Being self-employed in Ireland (which we define as deriving your income from a trade or profession) has, in recent times, been a particularly painful experience from a financial perspective. Aside from the traditional disadvantages of the lack of limited liability in their occupation, no opportunity to avoid marginal income tax rates by retention of profits and the significantly less tax relief available for pension contributions (all available through a corporate structure) there has been further developments that have made it very unattractive to operate on a self-employed basis.
As a result of a number of successive budgets, the Government’s National Pensions Framework Paper and the National Recovery Plan, a self-employed individual is now able to say that they are taking more than their share of the pain. They have seen the relevant earnings limit (the income limit on which pension contributions are based) fall from €275,000 a few years ago to the current limit of €115,000. This represents a reduction of over 60%! In addition to this, there are indications that the government may reduce the level that an individual can claim tax relief on their pension contributions from the marginal income tax rate to 20% in the coming years. So, for example, the ‘out of pocket cost’ to a 53-year-old dentist or doctor in 2008 of making a pension contribution of €76,200 was €44,958 (assuming a tax rate of 41%). If the current proposals are actually introduced, this same pension contribution of €76,200 would cost €69,600, a €24,642 increase – an enormous difference with big implications for the self-employed trying to provide for their future.
While most citizens believe that we should all share some of the financial pain of our current economic situation, the self-employed have, by far, taken the greatest hit through governmental policy and in successive budgets when compared to other sectors of the workforce. As George Orwell said in his famous book, Animal Farm, ‘All animals are equal, but some are more equal than others….’
From reading the above you might think that there is little you, as a self-employed individual, can do to create wealth going forward and achieve the financial ambitions that you now have or even once had. This is not the case. There are still many financial planning opportunities available to you. Now, more than ever before, effective tax and financial planning, specific to the individual, is needed if you are to keep more of the income that you are creating and provide for a comfortable future for you and your family.
Opes Wealth Trust advises many self-employed individuals in many areas of financial planning and tax efficiency. While each client is different, we include two case studies below (click on each to view) to highlight the type of planning that we do for self-employed clients.