Nobody wants to pay any more tax than they have to. Thankfully there are plenty of areas where self-employed professionals can optimise their take home pay legitimately. However, we have been made aware of professional contractors being offered a scheme which on the surface may sound like a potential tax-saving opportunity but when examined more closely is very suspect, appears to have no substance and could get you in serious trouble with the authorities.
The old mantra of ‘buyer beware’ always prevails, and if you are being presented with a ‘solution’ which allows you take a large portion of your monthly earnings tax-free, then look closely at the detail and exercise caution. If it sounds too good to be true, then it probably is.
Recently a Contractor called us to see if we could offer a ‘solution’ (we’d call it a scheme) they were told about where about 50% of their earnings in every month are given tax free under what was classed as an ‘Annuity Payment’. We take a look below at all the reasons this doesn’t appear to stack up from a tax point of view and could leave you with a (very) large tax bill and possibly penalties and interest on top of that.
The first thing to recognise is a Purchased Life Annuity is a very real and legal insurance policy. In very simple terms it allows the user to buy an annuity (yes, you must first hand over money to the insurance company to buy this type of insurance policy) and then the insurance company makes an annuity payment to you each year. Part of this payment can be taken tax free, and this is calculated by a formula prescribed by the Revenue Commissioners.
For example, Mr. Murphy who is 65 spends €50,000 of his savings to purchase a life annuity (there’s the buying bit). Then, each year the insurance company will pay out an amount of say €5,000. The Inspector of Taxes determines in this case that the capital element (i.e. the repayment of part of the initial €50,000 used to purchase the annuity) is €4,000. Therefore, this amount is taken tax free as it is considered to be repayment of part of the original €50,000 used to buy the annuity in the first place. The balance of €1,000 is taxable in the normal way.
If a Purchased Annuity Scheme is being suggested to you as a way of removing some of your gross income from the tax net, then you should ask yourself some questions;
The ‘scheme’ shown to us appears to be that individuals will receive an annuity payment as part of their income in a given week/month. Let’s recap on what an annuity is: an annuity is an annual payment for the rest of your life in return for a capital sum you pay out. A Purchase Life Annuity is a non-pension annuity where the annual payment is deemed to be part income and part return of the original capital, with only the income part being exposed to tax. The important characteristic of an annuity is its payment term – i.e. annually until death.
When buying any financial product, it is important to understand what the product is and how it works for your circumstances. Your insurance provider will no doubt advise that taking out an annuity is a long-term commitment and so you should ensure that it meets your retirement investment and income needs, and specialist advice should always be taken. Contracting PLUS has expert tax advisors who can help you understand possible risks associated with ‘opportunities’ offered to you.
While tax law supports, to a degree, taxpayers who look after their health, plan for the future and encourage business enterprise, it also penalises those who deliberately avoid paying tax. Irish Tax Law includes General Anti-avoidance of Tax regulations intended to defeat schemes which have little or no commercial purpose and/or are primarily entered into to obtain a tax advantage. The taxpayer is not entitled to claim the tax advantage when submitting their tax return and as such they risk receiving a hefty surcharge. Exercise caution with unusual tax-saving opportunities!
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