PERSONAL FINANCE:Claim maximum pension tax relief now, before the Budget restrictions kick in, and you could start the new year off in fine financial fettle

AT THIS time of year, most of our financial planning efforts are focused on budgeting for seasonal essentials. However a small window of opportunity exists for some clever tax planning that will save you money – or at the very least keep you on the right side of the Revenue – and help you start the new year on a sound financial footing.

Firstly, and most importantly, a fast-disappearing opportunity exists to claim maximum tax relief on pension contributions before the changes announced in Budget 2011 kick in. For many people, pension contributions have had to fall by the wayside in order to keep the wolf from the door. However, if you’re in the fortunate position of being able to take a longer-term perspective on your finances, and have some cash to spare, then the advice from the experts is to max out your pension top-ups – and fast.

“If you wish to make pension top-ups against the 2010 tax year to avail of maximum tax relief you must do so before the end of this year,” advises Cathal Maxwell, managing director of paylesstax.ie.

There are two compelling reasons for taking this course of action. First, from January 1st, 2011 pension contributions will no longer be deductible for PRSI purposes. Neither will they be deductible for the new universal social charge (USC), which is replacing the health levy and income levy. The top USC rate of 7 per cent is likely to apply to income being used to make pension contributions.

Second, the annual earnings limit which determines the maximum tax-relievable pension contributions you can make is being cut from the current level of €150,000 to €115,000 for 2011. What’s more, pension top-ups made during 2011 for the 2010 tax year will also be based on this new cap of €115,000.

These changes do not come into force until January 1st, 2011. “This leaves a window of opportunity for contributions to be paid before that date and thus avoid the PRSI restrictions as well as the new earnings ceiling,” points out Lisa O’Neill of Power Life and Pensions.

“Typically the self-employed make their pension contribution in October/November of the following year,” she explains. “There are now good financial reasons to make that contribution before December 31st, 2010 rather than October/November 2011.”

Once you’ve sorted your pension, it’s time to claim your full entitlement to an income tax refund. Dull though this may sound, think of it as a Christmas present to yourself and you’ll soon have those forms filled out.

A generous four-year time limit applies when it comes to claiming income tax refunds, but human nature being what it is, many people still haven’t got round to requesting rebates for 2006. Time is fast running out, and once the New Year is rung in, the chance to make a claim for 2006 is gone. If you submit an income tax refund claim for any allowable tax deduction (medical expenses, rent, etc) to Revenue by December 31st, they will process it.

Making a claim couldn’t be easier. Simply register for Revenue’s PAYE Anytime service and you can do it all online; alternatively many reliefs can be claimed with a simple text (see revenue.ie for more information).

Although 2006 is the earliest year for which you can now make a claim, why not tidy up your tax affairs for all of the past four years and claim as much relief as possible now? When applying for relief on medical expenses it’s important to bear in mind that different rules apply pre- and post-2006.

From 2007 onwards, tax relief can be claimed for any qualifying health expenses that you paid in respect of any individual, whereas for 2006 certain restrictions apply.

Furthermore, if your claim relates to 2006, the first €125 of the claim is disallowed (or €250 if the expenses relate to more than one person), whereas tax relief on the full cost of the health expenses can be claimed for subsequent years. Finally, health expenses were deductible at the higher rate of income tax in 2006, 2007 and 2008. However in 2009 and 2010 relief is only available at the standard rate.

John O’Connor of Red Oak Tax Refunds points out another area where tax planning is required. Currently, an age exemption limit of €40,000 applies to married couples where one person is aged 65 or over, which effectively means they do not pay income tax if their total income is less than this level. However next year, due to changes announced in the Budget, this threshold is being reduced to €36,000. “That will bring a lot of people into the tax net,” O’Connor says.

He estimates that for a married couple where both spouses are receiving the State pension (which would amount to about €20,000), and they also earn an additional €16,000 from a private pension, this change in the tax rules could cost them about €1,700 next year as they will cross the new exemption limit. He advises that advance planning is required now for people in this sort of situation to ensure they aren’t left with an unexpected tax bill at the end of 2011.

If they have a small private income, for instance if one spouse is doing part-time consultancy work, it is important to consider whether their earnings will take them over the new lower threshold next year. If this looks likely, they need to run some calculations to see whether they would be better or worse off if they scaled back on their work to remain beneath this limit.

Finally, if you’re in the unusual but fortunate position of having sold an asset, such as shares, at a profit then don’t forget about the tax compliance requirements this brings. Depending on the type of asset sold, and the profit made, you may well have to pay capital gains tax (CGT), currently 25 per cent.

Maxwell says that many PAYE individuals will never have been in the self-assessment tax system before and might not realise CGT is self-assessed, so it’s important to ensure you are complying with tax requirements. If you made a gain between January and November of this year, then the CGT arising was payable by December 15th. However if you made a gain this month, the tax is payable by January 31st 2011, which means you still have a little over a month to pay it off. But why not get the bill out of the way now? There’ll be less temptation to fritter your profit on Christmas shopping and you can start the New Year with a clean slate.