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Being self-employed in Ireland comes with its challenges and responsibilities, and managing your income tax is one of them.
However, with careful planning and a solid understanding of the tax system, you can implement strategies to legally minimise your tax liability.
In this blog post, we’ll explore some tips to help self-employed individuals in Ireland reduce their income tax burden.
Contribute to a Pension Scheme
One effective strategy to reduce income tax is by contributing to a pension scheme.
By actively participating in a pension plan, you not only secure your financial future but also benefit from immediate tax advantages.
Contributing to a personal pension can provide significant tax relief, as you can potentially enjoy up to a 40% reduction on your contributions.
If you are self-employed, you can claim tax relief on pension contributions, subject to certain limits.
For instance, when you’re 29 years old, there’s a limit of 15% of your total income that can be allocated to your pension fund. This allocation limit incrementally increases as you progress through age groups, reaching its highest point at age 60 and beyond, currently standing at 40% of your salary.
Note that the maximum annual earnings considered for calculating tax relief is €115,000.
Explore our comprehensive retirement planning guide, which provides insights into the importance of having a private pension, how to plan your retirement at different stages of life, and a wealth of information on all aspects of pensions.
Boost your pension funds with AVCs
Additional Voluntary Contributions (AVCs) serve as an extra retirement savings avenue for individuals with established pension plans in Ireland, including occupational pension schemes or personal retirement savings accounts (PRSAs).
These voluntary contributions allow individuals to enhance their pension funds beyond the regular contributions made to their primary pension scheme, offering an additional means to strengthen their future retirement income.
This tax-saving approach is beneficial for higher earners, leading to reduced income tax obligations and enhancing overall financial planning and retirement savings.
Learn more about AVCs and their benefits by reading our article, How Additional Voluntary Contributions (AVCs) Can Supercharge Your Pension Savings.
Move company profits into your pension
A strategic approach to reducing income tax involves channelling company profits into your pension.
Traditional methods of profit extraction, such as dividends or personal asset acquisitions, expose business owners to higher tax burdens, ranging from 30% to 40%, as well as Capital Gains Tax, Capital Acquisitions Tax, and immediate tax liability for directors.
In contrast, transferring profits into your pension plan provides several advantages. These include no Benefit in Kind for the employer, immediate tax deductions, corporation tax relief, and exemptions from employer PRSI, Capital Gains Tax, and Corporation Tax.
Furthermore, pensions experience tax-free growth, and at retirement, a 25% tax-free lump sum is available, with the option to access the pension from the age of 50.
Alternatively, explore our article, “A Guide for Business Owners on Protecting, Extracting, and Growing Wealth in Ireland.“
Get a Tax Efficient Planning Quote
Contribute to an Income Protection Policy
Another effective avenue for reducing income tax is by contributing to an income protection policy.
Payments towards an income protection policy enable self-employed individuals to qualify for tax relief of up to 40%.
In the event of illness or injury preventing you from working, an Income Protection Insurance policy ensures an income, covering up to 75% of your annual salary.
If you’re a self-employed sole trader, you can take out personal income protection, and if you’re an employer, you can provide executive income protection for your directors and key employees. Read our article, Why is Executive Income Protection Vital for Directors and Key Employees?
Claim Business Expenses
You might be able to claim a deduction for your business-related expenses when calculating your company’s profit.
You can claim expenses that are directly linked to operating your business, including:
- Buying goods for resale
- Employee wages
- Rent and bills for your business space
- Operating expenses for vehicles or machines used in your business
- Lease payments for vehicles or machines used in your business
- Accountancy fees
- Interest payments for money borrowed to fund your business
For further information, please visit the Revenue website.
Deduct your advertising expenses
All costs associated with promoting your company fall under the category of business expenses.
Whether you’re investing in advertising on platforms like Google or Instagram, these expenditures can be deducted from your profits before taxation.
Additionally, activities like website development or logo design are also considered part of your business expenses.
Use Capital Gains Tax Exemptions
Capital Gains Tax (CGT) is the tax applied to the profit earned from selling or disposing of an asset.
Take advantage of Capital Gains Tax exemptions where applicable.
For instance, the Retirement Relief scheme provides relief on the disposal of qualifying business assets when retiring, reducing the potential tax liability.
Under typical circumstances, selling a substantial business asset would normally incur a 33% capital gains tax liability.
However, with retirement relief, you might be eligible for a 0% CGT obligation, subject to certain limits and depending on the age of the person selling the asset.
Learn more by reading our article, Tax-Efficient Planning: Retirement Relief in Business Asset Disposals.
Corporate Tax Advantage
Opting to invest through a company is a strategic move that holds the potential to significantly reduce income tax burdens.
For example, exit taxes for businesses stand at a 25% rate, the same rate applicable to future interest income.
This contrasts with the 41% paid by individuals when acquiring most mutual funds.
Discover more by delving into our article on Corporate investments: Can you invest money from your company?
Employ Family Members
Employing your spouse or your children can help reduce the overall tax due on business profits and, at the same time, retain the same income with less tax payable within the family.
For example, you won’t be taxed if you hire a family member and pay up to €8,000 annually from your family business.
It is important to use timesheets, clear job descriptions, and evidence showing the actual work conducted by each individual.
Get a Tax Planning Quote with True Wealth
Unlock the potential for substantial tax savings by obtaining a tax planning quote from True Wealth.
Our expertise lies in crafting strategic tax plans specifically tailored to the needs of the self-employed.
With our guidance, you can explore avenues to reduce your income tax burden, ensuring that you retain more of your hard-earned money.
Additionally, read our article, Corporate Tax Planning: 6 Things Irish Business Owners Should Be Doing Now.
Gain in-depth knowledge by exploring our article, A Guide for Business Owners on Protecting, Extracting, and Growing Wealth in Ireland.
Get a Tax Efficient Planning Quote
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.