It's difficult for me to say this but well done to Waterford last Saturday evening in Croke Park. It was one of those games where Kilkenny would have been happy at half-time. Waterford supporters would have had a sense of "oh no here we go again". Waterford hurled in the second half like their lives depended on it. There were superb performances all over the field. They dominated possession in the middle third and there were some wonder scores. It will be a long winter for Brian Cody and his charges. He will get some positives from the year and there is silverware, so not all doom and gloom. I will have to hide from a few Waterford fans and re-emerge next Summer when the 2021 championship starts. Waterford have been improving in every game and have had a great impact from their bench. They are powerful in the air and have a strong goal threat so are in a great position going into the final. Let's hope that they can make the final push and bring Liam back to suirside.
Last week we looked at some of the things to look out for when choosing an accountant. In case you missed it Read here. This week we will look at planning for the future and how this can help your finances. I had some very good meetings with clients over the last few weeks. This blog aims to highlight some of the useful insights.
"Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success" Pablo Picasso
In many family scenarios, one spouse is the main income earner. The other spouse works part-time and is on a lower income. Sometimes the lower income earning spouse works in the family business. There is a tendency for the higher income earning spouse to plough money into his or her pension. Often the other spouse has little or no pension, so may have the State pension or no pension at retirement. I noticed how low the effective tax rate was for a client of ours when reviewing their tax return recently. Let's look at an example.
Bob & Bella Bliss are a married couple aged 70 and have an income of €72,000. This consists of two state pensions of €13,000 each and private pensions of €15,000 each. They also have two rental properties, owned jointly, on which there is a profit of €16,000. Their tax liability in 2019 is
|Less Tax credits|
|PAYE x 2||€3,300|
|Net Tax liability||€7,590|
|Add - USC||Bob||€280|
|Add - USC||Bella||€280|
|Final Tax liability||€8,150|
|Effective Tax rate||€8,150/€72,000||11.32%|
Let's compare Bob and Bella with the same total income but all in Bella's name. She has a state pension of €22,000. This is the normal pension of €13,000 and an increase for Bob, as a qualifying adult, of €9,000. She has a work pension of €34,000 and a rental profit of €16,000. Their tax liability for 2019 is
|Less Tax credits|
|PAYE x 1||€1,650|
|Net Tax liability||€14,500|
|Effective Tax rate||€15,320/€72,000||21.28%|
You will see in the second scenario Bob & Bella pay an extra €7,170 or 88% more tax on the same income. This could cost them two good holidays a year! Key lessons learned are
- Hold investment assets in joint names
- Ensure both qualify for the state pension in their own right
- Can you plan that both have private pensions?
The key is to maximise your lower rate band of €70,600. The higher income earning spouse can earn up to €44,300 at the lower rate. This leaves the other spouse with the potential to earn up to €26,300 at the lower rate. If the lower income earning spouse will earn the state pension only are there ways to bridge the income gap? Also, it is important to maximise tax credits. You will see that there was only one PAYE credit in the second example, as Bob had no pension income in his name.
Action Points - what can you do?
To qualify for the State pension, you will need to pay enough PRSI contributions. Social welfare looks at contributions paid from the time you enter employment to 66. For the maximum state pension, you must have a yearly average of 48 paid or credited PRSI payments. For more information on this - Read here
The self-employed pay PRSI at Class S and this is at 4% of your earnings, once they are over €5,000 per annum. The minimum payment is €500 but it is well worth it if it gives you a yearly PRSI contribution. Those who are living off investment income such as dividends and rent also pay Class S PRSI. If you are self-employed and your spouse is working for you that is not an insurable employment. That means that he or she won't have PRSI contributions while working in the family business. Possible options here would be to change from a sole trade to a partnership. Or, if circumstances were favourable, transfer the business into a limited company. Click here to see our blog on this
Investment Assets in Joint names
This could be a rental property or other investments like shares that will give you an income. The idea is to get half the income or profit into your spouse’s name. While this can help with efficiency around the lower rate bands it can also help with PRSI. There should be no tax implications in transferring an asset from one spouse to the other. The same goes for civil partners in that
- There is no Capital Gains Tax when transferring assets from one spouse to another
- There is no Stamp Duty
- There is no Gift Tax
There would be some legal fees
Future Pension Contributions
Many people have planned well and will have excellent pensions at retirement. This would be especially true in the State sector and large multinationals. In some cases, we would see clients making extra pension payments into their pensions. This doesn't make sense in all cases. While they are saving tax at 40% on the contribution, they will be paying 40% tax on the income at retirement. Could this money be put to better use? Is there a shortfall in their spouse’s pension? It could be wiser to make payments to a spouse’s pension. While tax relief may only be at 20% the income may only be liable to tax at 20% too.
We can see from the above examples that there can be a large difference in the tax you pay. Everyone's circumstances are different. You must take advice on this before making any changes to ensure good planning for now and the future. Good planning in your business will lead to good planning in your personal finances.
Could you use our help? If so, call Deirdre on 051396703 or contact us and we will find out more about you and see how we can help.