There are some powerful reasons that 455 fund promoters from over 55 countries have chosen Ireland as a domicile for their investment funds. If you decide on an ETF, it is always handy to know how much you will pay on the investments made towards your future. In Ireland, numerous factors go into the tax liability that the public carries. In addition to income earned from traditional employment, a return on investments may also be eligible for tax exemption.
Read ahead to find out more about taxation and where your investments will go to work for you the best that they can. We will dive into some of the critical things to understand about taxation in Ireland, and we will cover areas such as:
· Taxation on euros saved
· Finding the best investment to reduce your tax liability
· Different tax brackets in Ireland and how they apply to income earners
· Various types of investments and their impact on taxation
· And much more
Tax Brackets in Ireland
A portion of earned income is subject to taxes. However, the tax liability is not the same for all earners in all circumstances. For example, Ireland has a standard rate applied at 20%. That means that a portion of your salary, currently 0-€36,800, is taxable at that rate.
A higher rate also applies to the remainder of your salary. That higher rate of tax liability is 40%. When paying taxes, your social situation will also be considered. Your tax rates will be unique, as shown below, if you are a single person, married with one income, a single parent, or married with two household incomes.
Taxes That Apply to Investments in Ireland
Income through traditional employment is not the only tax in Ireland. Stocks and dividend payments also bear their tax requirements. When an investor sells a stock, they pay a tax on the investment's gains, dividends, or payments made to a shareholder, which are also taxable.
Capital gains tax on your investment is at a rate of 33% in Ireland. However, you can find relief from that tax liability but more on that later. The price you bought a stock for subtracted from the price you sold the stock at is the realized gains on that stock. That amount minus the tax exempt first €1,270 bears a tax liability of 33%. Therefore, if you bought at €7000 and sold at €10000, your 33% tax liability on that €3,000 gain is €570.9.
Dividends are taxable under your standard income tax rate. Within the threshold, you will pay 20% on your dividends, and if you exceed that amount, you will pay 40%.
Different Types of Tax on The Various Types of Investment
ETFs (Exchange Traded Funds)are exceptionally popular in Ireland. For dividends paid out from an ETF, investors assume a 41% tax responsibility. An accumulating ETF (over a distributing ETF) will allow your tax returns to be slightly more straightforward, as the former accumulate dividends rather than paying them. A 52% marginal tax rate may apply if investing in US Domiciled ETFs.
Capital gains tax on increases in value to your investment is applicable in many cases. An exit tax of 41% applies when an investor withdraws funds, surrenders the policy, or dies. No tax applies if there has been no realization of profit. Exit Tax is a tax you pay on any profit you make on a plan with a life insurance company.
A 25% dividend withholding tax applies if an Irish company pays dividends on shares.
What to Consider Before Investing
Prior to investing your earnings, it is imperative that you:
- Have a clear picture of your finances and evaluate a financial roadmap for how you want your money to work for you.
- Assess your risk appetite for any investments you maybe considering.
- Over the course of a conversation with a financial advisor at FitzGerald Flynn, assess your comfort level around the idea of long term versus short term investments.
Additionally, a professional can help provide an in-depth look at your financial standing and how it matches your prospective investments. A mix of investments also brings a sense of balance and reduces overall volatility i.e. diversifying your investments allows for greater wiggle room should one investment not be performing as intended.
Finally, it is always vital to maintain a "rainy day" fund or an emergency fund. This fund may help you in liquidating investments should the need arise.
Irish citizens have a capital gains tax exemption of €1270. However, that amount doubles to €2540 for married couples. If your gains are under that amount, you owe no taxes on that appreciation in value. Investors would like to make the most of their money, and suitable investments help do just that.
Writing off your losses can also provide relief on your investments. For example, you incur a loss if you buy a stock for €5000 and sell it at €4800. An investor could write off that loss against the profits if it occurred in the same year. As well as that, losses can also be brought forward to the next tax year and used against future profits until utilized.
Pensions allow investors to be less reliant on the state in their retirement years. In addition, an investment in pensions provides tax relief by letting people contribute a portion of their earnings, income tax-free depending on their age.
Dividend stocks are payable annually and by holding an asset longer, you save by not having to pay annual taxes. An option available to you instead would be to pay gross rollup every 8 years or Capital Gains Tax when you sell.
Learning the existing tax system will make you aware of relief and exemptions that apply to your circumstance. For example, capital gains tax seven-year exemption allows for property purchased before 31 December 2014 to be exempt once sold. So long as the investor held the property for seven years, the exemption remains.
Deposit Interest Retention Tax (D.I.R.T)
In addition to gains made on investments, income received from interest paid on savings is subject to Deposit Interest Retention Tax, or DIRT. This tax is, as of the first of January 2020, charged at 33% on all interest payments and is a wise consideration around your savings. DIRT is a final liability tax, which means that the financial institution with whom you have invested your funds, be it Bank of Ireland or a local Credit Union subtracts the requisite tax before they pay out on your earnings. It is also at the discretion of said financial institution to decide if the deposit is subjected to Deposit Interest Retention Tax. When all the relevant deductions regarding DIRT have been made, you are within your rights to request a statement, officially documenting all deductions that have occurred on your interest.
Investing can be an excellent opportunity that can reap impressive future proofing rewards but knowing the tax guidelines of your intended investment location and having a plan for your money is vital. Here at FitzGerald Flynn, we are trained professionals in Life, Pensions, and the Investment area and are here for you at every stage of your investment journey. If you need guidance on where to begin your path towards excellent financial literacy and planning, then look no further.
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