How a small business owner in Ireland can use a pension to minimise their tax rate while moving toward retirement.

The Background

We all know the top rate of income tax in Ireland can be as high as 55%.

This means that you are giving away more than half of everything you earn when your earnings exceed the standard tax rate thresholds. It can be disheartening; you might find yourself asking why bother working harder?

In this guide we lay out our strategy that we implement with our clients when seeking to:

Catch-up on a lifetime of delayed & postponed pension payments
Reduce your effective tax rate for your remaining working years to the lowest possible level.

The overall goal of the strategy is to minimise tax bill over your remaining working life by only taking what you need now from your business, and only paying tax on that level of income while deferring your excess income to retirement through the use of a pension.

Delayed your pension payments?

A key problem facing a large proportion of self-employed people in Ireland is that in the early and growing stage of their business, they often need to take all of the available income or profits in order to meet their living expenses – income is required to fund a home purchase, children, cars, health and all of the other important living expenses that arise as you progress from 30s to 40s and into your 50s.

Often pension planning for small business owners and self-employed people in Ireland can be put on the long finger, sometimes due to procrastination but more often than not due to a need for cashflow NOW rather than locking it away for use far into the distant future.

As a result, small business owners and self employed people in Ireland often find themselves in a scenario where they are in their 50s, and they are only now seriously thinking about retirement and how much income they will actually need after they either sell on their business or after they simply close up shop. Check out our post on how much you should be paying into your pension fund. You may also want to read our guide on investing in property through a pension.

It is never too late to start your plan.

Our strategy is made up of five stages, and we will work with you at each stage:

Stage 1: Identify your current required income level to maintain your lifestyle and cover all your living expenses.

Stage 2: Review the structure of your business, and project business results for the next 3 to 5 years.

Stage 3: Set a target retirement age and review potential succession planning or try to find the most tax-efficient way to sell a business that might be suitable for your business – we recommend doing this now so that you give yourself a few years lead-in time meaning you can ensure you have the right structure in place. Identifying the potential options at this stage will mean the right decisions can be taken now to ensure you qualify for relevant tax reliefs down the line – many of the tax reliefs associated with the sale of a business (retirement relief, entrepreneur relief) have lengthy time-period requirements, so important to get right in advance!

Stage 4: Determine your likely excess income level (the gap between amounts in stage 2 and stage 1) and map out whether to pay into your pension or whether to hold in your company for future alternative tax-free ways to extract income from your business (depending on decisions made in Stage 3).

Stage 5: Execute the plan, monitor, on an ongoing basis and make adjustments as required.

We often develop plans (depending on circumstances and means) where a small business owner is faced with the prospect of never paying tax over 20% again – for the remainder of their working AND retired life. If you have any questions on this article, or if you would like to talk through, we are here to help.