A major benefit of being self-employed is that you can claim pension payments as a business expense. By setting this up, you can effectively redirect your tax payments into your pension fund.
How does a pension contribution save me tax? Because your pension contribution is an ‘allowable expense’ in your tax bill, writing a cheque for it it is deemed to be a legitimate business cost for you. As such, even though you own the pension fund that you are paying in to, it is still treated as a business expense for you and reduces your taxable profit in that year.
Does it reduce preliminary tax or just the balance of last years tax?
So, in October you will submit your Income tax return for the previous tax year and pay the remainder of the tax in excess of the preliminary tax you paid last year. In addition you will be required to pay your preliminary tax for the current year. This figure is likely to be 90% of your expected Income tax liability or 100% of last years figure.
Therefore if you pay €20,000 into your pension for last year’s tax year, you will in effect reduce your preliminary tax obligation for this year by €8,000 if you are on the higher rate of tax. However, remember you must make the contribution when the time comes a year later or your balancing payment will go back up again.
For the purposes of calculating maximum pension contributions, the income allowed to be considered is limited to €115,000 per annum. The infographic above shows the percentages of income you can contribute according to your age. We suggest that you ask your accountant what your tax bill is without making a pension contribution and what your tax bill is making the maximum contribution. With this information you will see the benefits of doing something for yourself and reducing your tax payable to the Revenue.