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Chapter 1: 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.
Chapter 2: 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 ā¬100,000 in your bank account. So your ā¬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, ā¬200,000 in bonus equals ā¬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?
Chapter 3: 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 ā¬100,000 as salary, you've paid ā¬50,000 in tax, the other ā¬100,000 has gone into your pension fund.
To get the ā¬50,000 tax back, you make a ā¬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.
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Chapter 4: 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 ā¬100,000 in your pension fund.
Your personal wealth is no different than had you taken the ā¬200,000 as bonus or salary and just paid the tax on it. The other point that that means is that if the EIIS gives you a euro back, you're a euro ahead. If it gives you 50 euro back, you're 50 euro ahead. And my goodness, if it gives you 100,000 euro back, you're 100,000 euro ahead. What I'm showing here is planning.
What I'm illustrating is the difference as I said at the start between a financial planner and a financial advisor. If you rang a financial advisor and said what is my maximum funding rate based on my current salary you will get an answer to that. But what you won't get is a question, well, could you increase your salary? Is there a bonus coming? What about EIS? What about dovetailing?
Because that's what I'm doing here. I mean, I've done videos and produced other podcasts on both EIS and pensions as two individual tax allowances, as it were. But what I'm showing here is that you can dovetail these allowances.
If you have surplus income in your company, if you're a business owner, if you are somebody whose income fluctuates, if you're employed but it fluctuates with bonuses on sales commissions, for example, or bonuses linked to the performance of the company or your personal performance, then you have the opportunity to look at planning like this.
Now, I wouldn't be saying this to somebody who's earning 50,000 a year and spending 51,000 a year. Those people, unfortunately, don't have the same opportunities because they have no surplus income. But if you have surplus income in your business or you have surplus income through your employment, then this type of planning can massively improve personal wealth accumulation.
Focus on the business for a second. If you have a business with surplus cash in it, One of the things you've got to be aware of is leaving surplus cash on the balance sheet of your business is a risk. Every new contract you take on, every new job you take on means commercial risk. Getting the money off the balance sheet of the company
is a positive thing from a commercial risk management point of view. Because the more money you can get off, the less money you're risking on a day-to-day basis. So the other thing that the risk mitigation here is that if you have a company that gradually builds assets, builds investments rather than the trading activity,
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Chapter 5: How can you reduce your tax liability through salary and pension contributions?
This is money he doesn't need. This is money he wishes to set aside for future self. And basically, a dovetailing in his example of the pensions rules and the EIS rules allowed 160 grand, of which 80 grand was disappearing today based on the declarations, the salaries, and the lack of pension contributions. we could erode that 80 grand down to zero. Does he still have risk? Yes, he does.
But as the figures I've shared with you already suggest, that the worst outcome is that he ends up with exactly the same amount as he ended up with if he didn't do the planning. The best outcome is he ends up with more. This isn't for everyone. And I can't tell you through the lens of this camera whether it's for you or not. What I can tell you is that these are the laws of the land.
I don't talk about tax evasion. I don't talk about ways that you can manipulate your world to evade taxation because that's not necessary. I do talk about a very high tax environment for individuals and I do talk about legitimate ways.
The problem I see in the marketplace is that the people who are predominantly selling these products, whether they're selling pension schemes or EIS, that they're doing so because they're paid by the product manufacturer, not because they're paid by you.
For you to use this type of vehicle or these type of vehicles to your best possible advantage requires the input of a truly impartial financial planner.
I was telling, I told you I was telling this to a chap the other day and he started to argue with me and I leaned forwards to the camera and I said, just before I answer your arguments here, you are aware that I'm not selling you a pension, aren't you? You are aware that I'm not selling you E-double-I-S. You are aware that financially at least, I don't care whether you buy a budget.
I don't care whether you do an E-double-I-S investment. I've no skin in the game. What I'm here to do is illustrate for you how using these can benefit you. The man visibly relaxed. Oh yeah, I'm used to talking to people who are selling me the stuff, not talking to people who are showing me how using these pieces of legislation can benefit myself and my family.
So the difference between the salespeople and a real planner is the salespeople are selling the stuff. Success to them is you buy the stuff. Success to the planner is you use these vehicles to your best possible advantage. And in these simple numbers, I can illustrate for you. You can use these allowances.
At a worst case, the worst outcome is that you accumulate exactly the same amount of wealth as if you didn't do it at all. And the best outcome is you accumulate more.
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