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Tax Reductions for the Self Employed in Ireland

The deadline for tax returns is the 31st of October, but before filing your tax there are some important tax breaks that you can benefit from such as pension tax deductions.

If you’re self employed or gain income from non-PAYE sources, you need to be self assessed by ROS. This is where you calculate your owed income tax for the current year yourself, every year. More importantly, because you’re doing it yourself – You can make tax deductions to reduce your tax liabilites.

One of the biggest deductions for your tax bill will be investing in your Personal Pension. If you’d like to learn how or haven’t already got a Pension you can call us free on 1800-828-800, or fill out our enquiry form by clicking here.

Pension Tax Relief is granted up to the highest rate of income tax paid by you. If you pay the marginal rate of income tax, you are granted 40% tax relief on your Pension contributions and if you are a standard rate tax payer, relief at the rate of 20% is granted on gross contributions. There is no PRSI or USB relief available on contributions.

The max relief you can get is based on your earning and age. For example if you are 33 and earning €90,000 per year – You can invest 20% of your salary back into your pension (€18,000). Another example is when you pay per month; If you contribute €100 per month into your pension and pay tax at the marginal rate of 40%, it only costs you €60 as your pension tax relief is €40 (40%).

You do not have to pay tax on any money you place into a personal pension fund (Falling within limits set out below).


Percentage of wage saved based on age

AgeAmount qualified for tax relief
Under 3015% of net earnings
30-3920% of net earnings
40-4925% of net earnings
50-5430% of net earnings
55-5935% of net earnings
60+40% of net earnings
The older you get, the more you can invest.

The maximum net relevant earnings for each person that can be taken into account for tax relief is €115,000. Meaning that any earning over €115,000 won’t be taken into account when calculating your allowable contribution to your Pension. Although, these contibutions that exceed the limit for the year can be carried forward into the following year. The max contibution age is 75 years old.


Retirement Options

There are several options when retiring, most people generally choose to take their pension tax-free lump sum. The remaining balance of the Pension fund must be then used to purchase an annuity or invest in an ARF. If your Pension fund will not provide at least €12,700 p/a for life or not reached age 75 – the lower. of €63,500 or remaining balance must be transferred into an AMRF, or purchase an annuity before an ARF is available to be purchased.

Taking your benefits

First 25%Next €63,500Balance
Tax free lump sum up to €200,000Approved Minimum Retirement Fund (AMRF)Taxable Lump Sum
AnnuityApproved Retirement Fund
Purchase an Annuity

Lump Sum

When retirement benefits are taken, the individual can first take up to 25% of the fund as a lump sum, which is tax free and subject to a limit of €200,000 on all tax-free lump sums taken by that individual from all pension arrangements since 7th December 2005.

The Balance can then be used for –

  1. Buying an Annuity
  2. Investing in an ARF or AMRF
  3. Taking a taxed lump sum

Annuity

An annuity is a single premium insurance policy where, in return for a lump sum payment, the selected life insurance company guarantees to pay a specified level of regular income for entire life of the individual insured by the policy.

A single life annuity ceases on the death of that individual, apart from outstanding payments under the guarantee period (if applicable).

An annuity can provide a continuing payment of part or all of the annuity to a nominated person, typically a spouse, following the individual’s death; this is called a joint life annuity or an annuity with a reversion, i.e. part or all of the annuity ‘reverts’ to another individual following the death of the individual who took out the annuity.

E.g. James is now 65 years old and a RAC fund of €200,000. Taking €50,000 lump sum, purchasing an annuity for €150,000. This guarantees €6000 for the rest of his life, with a guarantee of 5 years. If James dies 3 years later, €6000 per year will be paid to James’ estate for two years. Or pay the outstanding to his estate.

Approved Retirement Fund (ARF)

An Approved Retirement Fund is a personal investment account into which an individual can (in certain circumstances) transfer part of their retirement fund, instead of using those funds to buy an annuity or take as a taxable lump sum. The balance of an ARF on death is paid to the holder’s estate.

The ARF owner can withdraw funds from the ARF whenever required. There is no maximum rate of draw down from an ARF. An individual can withdraw the full balance in an ARF at any time.

Any withdrawal made during the lifetime of the ARF holder is subject to income tax under PAYE, USC and Class S PRSI (if under 66)

ARF Offers:

  1. Tax free investment returns.
  2. Option of lower annual taxable withdrawals.
  3. Ability to pass the balance of the ARF to a spouse’s ARF without any immediate tax charge.

Approved Minimum Retirement Fund (AMRF)

This is an investment fund which grows entirely tax free. Up to age 75, you can opt to (but is not obliged to) take an annual taxable withdrawal of up to 4% of the value of the AMRF.

At age 75, the AMRF turns into an Approved Retirement Fund (ARF), or if earlier.. the individual starts to receive pension income payable for his or her lifetime of at least €12,700 per year, or dies.

Pension Conclusion

Regular pension payments: Pension tax is deductable depending on your rate of income tax. Either 20% or 40%.

End of year pension tax relief: You don’t have to pay tax on any money you place into a personal pension fund (based on the limits above) E.g. If you are 33 and earning €90,000 per year – You can invest 20% of your salary back into your pension (€18,000)


Other possible tax deductions for the Self employed in Ireland

  1. Consultancy & professional fees
  2. Advertising costs
  3. Rent, rates & power
  4. Wages, salaries / staff costs
  5. Banking, credit card & financial charges
  6. Interest on bank & other loans
  7. Insurance costs
  8. Travel expenses
  9. Maintenance costs of machinery & equipment
  10. Purchasing assets
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