Over the course of our recent articles, we’ve explored the important themes of the benefits of a structured financial plan and your retirement outlook. With both themes, we’ve identified the importance of recognising that a successful financial plan needs to be dynamic, so that it can adapt to life’s changes. Importantly, success is also underpinned by a suitable investment plan, reviewed regularly by your professional investment advisor. For all our AdvisorPro financial planning clients, we develop their bespoke investment plan, incorporating both their pension and personal investments, as a core part of our service.
But excellent financial planning is not only focused on the future. Actions that you take today can have a fundamentally beneficial impact on your future outcomes. Knowing and availing of all the annual tax reliefs available to you now, can significantly help to reduce your biggest cost over your lifetime. That is tax, and in particular income taxes. The more tax you can defer now, the more you can invest instead. Through our AdvisorPro process, we develop strategies for clients that help them minimise their tax liabilities now and into the future. As we approach the 31st October tax deadline, reducing your tax bill is one way in which immediate actions can provide long-term benefits. Here are a few areas to consider.
Pension contributions are extremely tax efficient
Pension contributions are one of the last bastions of tax relief that qualify for marginal rate relief. Company pension contributions attract full tax relief against Corporation Tax, while personal pension contributions you make to your pension plan receive tax relief at your own highest rate of income tax. As we are encouraged to fund our own retirement without relying solely on state benefits, there are also very generous limits in place to which these tax reliefs are applied.
On top of this, pensions funds grow tax free, not being levied by Deposit Income Retention Tax – DIRT (33%), Capital Gains Tax (33%) or Exit Tax (41%) on the growth of the funds. With the additional impact of time and the magic of compounding investment returns, this tax free environment enables strong growth prospects for funds that are invested wisely.
Of course income tax applies when pension funds are accessed down the road, however there are drawdown strategies that can be deployed to further optimise the tax efficiency of your funds. Each of these elements are considered as part of the AdvisorPro process.
Small gift exemption
This is an under-utilised tax strategy that can make a significant difference to people who have assets that they have already earmarked to transfer to others, usually family members. Too often we see these assets being passed on death, when Capital Acquisitions Tax (CAT) takes a significant chunk out of them, once CAT thresholds have been exceeded. After the financial crash these thresholds reduced significantly, pulling a lot more inherited assets into the tax net.
However, any person can gift any other person up to €3,000 p.a. without any tax liability. As an example, consider a husband and wife with 3 children (who each have spouses) and 9 grandchildren. Both the husband and wife can gift €3,000 every year to each of their loved ones (15 people in total), transferring a total of €90,000 p.a. without any tax liability or use of their CAT thresholds.
In considering this as part of the AdvisorPro process, it is really important to ensure this doesn’t undermine the potential future financial requirements of the grandparents. We do this by considering “What if” scenarios such as the future need for long-term care etc.
Is your spouse employed?
When working with SME business owners, we come across situations where the owner’s spouse is an unpaid extra pair of hands, being regularly called upon to help keep the business running smoothly. Pay your spouse, particularly if they are not working elsewhere. This will result in an increased standard rate tax band, which results in a lower overall income tax bill.
It is important to state that there must be commercial justification for employing your spouse. This is often not a problem as they carry out valuable roles in administration, invoicing or general business operations.
Then there are the rest
It is always worth giving focused time to your tax return. There are many seemingly small ways of reducing your tax bill, but when added together can make a significant difference. Top of mind areas to be considered carefully include claiming for medical expenses, working from home reliefs and the bike to work scheme – do you fancy buying an electric bike?
As you implement and commit to your long-term financial plan, don’t lose sight of making the journey easier by reducing your tax bill today.
For more information about AdvisorPro from Acuvest, please contact Aengus Moran, Investment Advisor, on 01 634 4807 or email directly at firstname.lastname@example.org.