your 2022 income tax return
- Pay any balance of income tax outstanding for 2022
- Pay preliminary income tax for 2023
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What is preliminary tax?
Preliminary tax is a system used to make advance payments towards your annual income tax liability.
It is a way for self-employed individuals, business owners, and those with income not subject to Pay As You Earn (PAYE) withholding to ensure that they meet their income tax obligations throughout the tax year.
Do I need to pay preliminary tax?
Whether or not you need to pay preliminary tax depends on your specific tax situation and the tax regulations.
Preliminary tax is typically associated with income taxes in Ireland, and it is an estimate of the income tax you’ll owe for the current tax year.
If you are self-employed or have income that is not subject to PAYE, you may be required to pay preliminary tax. This is to ensure that you are making regular payments towards your annual income tax liability.
This will allow you to calculate and pay your preliminary tax for this year at a reduced amount.
Who needs to do a self-assessment tax return?
You are required to submit a self-assessment tax return if you fall into the following categories:
- Self-Employed
- Proprietary directors holding over 15% ownership in a company
- Those receiving non-PAYE income (e.g. profits from rents, investment income, foreign income)
- Members of company pension schemes making Additional Voluntary Contributions (AVCs) and seeking to retroactively apply income tax relief to 2022
Self-Employed and Directors
Claiming Income tax relief on personal pension or PRSA contributions
To qualify for income tax relief on contributions to a personal pension, or PRSA, you must meet the condition of being “chargeable to tax in respect of relevant earnings.”
Relevant earnings refer to the income of individuals falling into the following categories:
Self-employed: This includes income from a trade or profession that is subject to taxation under Schedule D, Case I or II.
Directors of companies: Directors who are categorised under Schedule E, subject to PAYE deductions, and not part of a company pension scheme also qualify.
What are relevant earnings?
Net relevant earnings include relevant earnings minus deductions from income, such as covenant payments, tax-deductible maintenance payments, and allowable interest. As well as any losses or capital allowances linked to the individual’s relevant earnings.
Income that does not qualify as relevant earnings includes:
- Income received from pensions (annuity income) or payments from an Approved Retirement Fund (ARF) or vested PRSA.
- Earnings obtained from an investment company where the client has direct or indirect control of more than 20% of the company.
- Income from being a sleeping partner.
- Investment income (e.g., rental income).
- The income of one’s spouse, as it is not permissible to establish a pension using your spouse’s income.
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What are the pension tax relief limits for my contributions?
For contributions made in 2023 but allocated against 2022 earnings, a cap of €115,000 on earnings is in place for tax relief considerations regarding total contributions.
This applies to contributions made to PRSAs, personal pensions, and employee/AVC contributions to company pension schemes.
Note:
- When backdating contributions to 2022, employer PRSA contributions are counted within the specified limits mentioned above. The adjustment that excludes employer PRSA contributions only took effect from January 1, 2023.
- The earnings cap does not affect employer company pension contributions.
- In the case of company pension schemes, the combined contributions (employer, employee, and AVC) must adhere to the overall maximum limits set by the Revenue.
- You can optimise your tax planning by making a pension contribution before this year’s tax deadline and minimising the taxes you owe for the previous year.
How to submit tax returns using ROS
Some people choose to use the Revenue Online Service (ROS) system to file their taxes.
This includes calculating your own taxes online and looking to get tax back for things like personal pensions, PRSAs, AVC contributions, and other special tax breaks like those for artists or woodlands.
Make sure you are registered for ROS so you can claim all tax reliefs that you’re entitled to.
Your accountant may help you with this. Of course, we can advise on any insurances such as income protection or key person insurance, pensions, and what tax relief you can gain on these.
Self-employed
If you’re claiming tax relief on pension contributions using Form 11, you may need to upload a pension certificate or pension contribution details form.
This can be a Word or PDF file with the following information:
- Date of pension contribution payment
- Total amount paid
- Type of contract to which the contribution was made
- Policy or scheme number
- Name of the insurance company or pension provider
- Name and address of the customer
- Confirmation that tax relief has not already been granted for the contribution through payroll deductions
If you choose not to upload a pension certificate or pension contribution details form, it is advisable to keep your pension certificate on hand in case Revenue requests it during a future audit.
For more information, see the Revenue website.
Why True Wealth?
True Wealth is your trusted partner on the journey to optimising your income tax strategy as a business owner in Ireland.
We offer tailored solutions that empower you to make informed decisions about your income tax position.
With our guidance, you can maximise your pension contributions, benefiting from valuable tax relief that can significantly enhance your financial well-being in the long run.
We are also experts in personal and business protection, savings and investments, pension tracing, personal and business financial planning, mortgages, and wealth extraction.
Get in touch today!
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All our content has been written or overseen by a qualified financial advisor. However, you should always seek individual financial advice for your unique circumstances.
