To use an American expression, this one is a “no-brainer”!
If you’re self-employed and some of your income is going to be taxed at 40% it makes sense to take out a pension which has the double advantage of reducing your Income Tax bill now and providing for your retirement.
As a self-employed person you have the considerable advantage of making contributions to a pension up to 31st October following the year of assessment. A simplified example illustrates:
- John gives his accountant his 2021 information in April 2022 in order for his Accounts and Income Tax return to be prepared.
- The accountant calculates John’s taxable business profit for 2021 at €60k (of which €20k is in the 40% tax bracket)
- At 45 years of age John can invest up to 25% of his business profit figure into a pension (i.e. €15k)
- If John invests €15k into a pension by 31st October 2022 he will reduce his 2021 Income Tax bill by €6k, so in real terms the €15k pension investment has only cost John €9k
Other advantages are:
- Tax free growth – Your money gets the room it needs to grow since no CGT, DIRT or income tax is applied to any growth
- Tax free lump sum – You can take up to 25% of your fund as tax free cash when you reach 60 up to a maximum of €200,000.
So if you don’t have a pension, next time when your accountant advises you of your Income Tax liability for the year, ask them to run the numbers on different pension contribution amounts and look into starting a pension to avail of the savings before the October 31st deadline.