How to decrease your taxes?

What is your biggest liability? People usually say “my spouse.” Think again, your biggest liability is actually your taxes. Yes, that painful monthly bill that you don’t get a chance to pay as it is taken directly from your income before you even get to see it in your bank account.

What is the difference between an asset and a liability? Anyone know? An asset is something that is going to make you money whereas a liability is something that is going to cost you money. Your car is a liability unless you are a taxi driver or a courier. Some even say your house is a liability because it doesn’t make you money, it costs money. You may make money when you sell it, but you will probably need to buy another one. A long-term investment in an index fund is an asset as it will make you money. We should strive to increase our assets and decrease our liabilities as much as possible.

Obviously, our taxes are a liability. It is something that costs us money and we must pay it on all income. In Ireland, our income taxes are high compared to some other countries; in the high bracket, we pay as much as 53% of our income. However, we are living in a socialist country and those taxes are shared among those less fortunate so that we have a level financial playing field.  

How do we legally decrease that liability? Adding more money to your pension fund is one way of doing it. If you are a PAYE worker or Self-Employed, you can add additional money to your pension pre-tax this is known as Additional Voluntary Contributions (AVC) . This means that if you were to add €100 per month to your pension it will only cost you €60 if you are on the higher tax bracket. So essentially, you are making a €40 for every €60 that you invest. You won’t get that type of interest at any bank. Let’s say that you were to do this every month for 40 years and you get a 5% growth per year on your pension. At the end of the 40 years, you will have over €153,000 in your pension pot and it would have cost you €28,800 (€60 x 12 months x 40 years).

Contributions
(per month)
Time (Years) Growth (%) Total Balance
 € 100 40 5%  €153,338

Now, here is the extra bonus; when you retire, you can take out 25% of your pension up to €200,000 tax-free lump sum. Which means you were able to earn over €38,000 absolutely tax-free. Plus you still have the other 75% that can be used for pension payment.

There is a maximum that you can contribute to AVCs per year based on your age.

Age Group Percent of Annual Salary
under 30 15%
30-39 20%
40-49 25%
50-54 30%
55-59 35%
60 or over 40%
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