MANY readers will agree that Ireland has a pretty high rate of income tax, but most don’t realise just how much it affects them.
It is the largest expenditure that most of us will have each year. Take someone earning €55,000 per annum. They will pay €15,890 between income tax, USC and PRSI, amounting to 29% of their gross income for the year.
But there is more. You will also contribute to the state coffers through VAT, property tax, CGT and DIRT. But death and taxes are unavoidable, right? Yes, but several reliefs are underused by the public.
For many, it is a case of being unaware or unsure of the opportunities available to them. To be fair, Einstein said, “The hardest thing in the world to understand is income tax” but leave the theoretical physics to him and I’ll look after the financial advice.
This week, I will lay out a couple of ways in which you can reduce the amount of tax you pay each year.
We all know that we should be planning for our future by contributing to our pensions, but many don’t realise that it is also an excellent way to reduce our tax liabilities.
In Ireland, there are two income tax bands; those earning up to €34,550 will pay 20% income tax; people earning more than this will pay tax at the higher rate of 40%.
But if I pay the higher rate of tax and I contribute €10,000 to my pension, it will only cost me €6,000 to do this and Pascal Donohue will pick up the tab for the balance of €4,000.
Another available relief is to claim back tax on health costs that we have incurred during the year. Every time you spend money on doctors, prescriptions, operations or a host of other regular health expenses, you should be claiming relief at the rate of 20% on these costs.
A great way to track this is to download the revenue app to your phone. Log into the myaccount section when you visit the doctor or dentist and log your expenses as you go.
If you are paying €50 per visit you will get €10 back each time.
Entrepreneurial Investor Incentive Scheme (E.I.I.S)
E.I.I.S. is a revenue approved scheme that allows Irish investors to receive tax relief on certain investments.
In my opinion, this can be one of the best ways to reduce your tax and get a good return on investment over a relatively short period of time. Let’s say that you invest money in a selected company in year one.
For high rate tax payers, EIIS will allow you to receive 30% of the value of your investment back from revenue in year one.
In year four, you receive the initial value of your investment back. Finally, in year five you receive a further 10%, which added to you 30% in year one, gives your 40% tax relief.
You have then made a return of 40% tax free.
Take the example of a €10,000 investment
Initial investment (€10,000)
Year 1 tax relief @30% €3,000
Year 4 Investment Returned €10,000
Year 5 tax relief @10% €1,000
Total Return €14,000 tax free
As you can see, this can be a little complicated, and it is important to note that it is only as good as the company that you are invested in.
That is why using a good financial planner is a crucial step to making the most of E.I.I.S and reducing your overall tax liability.
Pension Term Assurance
Another lesser used relief is pension term assurance. This is a product that allows you to receive income tax relief on your life cover.
Pension term assurance is available for the self-employed or for PAYE workers who do not have an occupational pension scheme available to them through work.
Pension term assurance is a great way to save 40% on the premiums payable on your life cover. Unfortunately, many of us are not aware of the benefits of pension term assurance and as a result, this relief is underused.
It is a great way to ensure that you have good cover in place for your family at the best prices.
There are many more reliefs available to us and I will revisit this topic in future editions.
Next week, I will be writing about pension benefits you may have in the UK and what options are available to you regarding these benefits going forward.
For anyone interested in knowing more, I am here to answer all your questions. If there is something I can help you with, please get in touch.
Where an opinion is expressed, it is the personal opinion of the author only and not of the paper.