WITH the 2019 income tax deadline fast approaching it is more important than ever to ensure efficient tax planning in the coming weeks to manage your cash flow in relation to both your 2019 tax liability and 2020 preliminary tax obligations.

There are a number of options available to you in order to effectively reduce your cash outflows in the coming months.

Have you considered all of your preliminary tax options?

Preliminary tax is due by October 31st 2020 although this may be extended where you file and pay online. It may be beneficial to explore each of the three options which may be available to you in the run up to the tax deadline to determine which will leave you in a more beneficial position from a cash flow perspective.

Due to the current Covid-19 restrictions it is likely that profits for the 2020 tax year have been reduced. If you find yourself in this position, paying preliminary tax based on 90% of 2020 income tax liability may be the best option for you.

The 105% of 2018 option has a number of conditions to meet before being available, for example, it only applies where you pay by direct debit and does not apply if your 2018 tax liability was nil. It is an option, only worth considering where your liability was significantly lower in 2018. However, you are potentially pushing a cash flow issue down the road.

It is important to note that underpayment of preliminary tax may be subject to interest by Revenue.

Depending on the duration of the economic impact of Covid-19 it is worth engaging early with your tax advisor and carrying out regular financial reviews of your business to effectively manage your future cash flow. A potential sharp increase in profits in future years, may result in an unexpected preliminary tax liability to be funded.

Covid-19 Stimulus Package loss relief

In a previous article in these pages, we discussed the Covid Stimulus Package. The Covid Stimulus Package introduced income tax loss relief, a measure to allow losses arising in 2020 to be utilised against 2019 income. The carry back is restricted to €25,000. This carry back can be claimed on an interim basis based on the estimated loss relief which maybe be available at the end of your 2020 financial period.

It is important to realise that this relief can now be claimed on submission of your 2019 return. It would be wise to contact your advisor to complete 2020 projections.

Can you make pension contributions?

Pension contributions can also provide tax relief at your marginal rate of income tax, i.e. 40%. The maximum amount of pension contributions for which an individual may receive tax relief varies with age and there is an overall earnings cap of €115,000 for the 2019 tax year. While a pension top up may be an additional cost, it is offset by the saving in current year income tax at the higher rate, the following years’ preliminary tax and the future benefit on retirement. In the example above, while it includes a cost to Emma, is offset by the preliminary tax payable by Emma (i.e. €60,000 vs €50,800 when pension top up made) and the future benefit which Emma will receive on retirement.

Emma, as a 31-year-old will receive income tax relief based on 20% of her earned income. However, there are a number of percentage limits depending on the age of the assessable individual.

Relief on 2019 income tax is still available for pensions, once the top up is made by the submission deadline.

Consider income averaging

step-out option for 2020

The income averaging regime allows qualifying trades to pay tax on the averaged of profits and losses over a five-year period. In order to provide relief for trades impacted by Covid-19, Revenue has introduced an additional option to step-out of averaging for the 2020 year of assessment.

This option is also available to those who have already used their ability to temporarily step-out of the scheme. In order to benefit from such relief, you must have availed of the temporary step-out option in one of the four previous tax years and have sustained a loss in the 2020 tax year.

If you fall into such category you should talk to your tax adviser about availing of the 2020 step-out option.

2019 income tax filing

requirements

The deadline for the submission of your 2019 income tax return is October 31st 2020 which was previously extended to November 12th 2020 for those who choose to both file and pay online. Revenue announced on September 17th, that the pay and file extension will now be to December 10th 2020. This should not be considered an extension for taxpayers as early calculation and interaction with your tax advisors ensures that you do not get a nasty surprise just in time for Christmas.

For any queries in relation to the above or if you would like any specific topics discussed, please email conor.phelan@ie.gt.com.