During the discovery phase of the financial advice process, we carry out a fact finding exercise in order to get a better understanding of a client’s current financial situation. This includes looking at income, saving, expenditure and everything in between.
We generally find clients who are based in Ireland, either may not be aware or simply do not take full advantage of the suite of tax reliefs and credits available to them. This is a good starting exercise when putting together a financial plan.
In this article, we run through a few of the main reliefs and credits that are on offer. This is a general guide of reliefs and we would always recommend speaking to a tax advisor to any individual wishing to put appropriate tax planning and structures in place.
It is also worth noting that tax claims can be submitted for periods of up to four years ago so just because something is not applicable now, it doesn’t mean you can’t claim back for previous years. Please also note there are penalties applicable for false claims.
We start with the pension as this is in our opinion, is one of the most tax efficient investments anybody can make. Any personal pension contributions made by a PAYE worker or a self-employed person under their respective pension structures are allowed income tax deductions at the marginal rate (currently @ 40%).
There are of course some restrictions on the relief available depending on your age and salary. There is also an annual earnings cap of €115,000.
An employee who is aged 42 and earns €80,000 can avail of tax relief on annual pension contributions of up to €20,000, which would equate to €8,000 which would have otherwise gone straight to revenue if taken out as salary.
When it comes to pensions planning, it is important to get professional advice to suit your circumstances. It’s not just about tax but also about having an appropriate investment strategy and financial plan in place for your retirement.
How to Claim Relief?
This depends on the type of pension scheme you are paying into. Speak with your financial advisor who can advise accordingly.
Assigning tax credits correctly as a married couple
Joint assessment - This means that you will be taxed as one unit and allowed some tax concessions not used by one spouse to be transferred to the other.
Separate assessment - This is very like joint assessment except that all the available allowances are split evenly between you and your spouse.
Single assessment - This is where you and your spouse decide to be treated as if you were two single people for tax purposes.
Under joint assessment and separate assessment, some unused allowances can be passed between husband and wife. This is particularly beneficial in the case of a two-income couple where one spouse earns more than another.
Other tax concessions made to married couples
A number of other generous tax concessions are made to married couples, including:
- Assets may be transferred between husband and wife without being subject to capital gains tax.
- Any capital losses made by one spouse may be used by the other spouse to reduce a capital gains tax bill.
- Any gifts or inheritances given by one spouse to another are completely free of capital acquisition tax.
- Any money received by yourself or your spouse from a life assurance policy (providing you or your spouse were the original beneficial owners) will be completely tax-free.
- Married couples do not have to pay stamp duty when they transfer assets from one to another.
Check with Revenue that your tax credits are being allocated accordingly.
Increasingly employers are offering health insurance as part of employee’s benefits packages. It is estimated that around 400,000 people in Ireland have their health insurance fully or partially paid by their employers.
Employees who participate in group health insurance schemes at work are charged benefit-in-kind (BIK) with income tax, pay-related social insurance (PRSI) and universal social insurance (USC) being taxed on the gross value of the cover.
However, if your employer pays all or part of your medical insurance premium, you do not automatically get tax relief. The TRS has normally not been applied on the Employer portion.
The good news is that you can claim this amount back.
If your employer only pays a percentage of your policy cost, the relief you can claim is restricted to that percentage. This is because the portion of the policy you pay yourself directly will have been discounted.
How much tax relief can I claim back?
The amount of tax relief available to employees will depend on the specifics of their insurance cover and the premium. In general, TRS is calculated at 20% of the gross premium. The 20% calculation is limited to €1,000 per adult and €500 per child.
Brian renews his policy on 1 January 2018 for €2,500 gross premium which is paid by his employer.
This policy covers Brian and his wife.
The tax relief due for 2018 is calculated as follows: €1,000 x 20% x 2 adults = €400
As Brian has not benefited from the TRS arising on the premium paid by his employer, he is entitled to a tax credit of €200 in his 2018 tax return.
Private Health Insurance
Many people are aware that health insurance taken out privately will automatically get tax relief on their premiums through a system called ‘Tax Relief at Source’ (TRS).
Under this system subscribers pay a reduced premium to the authorised medical insurer. This reduction is the same as giving tax relief at 20%. Anybody paying for health insurance through this method doesn’t need to have any further contact with Revenue as the medical insurance provider will implement the necessary changes to the amount of tax relief due.
Tax relief will similarly be accounted for those who pay medical insurance through a deduction from wages.
Contact your health insurer to see if you would be entitled to claim any tax back. You can then put this credit through with Revenue.
This is an insurance policy that gives you a replacement income if you can’t work because of an illness or injury for one month or more.
Income protection can pay up to 75% of your normal income less social welfare payments allowing you to protect your family’s lifestyle.
Income protection premiums qualify for tax relief at the marginal rate however there are certain limits such as the contribution limit does not exceed 10% of the employee’s income.
If you are employed, the life assurance company will deduct tax and social insurance payments from your benefits in the same way your employer would.
If self-employed, it may be payable gross. It should be treated like trading income in your accounts.
Pension Term Assurance
Pension Term Assurance is designed to provide Life Cover to those in non-pensionable employment. This includes self-employed people or people who are not members of an employer-sponsored pension plan.
Eligible policyholders pay their full premium to assurance provider and then claim tax relief at their marginal rate from Revenue. Based on current tax rates, this means that for a higher rate tax payer a saving of 40% of the premium may be available. This is subject to revenue limits.
Speak to your financial advisor to find out more.
Small Gift Exemption
The small gift exemption may not seem like a lot but it can make a considerable impact on your estate planning over time. This exemption allows people to transfer €3,000 to another person in a calendar year without having to pay Capital Acquisitions Tax.
That means that parents and grandparents (as couples) can each give €6,000 to each child/grandchild or any other person (including partners and spouses).
Parents could potentially gift a total €12,000 to their child and their partner in each calendar year which would can help a young couple with a house deposit or simply getting a start in life.
There is no obligation for these gifts to be spent in the year it is received, so such gifts could potentially accumulate year by year into a substantial tax-free sum, underlining the value of planning and incorporating all available reliefs into any inheritance plan. These exempt gifts are also excluded from calculating whether the tax-free threshold has been reached, meaning the tax liability of the remaining estate on inheritance is unaffected by giving them which makes for prudent family wealth transfer planning.
Section 73 policy
It is possible through a Section 73 Savings Plan for a parent to save for a minimum eight years to use the proceeds of this savings plan to pay some or all of the gift tax that might arise when they transfer an asset(s) to a child.
If the owner of the Section 73 Savings plan dies within an eight-year period the value of the plan will not qualify to be used against either gift or inheritance.
Please speak to your financial advisor for more information on this type of policy.
More details on financial gifts can be found here.
Section 72 Life Assurance policies to pay inheritance tax
An inheritance tax bill can be the cause of a lot of heartache for grieving families. Children are often left with a massive tax liability and are more often than not forced into selling the family home or else to delve into family savings to meet this bill.
Individuals should consider putting prudent tax planning in place to avoid a substantial tax liability at a later stage. One option is to take out a section 72 life assurance policy. The proceeds of this policy are tax-free if used to settle an inheritance tax bill. It’s a life assurance policy to cover inheritance tax.
Section 72 insurance must be taken out on the life of the person leaving the inheritance and the premiums must be paid by that person.
Let’s say you calculate that on death your assets will result in an inheritance tax bill of €100,000 for your children. You can put a Section 72 whole of life assurance policy in place for €100,000. On your death, the proceeds of this plan will pay the inheritance tax bill so your children can inherit your estate tax-free.
This type of estate planning / family wealth planning can be complicated and should be discussed with your financial advisor.
Help to Buy Incentive
The Help to Buy (HTB) incentive is a scheme for first-time property buyers. It will help you with the deposit you need to buy or build a new house or apartment. You must buy or build the property to live in as your home.
This is subject of a refund of €20,000. Please see the full terms
Who can Claim?
To claim HTB, you must:
- be a first-time buyer
- buy or build a new property between 19 July 2016 and 31 December 2019
- live in the property as your main home for five years after you buy or build it
- be tax compliant, if you are self-assessed you must also have tax clearance.
Other terms and condition apply so check with Revenue if you are entitled to this scheme
Rent a Room
If you rent out one or more rooms in your home, you can earn up to €14,000 each year free of tax. The €14,000 limit also applies to money you receive for food, laundry or similar goods and services, so student digs are covered. The relief applies on the gross amount you receive, before deducting any amounts for your own expenses. But beware of going over the €14,000 limit. If you do, the entire income is taxable.
More details on this scheme can be found here.
How do I Claim This Tax Relief?
Most claims can be made through the Revenue’s MyAccount online portal. If you’re not registered on it, you should do so. It provides facilities to claim tax credits and reliefs and submit tax returns. This service is aimed primarily at PAYE taxpayers.
The self-employed, along with some others who are obliged to file an annual return of income, can use ROS (Revenue Online Service).
Want to find out more?
Contact us if you would like to implement a financial plan or if you have any other financial queries.