A very important consideration to save for your future and also to compliantly pay less tax is to utilize a pension type plan. There are 2 options available based on whether you use a PAYE Umbrella structure OR a Personal Limited company. They are as follows:
PAYE Umbrella (PRSA) –
A PRSA is a pension contract between a contractor and a PRSA provider. It is an easy way to save for your retirement. You can make regular or 1 off payments. It is flexible, can be contributed to in and on/off or irregular manner and is transferable. There is significant tax relief from employing a PRSA. You can contribute large sums however income tax relief is only available on amounts up to a fixed percentage of net earnings on a scale depending on the contributors age.
Personal Limited Company (Executive Pension) –
Firstly, an Executive Pension is a one member Occupational Pension Scheme or Company Pension Scheme for an individual employee or director. An Executive Pension is allowed to accept/make pension contributions from the company i.e. an employer contribution. Employee contributions to an Executive Pension are also possible. Employer contributions can be written off fully as a tax deductible expense in the P&L (profit & loss) account. In other words it can be written off for Corporation Tax & Income Tax/USC/PRSI Tax at source each year and there is an option to fund to provide for back service. Depending on your personal circumstances a company could pay in higher levels of pension contributions into an executive pension than a normal self-employed pension.
If you are Self Employed you can contribute up to the limits below and claim tax relief, subject to a Salary Cap of €115,000.
The same limits apply to employee contributions to a company/executive pension scheme.
AGE % Salary:
<30 15% 30-39 20% 40-49 25% 50-54 30% 55-59 35% 60 & Over 40% For example if you have a Salary of €60,000 and are aged 42 you can contribute €15,000 (25% x €60,000) per annum into a pension fund and get full income tax relief against your marginal/higher rate of tax. From 2018 the Tax Band for 20% Income Tax is €34,550. Therefore pension contributions on a Salary over that amount are subject to income tax relief at 40%. There is no PRSI or USC relief on employee pension contributions to an occupational pension scheme. It is a condition of approval for a scheme or executive pension scheme by revenue that the employer must contribute a meaningful contribution to the Scheme. Meaningful normally means not less than 10% of the total contributions between the employer and employee. The amount an Employer can contribute to an Executive Pension Plan for an employee is dependent on a maximum funding test. In general, if you have 10 years or more of service with an employer, the employer can make contributions that could buy a pension income for you of up to 2/3rd of Final Salary as an income for life. To determine the maximum annual contribution that can be made by an employer the following factors/variables are needed to complete the calculation; 1. Date of Birth. 2. NRA (Normal Retirement Age) 3. Term to Retirement 4. Marital Status 5. Annual Salary 6. Existing Pension Funds 7. Interest Rates 8. Annuity Rates 9. Growth Rate to NRA