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Balancing Pension, BTW, & ESPP

  • 30-07-2021 9:34am
    #1
    Dedalus1
    Registered Users Posts: 18 ✭


    Hi Everyone,

    I'm just looking for thoughts on how to balance my finances. I've started working for a profitable and fast growing company, and they've just opened their ESPP for enrolment to maximum of 10% gross. I'm also balancing my pension contributions and the BTW and trying to get maximum value out the higher tax bracket.

    My gross salary: 42,000

    My higher band begins at: 35,300

    Currently I have 12% going into my pension: 5040 (+ 3% from employer) leaving 36960.

    When I can use the BTW scheme in about 3 months (I need 6 months served with the company to qualify), I want to spend about 600. The BTW scheme only really makes sense if it's on the higher tax bracket.

    I would like to put the maximum 10% into the ESPP but am not sure if it will knock the BTW down into the lower tax bracket. The trouble with the ESPP is that if I want to increase the contributions I need to re-enrol, which will mean beginning on a purchase level that is higher than I would otherwise have got.


    I'm not sure what to do here, and whether lowering my pension is wise. Maybe it's just best to bite the bullet and go in on the ESPP at 3%.

    Post edited by Dedalus1 on


Comments

  • #2
    dennyk
    Registered Users, Registered Users 2 Posts: 1,715 ✭✭✭dennyk


    It really depends on the exact terms of your ESPP. However, ESPP deductions don't normally reduce your taxable income (they're taken out of your net income after taxes, not your gross before taxes), so no matter how much you're putting into the ESPP, you'll likely still have income in the higher band, given those numbers. As such, your €600 bike-to-work scheme purchase would still come out of your higher band income.

    Don't forget to consider all the implications of an ESPP as well. In addition to the fact that your contributions aren't ordinarily pre-tax, you may owe income tax, USC, and PRSI on the difference between your discounted share price and the market value of the shares, and you'll also usually owe CGT on any gains realised at disposal. The exact rules depend on the type of ESPP scheme and the terms, but you will end up paying taxes at some point under most schemes. Those taxes can eat up a significant chunk of the potential gains you might realise from participating in an ESPP scheme, to the point where it might make more financial sense to put that money in some other tax-advantaged investment (such as additional pension AVCs) instead. If you're not sure yourself, consider discussing the matter with an independent fee-based financial advisor.

    If you don't plan to sell your ESPP shares right away, keep in mind that there are also risks involved in holding large quantities of a single company's stock in general, and separately there is an additional risk in holding a significant amount of stock in your employer's company in particular, in that all of your future income for an indefinite period of time is also dependent on the success of your employer. If a large proportion of your overall investment portfolio is invested into your employer's stock and your employer runs into difficulties (or worse, goes under entirely), you could find yourself out of a job and losing a significant amount of your investment net worth at the same time.



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