How to Reduce Your Tax Bill to 0%
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What is the main topic discussed in this episode?
Hello and welcome to the Ask About Wealth podcast. Today I want to share with you, I suppose, an example of the difference between working with a financial salesperson and working with a financial planner, because they're very different things. And I want to illustrate some of the types of discussions I have with clients on consoles when we're talking about tax planning. And we're talking about using the laws of the land to lower the taxes we all pay and ultimately to help build true financial freedom. So let me give you a quick example. Let's say you're running a business or you're in a business where you have a bonus coming to you.
What is the main difference between a financial salesperson and a financial planner?
And let's say that bonus is 200,000 euro. Just a nice round number. All other figures will be proportionate. In this example, though, if you take this bonus as salary, then you end up, of course, with about €100,000 in your bank account. So your €200,000, I've used 50%. Okay, we can argue it's actually 52-point-something percent because of PRSI and USC, but that doesn't change the points I want to make. So if we say it's 50% for the example, €200,000 in bonus equals €100,000 in personal wealth. Now you can go off and invest that money for your future. Hopefully you'll get some return on it. But of course, you'll also pay tax on that return because you're investing as an individual rather than in any other way.
So if this is you, let me make a suggestion to you. Why don't you just pay half of this bonus to yourself as a bonus?
How can tax planning lead to financial freedom?
and put the other half into your retirement fund. What does that do? Well, immediately it reduces the tax liability because in that example you only pay tax on the 100, not the 200. The 100 going into your retirement fund is exempt from income tax. Okay, so in that example, you pay 50 grand in tax on the 100. You put 100,000 euro into your pension fund. You have 150,000 euro, not 100,000 euro. And in that example, you've reduced the tax rate from the 50% pure salary to in this 25%. Okay, so that also means the other benefit is that of this 50 and 100, 50,000 is your personal income. You invest that for your future. Yes, you pay tax on the results of that investment. However, the other 100,000, which is in your pension fund now, you can invest for your future and pays no tax because pension funds are exempt from capital gains tax.
So if future wealth, if financial freedom is your goal here, we've got 100,000 of the 200,000 outside the tax net altogether. And we've got effectively a 25% tax rate on the overall 200, not a 50% tax rate. Let's say you're not satisfied with 25%. You want a 0% tax rate. Who doesn't? What you can then do is take the 100,000 you've got as your salary, or your bonus in this example, and make a 100,000 euro EIS investment. So, in this example, you've taken €100,000 as salary, you've paid €50,000 in tax, the other €100,000 has gone into your pension fund. To get the €50,000 tax back, you make a €100,000 investment in a qualifying EIS. There is a cash flow time lag here. You have to pay the tax on the 100 and make the 100 investment and get the tax back generally in January the following year.
So you need to be able to fund this from a cash flow point of view. But after the tax comes back, you have 100 grand in your pension fund and you have 100 grand in an EIS.
What is the significance of utilizing bonuses in tax planning?
You've got 200 grand. your bonus or your payment remuneration was 200 grand, 100 grand your pension fund, 100 grand the EWS, you've still got 200 grand. We've brought the tax rate down to zero. Now, that doesn't mean it'll always stay that way because, of course, there's risk on the investment side, most particularly in this example on the EISIS. But go back to the original figure. If you declared the 200 grand as a bonus and you simply paid tax on it, how much did you put in your bank? 100,000. Today, with the new arrangement, you've got 200,000. 100,000 in your pension fund, 100,000 in the EIS. Now, EIIS is risky. Let's say, in the worst case, the EIIS implodes. You get nothing back. You've still got €100,000 in your pension fund.
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Chapters
5 chapters
1
What is the main topic discussed in this episode?
0:00–0:50
2
What is the main difference between a financial salesperson and a financial planner?
0:50–1:52
3
How can tax planning lead to financial freedom?
1:52–4:28
4
What is the significance of utilizing bonuses in tax planning?
4:28–11:34
5
How can you reduce your tax liability through salary and pension contributions?
11:34–14:54