These days you need to make the most of every opportunity that allows you to run your business more tax efficiently and plan for retirement more tax effectively. Opportunities can very often be limited to simply making pension contributions of up to 40% (depending on your age) of your earnings. But with a little planning taxable profits can be made to work harder.

Tax Savings

Very often your spouse is an essential member of your medical practice but does not receive any financial reward. Where your spouse is a bona fide employee of the medical practice there is an excellent opportunity to direct some of the taxable profits to both Schedule E salary plus the provision of an executive pension plan. This can lead to maximisation of tax reliefs and retirement benefits for both you and your spouse.

Your spouse can earn up to €23,800 in the current year (2012 and only pay Income Tax at 20% on those earnings, as against the 41% Income Tax rate that you are more than likely paying on your personal income. This is due to the difference in the Tax Bands for a married couple where both spouses are working (€65,600), compared to a married couple where only one spouse is working (€41,800). Of course, any salary that you pay your spouse in excess of the €23,800 figure will also be taxed at 41%.

So, if your spouse has no other source of income and if he/she is employed by you, then paying him/her €23,800 can effectively save €4,998 in Income Tax payments on your combined incomes in the current year. This is a saving of 21% on the €23,800 salary which you pay to your spouse.

Also, employees who are spouses of their employers are not normally liable to PRSI on their earnings, but they are liable to the Universal Social Charge (USC), unless their earnings do not exceed €10,036 in the current year.

Increased Pension Funding

Where your spouse is an employee you can put an Executive Pension plan in place for him/her and save on Income Tax on your contributions to this plan. An added advantage of doing this is that, as an employer, your contributions to your spouse’s Executive Pension plan are not limited by the age-related contribution limits and the earnings cap of €115,000 that currently apply to pension contributions paid personally.

This allows you to contribute more to pension funding as a couple, and potentially accumulate a much greater amount of capital in pension funds than the amount you could potentially accumulate for yourself as an individual.

Example

Illustrating the sort of tax savings and increased pension funding that can be obtained from this exercise can best be done by providing an example. In the following example we look at a couple where both partners are aged 45, and are funding for retirement at age 65. In the example the doctor is limited to a personal pension contribution of €28,750 in the current year (i.e. 25% age-related limit applied to €115,000 earnings cap).

In the example the spouse’s earnings are limited to €23,000 to avoid the spouse having to pay Income Tax at 41% on any of his/her income

The outcome here is that the overall bill for taxes is reduced each year, with a tax saving in the first year alone of €17,540^*. Over 20 years this amount would accumulate to a significant additional saving.

Furthermore, a significant additional amount is invested in pension funding each year, starting with €19,780 in the first year and resulting in an increase of €832,201 in the illustrative retirement fund at age 65.

^* Note: €17,540 relates to the difference in tax savings between paying a pension and salary to an individual’s spouse, compared to the tax savings that the individual alone can make by maximising just his/her own pension contribution i.e. €29,237 less €11,787.
Notes regarding example figures:

• The illustrative retirement fund figures are based on the pension contributions shown paid annually in advance, a 20-year term, 6% p.a. gross investment return and 3% p.a. contribution increases, a 96.5% investment allocation and a 1% p.a. management charge. A €8.80 Pensions Board Fee is deducted on the Executive Pension. These figures are not guaranteed and investment returns and contribution increases may be more or less than assumed. The value of pension funds may fall as well as rise.
  

• The savings on taxes, etc. are based on the rates applicable from 1^st January 2011.
  So, all in all, a pension plan is probably the most effective way for you and your spouse to save for your retirement. You will get tax relief on your contributions and the contributions paid to your spouse's pension, the money in pension plans can grow tax-free – and, when you and your spouse get to retirement, you will be able to draw a significant part of your funds as a tax-free cash lump sum.

No other form of saving can match these attractive benefits. For further details, please contact IMO Financial Services.