October is traditionally a busy month in pensions. People filing their tax returns under the self-assessment system – where they must pay the balance of last year's tax bill plus their preliminary tax for 2009 – attempt to reduce their burden by availing of the generous tax relief on pensions. This year, making a pension contribution is more crucial than ever because the government has already moved to curtail reliefs that are perceived to benefit higher earners.
Under the current system, you can claim back tax relief on your pension at your marginal rate, so if you are paying tax at 41%, you can claim that back as well as PRSI and the levies. The relief is subject to thresholds based on age, with an income cap attached. Those under 30 can claim pension relief on contributions of up to 15% of their salary and the relief graduates upwards so that the over-60s can claim relief on contributions up to 40% of salary. The gradual increase takes into account the fact that, the closer you are to retirement, the more important it is that you maximise your pension pot.
To avoid a situation where the very rich abuse the relief available on pensions, an income cap applies. That limit for 2008 is €275,239 so the maximum contribution that qualifies for tax relief would be just over €110,000. However, the government has opted to reduce that cap for 2009 to €150,000 with €60,000 the maximum qualifying for relief.
Jim Connolly, head of pensions at Standard Life, says that business has remained stable this year with people basing their pension contributions on 2008's higher incomes while acting in anticipation of the reduced cap and further government moves on pensions.
"They are trying to capitalise on the last opportunity they are going to have to shelter such a vast amount of money in a personal pension in one fell swoop. You can put as much as you want into a personal pension but you are only going to get tax relief on a certain amount so if you have the capacity to do it, now is the last bite of that cherry. The Commission on Taxation and all the recent government guidance has been to restrict the reliefs available to higher earners, so they should recognise that that window is closing," he said.
The commission proposed that tax relief on pensions be replaced by a direct state contribution of €1 for every €1.60 contributed, effectively creating a uniform rate of relief of 38.5% for all tax payers regardless of their tax bracket. Fionan O'Sullivan, director with IFG Corporate Pensions, predicts that the government will move to close other "gaps" in pension legislation in the near future.
"These impending changes make now the optimum time to invest in a pension to ensure that people receive their current relief entitlements and save for the future in the most tax-efficient manner," he said.
It is not just the self-employed who can benefit: PAYE workers can also avail of the tax break by making additional voluntary contributions to their occupational scheme where permitted or by setting up a PRSA. As with the self-employed, the level of relief available will depend on age and the income cap.
Business Expansion Scheme
Although it does provide an opportunity for higher earners to reduce their tax burden significantly, the Business Expansion Scheme (BES) largely escaped the wrath of the commission. Around since the mid-1980s, BES allows you to invest up to €150,000 in a Revenue-approved scheme and it can be offset against income in the year of investment, with relief available at your marginal rate. It is one of the few remaining tax-efficient investments left for individuals following the collapse of the property market, said Emer Kirk, corporate account manager with the Independent Trustee Company.
"BES legislation is currently more attractive than it has ever been to investors, with tax relief available against all income. As the term of the BES investment is usually five to six years – a minimum of five years applies – it offers tax relief within the individual's working life. While the tax relief element offers BES greater protection from loss than practically any other investment on the market, smart investors will always look to diversify to spread the risk. A BES fund can facilitate this," she said.
It could be argued that BES is an unfair tax break available only to the very rich but the commission concluded that it plays an important role in the small and medium enterprise sector and actually recommended simplifying it to reduce the administrative burden on companies seeking to benefit from the scheme.
A whole range of available tax reliefs go unclaimed because people either are not aware that they exist or, probably more likely, they just don't get around to claiming them. However, with the exchequer putting the squeeze on taxpayers through the various levies and stealth taxes, now is not the time to be demure about your entitlements. A wide range of reliefs is available on everything from rent and tuition fees to charitable donations. See www.revenue.ie for more details.
Medical expenses relief covers most of the expenses you might incur if you're ill but is one of the areas often overlooked by taxpayers, says Brendan King, a higher executive officer with the Revenue.
"Health expenses are something that people do tend to forget about. You need to make sure that if there are health expenses incurred in the year, you claim it on your tax form. It seems to be one that people forget, possibly with the pressure of getting their accounts together for self-assessment, but they should be adding all those bills together and claiming tax relief on them," he said.
Don't assume that the revenue commissioners are aware of your personal circumstances. Each year is treated separately so if you have been paying a trade union subscription for five years, you still need to make them aware of this so they can apply the relevant deduction. They certainly won't be going out of their way to do it for you.