Tax: your biggest expense
While we all have to pay our taxes, it is the single biggest expense incurred by LHW clients during their lifetime. As we see in our financial plans tax puts a huge drag on our journey to financial freedom. It is an important part of our mission to ensure you are paying your fair share but no more. This is the time of year when we may be able to help reduce this tax burden. Here are some ideas……..
1. Change your investment strategy: With DIRT and investment fund tax still at 41% it is a “taxing” time to be a saver. By changing your investment strategy to one that generates capital gains, we can lower the tax rate to 33%. In addition the first €1,270 of capital gain is exempt (€2,540 for a married couple) from Capital Gains Tax (CGT). Although a €2,540 annual tax free gain is not life-changing, with investment returns becoming harder to get, it is worth taking advantage of.
2. Use capital losses: Once clients have changed their investment strategy to one that generates a CGT liability rather than the more expensive taxes mentioned above, it may be possible to offset historic capital losses against realised investment gains. This gives our clients the opportunity to effectively make tax-free investment returns for a period at least.
3. Eii schemes: The Employment and Investment Incentive (Eii) Scheme is a tax relief incentive scheme which provides tax relief against total income for income tax purposes to qualifying Investors for investments in certain qualifying companies. This scheme, formerly known as BES, offers one of the few remaining reliefs against all income tax including rental & ARF income. Eii tax relief is available in two tranches, an initial 30% in the investors 2016 tax return and a further 10% tax relief in year 4. You can invest in individual qualifying companies OR through one of the numerous pooled funds available. LHW fee-based investment clients do not pay the high entry commissions into these funds. It is important that our clients are totally familiar with the risks and costs associated with Eii schemes but as part of a well diversified investment strategy, it can be a good addition.
4. Pension tax relief: Finally given the time of year, we must cover the most popular income tax relief vehicle available; tax relief on personal contributions to pensions. The following is not meant as a definitive guide to this relief but to highlight some important points:
- You have until October 31st 2016 to make a lump sum pension contribution and offset that amount against your 2015 tax liability.
- This deadline is extended to November 10th if you pay your tax through Revenue on-line (ROS).
- Company directors, the self employed AND employees can all make pension contributions at this time in order to reduce their 2015 income tax liability.
- Tax is relieved at your marginal rate. For example €1,000 invested by a higher rate tax-payer will cost €600.
- There is an age-related limit on the amount of the annual contribution possible from 15% of salary in your 20s up to 40% in your 60s.
- €115,000 is the max salary that can be used for this calculation; a 45 year old can get relief on a pension investment of up to €28,750 personally in a given year (25% of €115,000).
- PAYE tax payers can make back-dated pension contributions using Additional Voluntary Contributions (AVCs) to their pension schemes.
- If you have more than 1 source of income, you need to take particular care on how you make pension contributions and claim relief. Talk to us if you have any queries.
- For the self employed you can also reduce your preliminary tax liability for 2016. This can mean in this year, the net cost is only 20% of your investment amount.
We recommend that all the above measures are addressed in the context of a comprehensive financial plan. Therefore if your accountant has recommended a pension contribution against your 2015 tax liability, we should first do a comprehensive review.
Finally once we have identified what the issues are in your financial plan, we can consult with your tax adviser to ensure your remuneration and employment status are structured as tax-efficiently as possible.
If you think it is time to take a fundamental look at your life and financial planning, we would love to hear from you.