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.