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Better to pay pension in that situation?

  • 10-10-2010 12:55PM
    #1
    Registered Users, Registered Users 2 Posts: 271 ✭✭


    Hi guys, I know that there have been a few posts about similar topics already, but I would like to have it clear before I make a mistake :)

    My current salary is €26000, but my employer pays for my health insurance as well. If I understand all this complicated tax system correctly (sorry, I am just not good at it!), I am paying more taxes at the moment, as the health insurance adds to my gross and I am over the magic number 26k, which makes me pay additional health levy, or sth, is that correct?

    Now, if I start contributing to my pension, which will be a little more than the health insurance amount paid by my employer, my gross salary should go down to slightly below 26k, and that should save me from the extra tax, is that right?

    Please help :)


Comments

  • Registered Users, Registered Users 2 Posts: 59,748 ✭✭✭✭namenotavailablE


    Your understanding is correct!

    Your VHI premium paid for by your employer is called a 'benefit-in-kind' and you are taxable and pay levies on the full value of the premium. You are also entitledto a tax credit for that- check if you are getting it.

    If you pay enough into a pension fund so that your annual pay (i.e. salary + benefit-in-kind) falls below €26000 (i.e. weekly of €500/ fortnightly of €1000/ monthly of €2167 etc) you will avoid paying the Health Levy going forward. Additionally, in this year, if you pay enough of a pension premium in the remaining part of the calendar year to bring the value of salary - benefit-in-kind - pension premium to below €26000 you will be able to get a refund of the Health Levy fthat you would have paid in earlier months of this year. See here for the procedure for that- your employer might be able to do it as part of your payroll at the end of the year; otherwise you'll have to do it yourself.

    You can check these things using my spreadsheet calculator available here. It has a function on the 'Other tools' worksheet menu which checks the possibility of any refunds.

    Here's what the calculator shows for a single person with standard tax credits earning €26000 salary and €800 benefit-in-kind per annum who then starts to pay a pension premium of €270 per month for the months of October to December of this year (the €270 per month for 3 mon ths is sufficient to bring your annual pay+BIK to below €27000 => you basically calculate the monthly premium for this year by dividing the annual BIK by the number of months you pay the pension in the current calendar year => €800/3 = €270. You can check with your pension provider if it is possible to change the amount paid each month in January to wahtever value you wish:

    Result:
    You will get a refund of €804 Health Levy (this is the levy you would have been paying in the months prior to the start of the pension contribution). Your monthly net pay before paying into the pension would have been €1824 (assuming you are a single person with standard tax credits).
    From October, your monthly net pay would be €1708 i.e. the pension of €270 is costing you €116.
    Additionally, you'll get the refund previously noted so you'll basically break even in the year (as well as creating a pension asset)


  • Registered Users, Registered Users 2 Posts: 271 ✭✭emka1984


    Thanks for your reply!

    With regards to the benefit in kind - I was reading about it a bit as well, and I understood that I can't claim it as tax credit -according to what I read, I would need to apply for it after December 31st. Is that not right? Tbh, I was trying to find the correct form in order to do so, but found nothing - I might wait till January and see what happens...

    And re: Additionally, if your annual calendar year income is below €26000, you'll also be able to get back the Health Levy you woiuld have paid in earlier months of this year. See here for the procedure for that- it might be done by your employer or else you can do it after 31 December yourself.
    How will I know if my employer did it, or if I need to do it myself? Cause until August I was on 24k gross, so my annual income shouldn't be higher than 26k, I guess...


  • Registered Users, Registered Users 2 Posts: 59,748 ✭✭✭✭namenotavailablE


    Re tax credit on medical insurance: see here
    Basically you are entitled to the tax credit but you might have to contact the tax office to see if it's on your certificate of tax credits

    Re the refund of the Health levy- OK, so if you were under an annual equivalent of €26000 pa in earlier months then you wouldn't have been paying the Health levy, unless your VHI benefit-in-kind brought you up to €26000+ (in which case that's an expensive VHI policy!). That means that the refund is not going to arise and you can decide to pay a smaller pension premium per month (just above the monthly BIK amount appearing on your payslip).


  • Registered Users, Registered Users 2 Posts: 271 ✭✭emka1984


    Re tax credit on medical insurance: see here
    Basically you are entitled to the tax credit but you might have to contact the tax office to see if it's on your certificate of tax credits

    Re the refund of the Health levy- OK, so if you were under an annual equivalent of €26000 pa in earlier months then you wouldn't have been paying the Health levy, unless your VHI benefit-in-kind brought you up to €26000+ (in which case that's an expensive VHI policy!). That means that the refund is not going to arise and you can decide to pay a smaller pension premium per month (just above the monthly BIK amount appearing on your payslip).


    OK, so I might have not made it clear enough for you:)

    I was hired by a different company before, they paid me 24k and no additional benefits. Starting from August, I have a new employer, and they pay me 26k plus the health insurance.


  • Registered Users, Registered Users 2 Posts: 59,748 ✭✭✭✭namenotavailablE


    :)

    OK- the position then would be that for employer 1, no health Levy was paid.

    For employer 2, you would have paid a health levy in August and September. This amount would depend on the monthly value of your VHI benefit but at an annual benefit amount of €800 the Health Levy would be €89 per month.

    So, just for this year, your total gross earnings from all employers and including the VHI benefit (using the €800 as the annual value of the benefit) would be under €26000 and you (or maybe your new employer) can recover the health Contribution as per that link to the welfare.ie site.

    In the upcoming December budget, there;s a very strong likelihood that the rules re the Health Levy will change so I can't really offer any advice re pensions etc for next year. At this point, be aware that:

    1. You can get a tax credit on the VHI benefit-in-kind.
    2. After December 31, you can recover the health levy you'll have paid with the new employer (if your new employer doesn't refund it in your last payslip for the current year)


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