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I'm contributing to a pension so how much is my tax bill reduced? Liam Croke lets you know

Liam Croke

Reporter:

Liam Croke

Email:

liam@harmonics.ie

I'm contributing to a pension so how much is my tax bill reduced? Liam Croke lets you know

Pension contributions reduce the total amount you are taxed on, as well as being an actual saving

Q: I’m doing some financial planning and have a question in relation to tax relief on pensions. I’m single, currently earning €67,000 and I contribute €9,000 annually to my pension. Based on that, I want to know if my taxable income is calculated on €58,000? And if so, does that mean I end up paying less income tax?

A: Yes. By making those pension contributions, you’ll end up paying 5% less in income tax which is a monetary saving of €3,600.

In relation to your salary, the first €35,300 is taxed at 20% with the balance taxed at 40%.

If you didn’t make pension contributions, you’d pay €7,060 in tax at the standard rate, and €12,680 at the higher rate, meaning you’re an overall income tax bill, before tax credits of €19,740.

That’s an effective gross tax rate of 29%.

Making those pension contributions, you’ll still pay €7,060 at the lower rate, but crucially you pay less at the higher rate, and in your case, that amounts to €9,080. So, you end up with a total gross tax bill of €16,140, which is a gross tax rate of 24%, and an income tax saving of €3,600. All because you made those pension contributions.