Did you know, you might be able to claim relief on last year’s income tax by making a once-off payment into your pension?
This once-off payment, often referred to as an Additional Voluntary Contribution (AVC), allows employees to boost their pension savings while claiming tax relief. The deadline for securing this tax relief is 31st October. For those who have registered for Revenue Online Services (ROS) and choose to file and pay their taxes online, the extended ROS deadline to file is mid November. By making a pension contribution before this date, you can reduce your taxable income and potentially receive up to 40% of your contribution back in tax relief.
What is an Additional Voluntary Contribution (AVC)?
An AVC is an extra, voluntary payment made into your pension, separate from the regular contributions deducted by your employer. It’s a smart way to enhance your pension pot while also reducing your Income Tax liability. If you contribute before the deadline and backdate the tax relief you can benefit from both increased pension savings and a significant tax refund.
How Pension Contributions Help Reduce Tax
Pension contributions directly lower the amount of income that is subject to tax. For example, employees in the higher tax bracket can receive a refund of up to 40% on any AVCs made. This means if you make a contribution of €1,000, you could receive up to €400 back as a tax refund, reducing the actual cost to just €600.
How to Get Your Tax Refund Through AVCs
To qualify for a tax refund, you must make a one-time contribution to your pension by the middle of November. When making your contribution, opt to backdate the tax relief, enabling you to claim a refund on the taxes you paid last year.
Example of an AVC Contribution and Tax Refund
Let’s look at how this works in practice..,
Jane, a 41-year-old employee, earned €50,000 in 2023 and is in the 40% tax bracket. By making an AVC contribution of €10,000 before the November deadline and backdating the tax relief to 2023, she can claim:
- Gross Pension Contribution: €10,000
- Tax Refund (40%): €4,000
- Net Outlay: €6,000
Not only does Jane boost her pension savings, but she also receives a significant tax refund on her contribution.
Pension Contribution Limits Based on Age
When making AVCs, it’s important to know how much you are allowed to contribute. Your contributions are capped based on your age and Net Relevant Earnings:
- Up to age 29: 15% of earnings
- 30 – 39: 20%
- 40 – 49: 25%
- 50 – 54: 30%
- 55 – 59: 35%
- 60 and above: 40%
Additionally, the earnings on which contributions are calculated are capped at €115,000. So, if you earned more than this in 2023, only the first €115,000 will be considered when calculating your pension contribution.
Steps to Claim Your Tax Refund on AVCs
- Make your pension contribution: Ensure your contribution is made before 14th November.
- Get a pension certificate: Obtain confirmation from your pension provider regarding the amount and date of your AVC.
- Notify Revenue and submit your claim online: Inform Revenue that you wish to backdate the tax relief to 2023 by uploading the necessary documents via Revenue’s myAccount or ROS.
Documentation Required for Tax Refunds
Revenue requires PAYE customers to submit proof of pension contributions when filing for tax relief. You will need to upload a pension certificate or a one-page alternative document with details such as:
- Date of contribution
- Amount paid
- Type of pension (AVC, PRSA, etc.)
- Policy or scheme number
- Confirmation that the contribution was not made via net pay
Benefits of Contributing to Your Pension via AVCs
AVCs not only help with tax relief but also ensure your pension pot grows. Some key benefits include:
- Boost your pension pot: AVCs increase your retirement savings, ensuring a more comfortable future.
- Maximise tax relief: You can claim up to 40% tax relief depending on your tax bracket.
- Flexible contributions: You can choose how much and when to contribute, giving you greater control over your pension savings.
If you’re considering making AVCs, it’s important to know that Employer Pension Scheme Members can make AVCs to your existing scheme, a Group AVC arrangement, or a PRSA AVC plan.
Getting Independent Financial Advice
Before making pension contributions, it’s wise to get independent financial advice. Understanding the tax implications and deciding how much to contribute is crucial for maximising your benefits.
Conclusion: Don’t Miss Out on Potential Tax Refunds
Making an AVC before the November deadline is an effective way to top up your pension savings while claiming a tax refund for last year. By making smart pension contributions, you can boost your retirement savings and secure significant tax relief.
Contact Riordan Financial today for expert advice on making the most of your pension contributions.
Frequently Asked Questions (FAQs)
- What is an AVC?
An AVC, or Additional Voluntary Contribution, is an extra contribution that employees can make to their pension scheme on top of their standard contributions. - How much tax relief can I claim on my AVC?
You can claim up to 40% tax relief on your AVC contributions, depending on your income and tax bracket. - What’s the deadline to claim tax relief?
The deadline is mid November every year. - Do I need documentation for my pension contribution?
Yes, you will need to provide a pension certificate or an alternative document confirming your contribution when filing your tax claim.