Income Tax Deadline. Pension Technical Services Bulletin. In this issue...

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1 For Broker Use Only Pension Technical Services Bulletin October 2017 In this issue... Income Tax Deadline In this briefing, we are focusing on the traditional Pension Season. We ll work through some examples which will show how, by contributing to a new or existing pension policy before 31 October or 14 November 2017, an individual can backdate these contributions and offset them against their tax liability for the 2016 tax year (subject to age related limits and the Revenue s overall tax relief limits). Richard Hales Pensions Propositions Manager This is an important time of year for your customers who are reviewing their pension plans. Make those conversations even more compelling by giving your customers access to our range of great funds for Pension Season 2017 and beyond. Don t forget that WriteNow Pensions allows you to key new Aviva Personal Pensions, Retirement Bonds or Approved Retirement Funds, put them live and issue documents to your customer electronically through Aviva Online in 7 minutes! Thank you for your continued support through 2017 in recommending Aviva to your customers. Income Tax Deadline - 31 October & 14 November How to minimise Income Tax bills by making Pension Contributions Individuals who both pay and file their tax returns through the Revenue On Line Service (ROS) have until 14 November 2017 to pay a pension contribution and elect to backdate the income tax relief to the 2016 tax year. Those who do not qualify for the ROS extension must do this by 31 October 2017.

2 Income Tax Relief on Contributions Personal contributions to Personal Pension Plans, PRSAs, PRSA AVCs or AVCs are deductible against an individual s relevant earnings for Income Tax purposes up to an annual limit related to the individual s age and net relevant earnings in the tax year: Age attained during the year Less than 30 15% 30 to 39 20% 40 to 49 25% 50 to 54 30% 55 to 59 35% 60 and over 40% Tax relief limit (% of Net Relevant Earnings) Who Files a Self Assessment Tax Return? The self employed, proprietary directors and individuals with non PAYE income are required to file a self assessment tax return under the Pay and File system with Revenue. In order to avoid interest & penalties these individuals must by 31 October 2017 /14 November 2017: File their 2016 Income Tax Return Pay any balance of income tax for 2016 Pay preliminary income tax for 2017 Employees and directors who are members of occupational pension schemes can also reduce their 2016 income tax bill if they pay an AVC single premium on or before 31 October 2017 and elect to backdate to Backdating of Income Tax Relief Personal Pension Plans, PRSAs & AVCs An individual who wishes to pay a pension contribution now and backdate relief against their 2016 income needs to do the following: 1. Pay the pension contribution on or before the relevant return filing date 31 October or 14 November Send their tax return to Revenue on or before the relevant return filing date 31 October or 14 November Revenue will not permit tax relief to be granted in the preceding year where the individual has not elected to claim the tax relief in that tax year in their tax return or where the individual has not filed the tax return on time. Page 2

3 Can Employees backdate Income Tax relief on AVCs or PRSA AVCs? AVC or PRSA AVC contributions paid before 31 October 2017 can be backdated to 2016 for income tax relief provided the individual is still in the same employment. An employee has until 31 October 2017 to: 1. Pay a single premium AVC to their main company pension scheme (if scheme offers this option), a PRSA AVC or through their existing AVC plan (if they have one), and claim income tax relief for the 2016 tax year. 2. Send their tax return to Revenue, electing to backdate the pension contribution to the 2016 tax year. Be careful that relief has not been given in the current tax year where the contribution is paid through payroll under the net pay arrangement income tax relief is automatic and is given in the current year. Who can claim Income Tax relief on AVCs or PRSA AVCs? Income tax relief on AVCs or PRSA AVCs can be claimed by individuals who are: Employees schedule E, PAYE earner & member of occupational pension scheme. Directors schedule E, PAYE earner & member of occupational pension scheme. The following worked examples show how an individual can reduce their income tax bill in real terms. If a pension contribution is made on a prior year basis the benefit is twofold: 1. Reducing the prior tax year s liability, and 2. Reducing the current year s preliminary tax liability. Page 3

4 Example Tax Bill By making a pension contribution before 31 October 2017 or 14 November 2017, you can reduce your 2016 Income Tax bill (subject to age related limits and the Revenue s overall tax relief limits). In the following example, Joe Murphy s final tax liability for 2016 is 10,000. Assuming that he made a Preliminary Tax payment on 31 October 2016 of 6,000, the balance of Income Tax due for 2016 on 31 October 2017 is 4,000. Let s see how a pension contribution of 8,000 can reduce his tax bill on 31 October 2017 If Joe doesn t make a pension contribution before 31 October 2017 Total Tax Liability for ,000 10,000 Less: Income Tax Relief on Pension Contribution ( 8,000 x 40%) Final Income Tax liability for 2016 Less: Preliminary Tax already paid for 2016 Balance of Income Tax due for ,200 10,000 6,800 6,000 6,000 4, The pension contribution has reduced Joe s 2016 Tax Bill by 3,200 If Joe makes a pension contribution of 8,000 on or before 31 October 2017 Page 4

5 Example...Total Outlay on 31 October 2017 Not only has Joe saved 3,200 on his final tax liability for 2016, but if he takes the 100% option for his 2017 Preliminary Tax payment, he can pay Preliminary Tax of 6,800 (i.e. 100% of the reduced liability) as opposed to 10,000. The total amounts payable by Joe on 31 October 2017 would be as follows: If Joe doesn t make a Pension Contribution before 31 October 2017 Final Balance for , Preliminary Tax for ,000 6,800* Pension 0 8,000 Total Outlay 14,000 15,600 If Joe makes a pension contribution of 8,000 on or before 31 October 2017 *The reduction in the 2016 Preliminary Tax payment is a deferral of tax, not additional income tax relief on the same contribution. While the 1st instalment of Income Tax for 2017 has been reduced, remember that the balance of payment will increase, unless Joe effects another pension contribution in October 2018 (see example below). For an additional outlay of 1,600 Joe can settle his tax bill for 2016 and his preliminary tax bill for 2017 and also invest 8,000 in a pension, which will have the potential to grow over the term to his retirement. Page 5

6 Example Tax Bill How does the pension contribution on 31 October 2017 effect Joe s 2017 Tax Bill? Let s jump forward to October 2018 and assume that we have determined that Joe s total Income Tax liability for 2017 turned out to be 15,000 No Pension tax Relief for 2017 Final Liability for ,000 15,000 Preliminary Tax for 2017 (based on 100% of 2016 liability) Balance of Tax due for 2017 (payable on 31 October 2018) 10,000 6, ,200 Relief on 8,000 pension contribution for 2017 If Joe makes a pension contribution in October 2017 and reduces his final 2016 Income Tax liability, his Preliminary Tax payment for 2017 can also be reduced accordingly. However, next year when the balance of tax for 2017 is payable, the final liability will increase by 3,200 (the amount of tax deferred in October 2017). Subject to his age-related limits and the Revenue s overall tax relief limits, Joe can of course effect another pension contribution in October 2018, and backdate the Income tax relief to 2017! Page 6

7 Warning: The value of your customer s investment may go down as well as up. Warning: If your customer invests in this product they may lose some or all of the money they invest. Warning: If your customer invests in this product they will not have any access to their money before they retire. Warning: These products may be affected by changes in currency exchange rates.

8 This guide has been produced by Aviva Life & Pension UK Ltd. Great care has been taken to ensure the accuracy of the information it contains. However, the company cannot accept responsibly for its interpretation, nor does it provide legal or tax advice. This guide is based on Aviva s understanding of current law, tax and Revenue practice October Retirement Investments Insurance Aviva Life & Pensions UK Limited, trading as Aviva Life & Pensions Ireland, is authorised by the Prudential Regulation Authority in the UK and is regulated by the Central Bank of Ireland for conduct of business rules. Aviva Life & Pensions UK Limited, trading as Aviva Life & Pensions Ireland, is also regulated in the UK: by the Prudential Regulation Authority for prudential rules and, to a limited extent, by the Financial Conduct Authority for applicable UK conduct rules. Registered Branch Office in Ireland (No ) at One Park Place, Hatch Street, Dublin 2. Tel (01) Web Registered in England ( ) at Wellington Row, York, YO90 1WR